What Is a Stop Loss Carrier and How Does It Work?

A stop-loss carrier provides a specific type of insurance that protects self-funded employers from unexpectedly high healthcare claims. This coverage acts as a financial safeguard, reimbursing employers when medical costs for their employees exceed predetermined limits. It allows businesses to manage the financial risks associated with self-insuring their employee health benefits, preventing catastrophic losses that could impact their financial stability.

Self-Funded Health Plans

Self-funded health plans mean an employer directly pays for employee healthcare benefits, rather than buying a fully insured plan. This differs significantly from fully insured plans, where an employer pays a fixed premium to an insurance carrier, and the carrier then bears the financial risk and pays all claims.

Employers often choose self-funding for several reasons, including potential cost savings and greater control over their health plans. Self-funded plans can eliminate certain expenses, such as state premium taxes. They also allow employers to maintain control over health plan reserves, potentially earning interest income on those funds until claims are paid.

Customizing plan design is another advantage, as self-funded plans are regulated under federal law (ERISA) rather than state insurance regulations. However, self-funding introduces financial risk, as the employer is responsible for all claims, including those that are unexpectedly high or frequent.

The Function of a Stop-Loss Carrier

A stop-loss carrier provides a financial safety net for employers who self-fund their health plans. The carrier reimburses the employer for claims that exceed a pre-established financial threshold.

The employer pays healthcare claims directly up to a certain dollar amount. Once the total claims for an individual employee or the entire group surpass this specified limit, the stop-loss carrier becomes responsible for reimbursing the employer for the excess costs.

Stop-loss insurance is not health insurance for employees; rather, it insures the employer against significant losses from their self-funded plan.

Forms of Stop-Loss Coverage

Stop-loss coverage comes in two main forms: specific and aggregate, each protecting against different financial risks. These two forms can be purchased individually or in combination to provide comprehensive protection.

Specific stop-loss, or individual stop-loss, protects against high claims from a single individual. For example, if a policy has a specific stop-loss threshold of $100,000, and one employee incurs $150,000 in medical claims, the employer would pay the initial $100,000, and the stop-loss carrier would reimburse the employer for the remaining $50,000.

Aggregate stop-loss places a ceiling on the total eligible expenses an employer pays for the entire plan during a contract period. It protects against the combined cost of claims for all covered members, rather than focusing on a single high claim. For instance, if an employer’s aggregate stop-loss attachment point is $1,000,000 for the year, and the total claims for all employees reach $1,200,000, the carrier would reimburse the employer for the $200,000 exceeding the aggregate limit.

Important Policy Provisions

Stop-loss policies include provisions defining how and when coverage applies, influencing the financial dynamics between the employer and carrier. The “attachment point” is the amount of medical claims an employer must pay before stop-loss coverage begins reimbursement. This threshold applies to both specific and aggregate stop-loss, determining when the carrier’s liability is triggered. For specific stop-loss, it is the amount per individual claim, while for aggregate, it is the total claims for the entire group.

A “corridor deductible” is a less common provision between specific and aggregate stop-loss coverage. It represents an amount of claims that the employer remains responsible for after an individual’s claims exceed the specific attachment point but before the aggregate stop-loss kicks in. This effectively creates an additional layer of self-retention for the employer.

Policy periods also involve “run-in” and “run-out” provisions, specifying the timeframe for claims eligibility and payment. A “run-in” period allows claims incurred before the policy’s effective date, but paid during the policy period, to be covered. Conversely, a “run-out” period extends coverage for claims incurred during the policy period but paid after its formal end date.

The “contract basis” specifies how claims are considered for reimbursement, commonly on an “incurred and paid” or “incurred but not paid” basis. An “incurred and paid” contract means claims must both be incurred (received by the patient) and paid by the employer within the policy period to be eligible for reimbursement. Conversely, an “incurred but not paid” approach accounts for claims that have happened but have not yet been submitted or processed for payment by the end of the contract period.