Self-funded plans give business owners more flexibility to adjust healthcare benefits to suit their employees’ needs. But, as these health plans are employer-funded, what happens if claims on a plan exceed what the employer can afford to pay out? Stop loss insurance might be the answer.
What is Stop Loss Insurance?
A stop loss insurance contract is an agreement between the business owner — often negotiated by a third-party administrator (TPA) — and their insurance carrier. Stop loss insurance protects the employer from devastating financial losses in the event of an astronomical claim. |
Stop Loss Insurance Explained in More Detail
The first step in getting stop loss insurance is determining how much risk the business owner is willing to take. This amount is usually arrived at after considering employee demographics, the company’s claim history, and how much they currently pay for healthcare costs.
After the business owner and their TPA set their preferred coverage and deductible limits, they send it to their insurer to set up negotiations. The insurer reviews their proposal, and the parties settle premium payments, deductible amounts, and aggregate limits.
When all parties agree, the business owner submits a contract to the insurer. This contract sets a maximum threshold for the business owner’s payouts on employee claims. When the claim exceeds that amount, the insurance company pays out the rest of the claim, shielding the business owner from the extra expense.
The threshold for stop loss insurance can be set in two ways (employers will commonly work with both simultaneously).
The employer may choose to set an aggregate limit, in which the threshold applies to the total amount of claims filed by company employees as a whole.
Additionally, the owner may set limits on a specific individual’s claims. When a single claimant exceeds the threshold, the insurer takes over repayment. This strategy might benefit companies with limited financial resources, but generally speaking, individual stop loss insurance is more expensive than a contract using aggregate limits.
Pros and Cons of Stop Loss Insurance
Pros: Stop loss insurance protects companies with self-funded (and level-funded) plans from unexpected or extreme healthcare costs. Healthcare expenses become more predictable, and owners are always free to adjust the contract terms to address any specific needs employees may have.
Cons: There are a few potential drawbacks that can be addressed during the negotiation. Stop loss insurance can be more expensive, especially for companies whose employees are considered “high-risk.” The deductible may be too rich for their comfort, and they may face advanced costs when claims exceed the aggregate limit. Again, though, these issues can be settled during negotiations.
Examples of How Stop Loss Insurance Works
How does stop loss insurance work in a real-world scenario? Take a look at the following examples.
For Aggregate Claims
Imagine a small manufacturing company with around 50 employees is looking to draw up a stop loss insurance contract. The business owner and their TPA talk about the company’s exposure to risk, using claims from the past to reach a determination.
After meeting with the business owner and TPA, the insurance company proposes a stop loss insurance plan with an aggregate attachment point of $100,000 — this is the maximum an employer will pay for medical claims during the policy year.
During the policy year, the company’s employees incur a total of $120,000 in medical claims for the year. The group is responsible for its aggregate limit of $100,000, and the remaining $20,000 is covered by the stop loss policy. Typically, the company will pay for the cost of the claims upfront and, after a review of claims, the carrier will reimburse the owner for the amount over the aggregate limit (in this case, $20,000).
For Specific Individual Claims
Let’s imagine the same scenario as above - a small manufacturing company with around 50 employees is looking to draw up a stop loss insurance contract, but they’re also adding a specific limit for individual employees.
In this case, let’s say the deductible for individuals is $50,000. If an employee of the company receives $60,000 in care, the employer would pay the first $50,000, and then the stop loss insurance would kick in to handle the additional $10,000.
The TPA’s Role
The third-party administrator (TPA) plays a crucial role in stop loss insurance. Typically, as an independent consultant, the TPA acts as a middle person between the business and the insurer.
The TPA usually handles claims processing, regulatory compliance, and interactions with claimants who need help filing or understanding their claims. They also manage networks of providers who are available to employees, often negotiating contracts and making sure the network can meet the company’s needs.
During the plan’s term, the TPA ensures the health insurance plan complies with laws and regulations like the Affordable Care Act (ACA). They may also monitor ongoing claims, analyze claims data, identify trends, and handle risk management.
Stop Loss Insurance: Limiting Company Liability
Stop loss insurance is a means by which employers administer self-funded healthcare benefits while being protected from catastrophic financial losses when claims become more expensive. With proper due diligence, careful analysis, and the aid of a TPA, stop loss insurance can be invaluable to a company’s security and status in the marketplace.
