What Is Stop-Gap Coverage and How Does It Work?

Stop-gap coverage, also known as stop-loss insurance, serves as a financial safeguard. It protects against unexpectedly high costs that could destabilize financial planning. This coverage is a form of reinsurance, designed to limit financial exposure when costs exceed predetermined thresholds. It helps organizations manage unpredictable, high-cost occurrences without severe financial distress.

The Purpose of Stop-Gap Coverage

Stop-gap coverage protects self-funded health insurance plans from catastrophic or unusually high medical claims. While self-funding offers greater control and potential cost savings, it exposes employers to the risk of large, unpredictable medical expenses. Stop-loss insurance mitigates this financial risk by reimbursing the employer for claims that surpass a specified amount.

The primary purpose of this coverage is to ensure the financial stability of the self-funded employer. Without it, a single severe illness or accident involving an employee could result in medical bills that significantly strain the employer’s financial resources. Stop-loss coverage allows employers to manage their health benefit risks while limiting their maximum financial liability for claims. It places a ceiling on the employer’s out-of-pocket costs for healthcare claims over a policy period.

Mechanics of Stop-Gap Coverage

Stop-gap coverage operates through two primary types: specific stop-loss and aggregate stop-loss. Specific stop-loss insurance protects against high claims incurred by a single individual within the self-funded plan. This coverage kicks in once an individual’s medical expenses exceed a pre-determined amount, known as the “attachment point” or deductible, for a policy year. For example, if the specific attachment point is $50,000, and an employee incurs $75,000 in eligible medical claims, the stop-loss carrier would reimburse the employer for the $25,000 exceeding the attachment point.

Aggregate stop-loss insurance provides protection against the total claims for the entire self-funded group exceeding a certain limit over a policy period. This type of coverage establishes an overall “attachment point” for the combined medical expenses of all covered individuals. If the total eligible claims paid by the employer for the group surpass this aggregate attachment point, the stop-loss carrier reimburses the employer for the excess amount. For instance, if a company has an aggregate attachment point of $500,000 for the year, and total claims reach $575,000, the insurer would cover the additional $75,000.

Who Utilizes Stop-Gap Coverage

Stop-gap coverage is primarily utilized by employers who choose to self-fund their employee health benefit plans. This approach allows employers to assume direct financial responsibility for their employees’ medical claims, rather than paying fixed premiums to a traditional insurance carrier. While potentially offering cost savings and greater control over benefit design, self-funding introduces the risk of unpredictable, high-cost claims.

Employers, ranging from small to large organizations, purchase stop-loss insurance to manage this inherent financial risk. It provides a safeguard against the financial impact of severe individual medical events or a higher-than-expected total claims experience across the employee population. This protection ensures that unexpected medical expenses do not jeopardize the company’s financial stability, allowing them to continue offering comprehensive health benefits to their workforce.