The Basics of Stop Loss Insurance
Employer Protection Against Catastrophic Health Plan Claim Costs
Virtually every form of insurance (including self-funding) makes use of a catastrophic backup. Insurance companies buy reinsurance. Home and business owners often buy umbrella coverage. In self-funding, this concept is called stop loss insurance (for once, a term that means what it says). Like the reinsurance an insurance company buys, stop loss coverage is designed to protect the ability to pay their covered person what is owed. It is not to pay the claim or loss directly.
There’s a common misunderstanding when it comes to how stop loss insurance works. It doesn’t insure an employer’s individual plan participants … it insures the plan or plan sponsor (such as an employer) against catastrophic losses.
In a self-funded health plan, stop loss insurance will be purchased to provide a financial safeguard against catastrophic plan costs during the plan year. The stop loss coverage kicks in to reimburse the plan/plan sponsor for any health claim costs that go beyond a pre-determined amount. Stop loss insurance can be purchased by the health plan to protect assets, or by the employer to protect itself as the largest source of funding for the plan.
Determining Coverage Levels
How does coverage work? There are two levels of coverage offered by stop loss carriers. The maximum amount an employer will pay for claims can be specified at both the individual level (specific deductible) and the aggregate level for all employees for a plan year (attachment point). Employers can choose from varying deductible dollar amounts for each level and will typically work with their third party administrator (TPA) partners to establish the appropriate number. Several factors are considered in this process, including:
- The total number of employees covered under the health plan
- The company’s financial state and risk tolerance
- Overall health plan costs
- PPO discount arrangements
- Health claims history
Plans or sponsors can and often do contract with stop loss carriers to carry coverage at both the individual and aggregate levels. Reimbursements for aggregate coverage are not paid out until after a plan year ends and all claims for that year have been totaled and adjusted for specific insurance reimbursements. Essentially, claims up to specific deductibles are added together; if that amount for the year exceeds the aggregate attachment point, reimbursements would be paid accordingly to the policyholder (plan or sponsor).
Purchasing Stop Loss Insurance
To provide a simple example, consider a company with a self-funded employee benefits plan that purchases a $25,000 specific (member level) deductible. A member within the plan has accumulated $300,000 in health claim costs which the employer is liable to pay. The employer must cover the full $300,000, but will be reimbursed $275,000 through the stop loss insurance purchased.
Stop-loss insurance in self-funding is similar to reinsurance in fully insured health plans. It serves as a tool to help employers manage financial risk and provide protection should they incur unexpected health claim costs above a certain level.
For more information on stop loss insurance, check out these additional resources: