What Is Stop-Loss Insurance and How Does It Work?

Stop-loss insurance protects employers managing their own health benefit plans. It safeguards financial stability by mitigating unexpectedly high healthcare claims incurred by employees, preventing significant financial strain from costs exceeding predetermined thresholds.

Self-Funded Health Plans and Stop-Loss Insurance

Understanding stop-loss insurance requires distinguishing between self-funded and fully-insured health plans. In a fully-insured model, an employer pays fixed premiums to a commercial insurance carrier, assuming financial risk and administrative responsibility for employee medical claims.

In contrast, a self-funded health plan means the employer directly assumes financial responsibility for their employees’ medical claims. Instead of fixed premiums, the employer sets aside funds to pay for healthcare services as incurred. This approach can offer greater flexibility in plan design, potential cost savings, and transparency into claims data, which can aid in cost management strategies.

However, self-funding introduces the risk of catastrophic claims, where a single high-cost medical event or a multitude of claims could significantly impact a company’s financial reserves. Employers purchase stop-loss insurance to protect themselves from these unpredictable, large financial losses, effectively capping their liability for healthcare expenses.

Stop-loss insurance is not health insurance for employees; instead, it is purchased by the employer for their own health plan. The policy indemnifies the employer, reimbursing them for claims that exceed certain limits, protecting the business’s budget and ensuring the sustainability of the health benefit plan.

Understanding Stop-Loss Coverage Features

Stop-loss insurance is primarily categorized into two types: specific stop-loss and aggregate stop-loss. Many employers choose to implement both types of coverage to ensure comprehensive protection for their self-funded health plans.

Specific stop-loss insurance, also known as individual stop-loss, protects against high claims from any single individual within the health plan. This coverage activates when an individual employee’s medical expenses surpass a predetermined amount, referred to as the “specific attachment point” or “deductible.” For example, if a specific attachment point is set at $50,000, the employer is responsible for the first $50,000 of an individual’s claims, and the stop-loss insurer then reimburses the employer for costs exceeding that amount. The specific attachment point can vary widely depending on the employer’s risk tolerance and group size.

Aggregate stop-loss insurance protects the employer from the cumulative effect of total claims for the entire group exceeding a certain threshold during a policy period. This threshold is known as the “aggregate attachment point.” It is typically calculated as a percentage of the expected total claims for the plan year. If the total claims incurred by all employees combined reach this aggregate attachment point, the stop-loss insurer reimburses the employer for any additional eligible claims, regardless of whether any single individual reached their specific attachment point.

For both specific and aggregate stop-loss policies, the reimbursement process is similar. The employer initially pays all employee medical claims as they are incurred. Once the claims meet or exceed the established specific or aggregate attachment points, the employer then submits documentation to the stop-loss carrier. The insurer reviews these submissions and reimburses the employer for the eligible amounts that surpass the policy’s thresholds. This ensures that the employer’s financial exposure to high-cost medical events or an overall higher-than-expected claims year is limited, providing a defined cap on their healthcare spending.

The Stop-Loss Policy Process

Employers typically secure stop-loss coverage through specialized brokers or benefits consultants. These professionals assist in navigating the market, comparing carrier offerings, and negotiating policy terms that align with the employer’s risk appetite and financial objectives.

To underwrite a stop-loss policy, carriers require specific information to assess the risk of the employer’s group. This includes historical claims data, demographic data of the employee population (such as age, gender, and geographic location), and information on current health conditions within the group. The proposed health plan design also influences premiums and attachment points.

Claims administration under a stop-loss policy involves a distinct process from the day-to-day processing of employee health claims. While a third-party administrator (TPA) typically handles the routine processing and payment of medical claims for a self-funded plan, the employer or their TPA is responsible for submitting eligible claims to the stop-loss carrier for reimbursement. The policy outlines specific requirements for proof of loss and notice of claim. This structured approach ensures that the employer receives timely reimbursement once the agreed-upon attachment points are met, reinforcing the financial protection afforded by the stop-loss coverage.