What Is Medical Stop Loss Insurance & How Does It Work?

Understanding Medical Stop Loss Insurance

Medical stop loss insurance provides a financial safety net for employers who self-fund their employee health benefits. It shields companies from the overwhelming costs associated with very high or unexpected healthcare claims. This insurance mitigates the financial risk if employees experience severe illnesses or injuries leading to substantial medical expenses. The coverage stabilizes an employer’s healthcare budget, preventing large claims from significantly impacting their financial stability.

Understanding Self-Funded Health Plans

Many employers offer health benefits through either fully insured or self-funded plans. In a fully insured arrangement, an employer pays a fixed premium to an insurance carrier, which assumes financial responsibility for all employee healthcare claims. This model provides predictable costs but includes a profit margin for the insurer and state premium taxes.

Conversely, a self-funded health plan means the employer directly pays for medical claims as they are incurred. This approach allows employers greater control over plan design, including benefit levels and administrative processes, and avoids state premium taxes. Self-funding can lead to significant cost savings if actual claims experience is lower than anticipated. However, it also exposes the employer to the financial risk of high-cost claims, which is where medical stop loss insurance becomes important.

How Medical Stop Loss Works

Medical stop loss insurance places a cap on an employer’s financial liability for healthcare claims within a self-funded plan. The employer pays all claims up to a predetermined amount, known as the “attachment point” or “deductible.” Once total claims for an individual or the entire group exceed this attachment point, the stop loss insurance carrier reimburses the employer for the excess costs.

This arrangement transfers the risk of catastrophic claims from the employer to the stop loss insurer. The employer still manages the daily administration of the health plan and processes claims payments. The financial burden of large aggregate claims is shared with the stop loss carrier, providing financial protection and budget predictability. This allows self-funded employers to benefit from savings while limiting their exposure to financial losses.

Specific Stop Loss Coverage

Specific stop loss coverage protects an employer from high medical claims incurred by a single individual within their self-funded health plan. It sets an individual attachment point, a specific dollar amount per covered employee. If medical expenses for any one employee exceed this predetermined threshold during the policy year, the stop loss carrier reimburses the employer for the excess.

For example, if a specific attachment point is $100,000, and an employee incurs $250,000 in medical claims, the employer is responsible for the initial $100,000. The stop loss insurer then reimburses the employer for the remaining $150,000. This coverage is valuable for safeguarding against the financial impact of rare but expensive medical conditions, such as organ transplants, severe accidents, or chronic illnesses requiring extensive treatment.

Aggregate Stop Loss Coverage

Aggregate stop loss coverage protects against total claims incurred by an employer’s entire group of covered employees over a policy year. Instead of focusing on individual high claims, it establishes an overall aggregate attachment point for the entire self-funded plan. If the total paid claims for all employees combined exceed this threshold, the stop loss carrier reimburses the employer for the excess.

This coverage guards against the financial impact of a higher-than-expected volume of moderate claims, or several individual claims that, while not reaching the specific stop loss level, collectively push total claims higher. For instance, if an employer’s aggregate attachment point is $1.5 million for a year, and total claims paid reach $1.7 million, the stop loss insurer reimburses the employer for the $200,000 difference. Aggregate stop loss provides a safeguard for the overall budget of a self-funded plan.

Important Terms

Several specialized terms are used in medical stop loss insurance policies. A “laser” refers to a specific exclusion or increased individual attachment point applied to a high-risk individual within the group. This allows the stop loss carrier to cover the rest of the group at standard rates while limiting their exposure to a known high-cost claimant.

“Run-in coverage” addresses claims incurred before the stop loss policy’s effective date but paid after it begins. Conversely, “run-out coverage” handles claims incurred during the policy period but paid after the policy has ended, typically within a few months. These provisions ensure a seamless transition of coverage for claims that span policy periods. Policies are written on either a “claims incurred basis” or a “claims paid basis.” A claims incurred basis means the policy covers claims for services rendered during the policy period, regardless of when they are paid. A claims paid basis means the policy covers claims paid by the employer during the policy period, regardless of when the services were rendered.