Stop-loss insurance protects businesses that self-insure against large or catastrophic insurance claims. It is used primarily in the healthcare and employee benefits space, by employers who have chosen to forego traditional group health insurance and benefits plans.
More and more employers today are ditching conventional medical benefits programs. The primary reason for this is the major increase in the cost of healthcare, and the resulting rise in health benefit premiums and/or deductibles on group plans that employers offer to employees.
To offset some of these challenges, many US companies are opting to self-insure medical benefits programs. As these self-insured plans are free from state-governed insurance requirements, employers can provide more flexible and tailored coverage, and therefore can introduce cost savings.
However, the obvious catch is that employers who self-insure are responsible for all medical costs. One virus that knocks out 30% of the workforce for 10 days, or two employees battling cancer at the same time, and those medical costs can quickly surpass any financial backups or dedicated medical funds that companies have set aside. This is where stop-loss insurance comes into play.
The Spencer James Group, Inc. describes stop-loss insurance as “a financial and risk management tool for businesses”. It is not, as some believe, a type of medical insurance.
“With stop-loss insurance, the employer’s out-of-pocket is capped at an agreed amount,” the group goes on to explain. “If costs exceed that threshold, any additional expenses are covered by the stop-loss policy. It’s important to note that this coverage comes in the form of reimbursement, so employers are still responsible for initial payment. It’s also important to note that stop loss insurance itself often has coverage limits.”
There are two main types of stop-loss insurance, explained below:
Specific stop-loss insurance
This is also known as individual stop-loss insurance. It protects a self-insured employer against singular high-severity or catastrophic claims on any one individual. An example might be an employee with a rare cancer, who needs a new drug (at very high expense) for a chance at survival.
Aggregate stop-loss insurance
This gives self-insured employers financial protection when medical claims for the entire group exceed the expectations the employer had for the policy term. The Healthcare Administrators Association describes aggregate stop-loss insurance as: “a ceiling on the dollar amount of eligible expenses that an employer would pay, in total, during a contract period.” The association goes on to explain that the stop-loss carrier would reimburse the employer for aggregated claims once the contract period has ended.
When are stop-loss insurance claims paid?
Stop-loss insurance claims are typically paid on an annual reimbursement basis (assuming it’s an annual renewal insurance contract). Some carriers will allow monthly payments, but if those payments end up being considered too great by the end of the policy year, the employer will have to pay the carrier back. Employers claiming stop-loss coverage will only be reimbursed for losses that exceeds the deductible on their policy.
What are some other benefits of self-insurance with stop-loss insurance?
When employers self-insure and use stop-loss insurance to avoid 100% of liability for losses, they gain multiple benefits. For example, by eliminating monthly premiums, they have access to more cash flow, which they can then pump back into their businesses. They also gain insight into claims data that they wouldn’t have if they were working through traditional channels. This extra data enables self-insured employers to create more tailored health benefit programs, which will likely garner approval from employees. Employers opting for this insurance strategy would also pay less taxes. The only insurance-related item they would have to pay tax on is their stop-loss premium.
