What Is Stop Loss Coverage in Healthcare?

Managing healthcare costs presents a significant financial challenge for many organizations. Healthcare expenses are unpredictable, with substantial costs arising from unexpected medical events. These high-cost medical claims can strain an organization’s financial resources. Stop loss coverage protects against unforeseen and catastrophic healthcare expenditures.

What is Stop Loss Coverage?

Stop loss coverage serves as a form of insurance for employers who self-fund their employee health plans. Unlike traditional health insurance that covers individual employees, stop loss coverage protects the employer’s health plan itself from large, unpredictable healthcare claims. It limits the financial exposure an organization faces from catastrophic medical events, ensuring the health plan’s stability.

In a self-funded model, an employer directly pays for their employees’ healthcare costs from their own funds, rather than paying fixed premiums to a traditional insurance company. This approach allows for greater control over benefit design and potentially lower administrative costs. However, the employer bears the direct financial risk of high claims, which is where stop loss coverage becomes a valuable tool. It reimburses the employer for claims exceeding a predetermined financial threshold, mitigating the financial impact of severe medical cases.

How Stop Loss Coverage Works

Stop loss coverage comes in two main forms: specific stop loss and aggregate stop loss, managing different types of financial risk for self-funded employers. Specific stop loss protects an employer from high costs incurred by any single individual within the health plan. Once an individual’s medical claims exceed a predetermined “specific attachment point,” the stop loss carrier reimburses the employer for the portion of claims above that amount. For example, if the specific attachment point is $50,000 and an employee incurs $150,000 in claims, the stop loss policy would cover $100,000.

Aggregate stop loss safeguards the employer from the total claims incurred by the entire group exceeding a certain threshold over a policy period. If the cumulative claims for all employees surpass a predetermined “aggregate attachment point,” the stop loss carrier reimburses the employer for the amount above that point. This protects against a higher-than-expected total claims year, even if no single individual’s claims reached the specific attachment point. Many self-funded plans utilize both specific and aggregate stop loss coverage for comprehensive financial protection against individual catastrophic claims and overall high claims volume.

Understanding Stop Loss Policy Terms

Stop loss policies involve several key terms. The “attachment point” is a threshold representing the amount of claims an employer must pay before the stop loss coverage begins to provide reimbursement. For specific stop loss, this is the amount per individual claim, while for aggregate stop loss, it is the total cumulative claims for the entire group. These points are negotiated between the employer and the stop loss carrier, reflecting the employer’s risk tolerance and financial capacity.

Stop loss policies also include “policy maximums” or “limits,” which define the highest amount the carrier will pay out for claims exceeding the attachment point. This maximum can apply per individual claim under specific coverage or to the total reimbursement for the aggregate policy year. The reimbursement process involves the employer initially paying all eligible claims, then submitting documentation to the stop loss carrier for reimbursement once the relevant attachment points have been met. Specialized insurance companies, known as stop loss carriers, underwrite and administer these policies, assessing risk and setting premiums based on the employer’s claims history and workforce demographics.