Stop-Loss Insurance 101
Stop-Loss Insurance Coverage is defined as a layer of coverage that provides reimbursement to self-insured employers for catastrophic claims exceeding predetermined levels. This coverage is purchased by employers who self-fund their employee benefit plan so that they don’t have to assume all of the liability for losses arising from an extremely high medical claim.
There are many different options for stop-loss coverages and contracts. Before you draft a contract or schedule a meeting with your insurance carrier, here is a brief introduction to the different stop-loss options, contracts, and terms.
What Stop-Loss Coverages Are Available?
Specific Stop-Loss: This form of stop-loss coverage protects a self-insured employer against large claims incurred by a single individual. Under a specific stop-loss policy, the employer will be reimbursed when claims for an individual exceed a specified deductible.
Aggregate Stop-Loss: This form of stop-loss provides a ceiling to the amount that an employer would pay in expenses on the entire plan, on an aggregate basis, during a contract period. Under this policy, the insurance carrier reimburses the employer after the end of the contract period for aggregate claims.
There are a number of variations available for each of these coverages, and there are employers that protect their plan with a combination of both specific and aggregate stop-loss coverages. Here is a quick overview of what specific and aggregate stop-loss policies may look like for your organization.
Specific Stop-Loss At A Glance
Under a Specific Stop-Loss Policy, an employer may elect for a maximum liability per person on their benefits plan. If the claims exceed that point, the stop-loss policy will reimburse the employer for the claims in excess of that amount.
For example, if an employer elects that their maximum liability per person on their benefits plan for that policy year be $100,000, and a specific claimant exceeds that liability and their total claims are $102,000, the stop-loss policy will reimburse them for claims in excess of that amount, the $2,000.
- The maximum liability employers take on can range from $10,000 to $1 million, and generally fall within 3 to 6 percent of the expected annual claim amount.
- Under a specific stop-loss policy, employers can be eligible to receive coverage for both medical and prescription drugs.
- The contracts that specify these details can be written in a variety of ways depending on the insurance carrier.
Maximum liability per person is determined by employers and their insurance carriers, and the amount an insurance carrier is willing to be liable for is subject to their specific policies.
Aggregate Stop-Loss At A Glance
Aggregate Stop-Loss protects against higher than anticipated claims for the entire plan. If the total paid claims exceed the established point amount, the carrier will reimburse the employer for the excess.
The point at which the insurance carrier is liable is determined by the carrier, and is generally derived from the enrollment on the employer’s insurance plan and on the aggregate attachment factor. The process for determining the aggregate attachment factor is as follows:
- First, the stop-loss carrier determines the average expected monthly claims PEPM based on the employer’s history.
- Then, this figure is multiplied by a percentage ranging from 110%-150%.
- That determined amount is then multiplied by the enrollment on a monthly basis to establish the aggregate deductible.
An example of deriving the Aggregate Stop-Loss coverage is as follows:
- First, the employer and stop-loss carrier establish the average expected monthly claims, for this example $300 PEPM.
- This figure is then multiplied by a percentage usually ranging between 110%-150%, for this example 150%.
- From these calculations, the aggregate attachment factor is established as $450.
- This attachment factor is then multiplied by the employees enrolled, for this example 1,000. This calculation equals out to a total amount of $450,000.
- That amount is the aggregate deductible for the month, and if that enrollment remains the same for the whole year, the annual aggregate will total $5,400,000.
- Assuming enrollment stays level and the contract term is a year, the maximum out of pocket claims for this employer would be $5,400,000.
- If claims exceed this amount, say $5,500,000, the stop-loss carrier will be liable to pay that excess, in this example $100,000.
- $300 x 150% = $450
- $450 x 1,000 = $450,000
- $450,000 x 12 = $5,400,000
Stop-Loss Insurance Contract Terms and Terminology
In order to fully understand stop-loss policies, it is critical to know the different stop-loss contract terms. Stop-loss contracts are written depending on the agreement made between the insurance carrier and employer.
These contracts specify the time period when the insurer is liable to cover claims and by what time employers must pay the claims they are liable for. There are many different term agreements, and which terms an employer is subject to depends on the contract between the employer and the insurance carrier. These different contract terms can include policies such as:
- “12/12” Contract: Under this contract agreement, claims must be incurred and paid during the plan year.
- “12/15” Contract: Under this contract agreement, claims must be incurred during the plan year and paid either during the plan year or during the three months after the end of the plan year.
- “15/12” Contract: Under this contract agreement, claims must be incurred in the three months prior to the end of the plan date and paid during the plan year.
- Deductibles: The limit at which the insurance company becomes liable for paying medical claims.
- Disclosure: An insurance carrier will require the disclosure of known high claimants or high-risk individuals before giving a final quote.
- Lasering: An insurance carrier can place a higher deductible on certain individuals or exclude them from coverage.
There are many different coverages, contracts, and terms to be aware of when integrating a stop-loss policy in your insurance plan. It is important to open the conversation with your insurance carrier about these different options, to not only understand the best option for your company, but also to understand how a stop-loss policy can impact your company’s bottom- line and safeguard your company overall.
Why Invest in a Stop-Loss Insurance Policy?
By incorporating stop-loss into their insurance policy, these self-funded employers are limiting their risk, safeguarding themselves against high claims, and impacting their bottom-line by opting out of expensive, traditional insurance policies.
- A study showed that from 2005 to 2010 the number of claims of $1,000,000 per million members grew from 11 to 24 claims.
- Without a Stop-Loss policy, self-funded employers would be liable for all these claims.
- A study found that 1% of claimants generate 25% to 35% of claims.
- By incorporating a Stop- Loss plan, employers avoid paying high claims for everyone on their plan, and would be reimbursed by the Stop-Loss carrier for the high claims of the 1%.
- In 2016, a study revealed that self-funded insurers received $6.7 million in claim reimbursements for high-claims associated with complications due to the birth of twins.
- Stop-Loss in this situation safeguarded the bottom-lines of self-funded employers from a short-term, high-claim.
Stop-loss allows employers to benefit from self-funding while limiting the associated risk from a catastrophic single claim or limit overall claim liability. Employers integrating these policies into their insurance plans are taking this one- step further and investing in technologies that they can utilize to show identify historic cost trends and forecast future spending.
How Can Analytics Be Incorporated Into Your Company’s Stop-Loss Plan
Aggregate stop-loss policies are negotiated based on many different criteria, one of which is an employer’s claimant history. In addition, when negotiating any stop-loss policy insurance carriers can exclude high claimants from a policy.
Employers are integrating health analytics platforms with specific stop-loss reporting features to identify and engage high-cost claimants and to keep healthy members healthy. By leveraging this technology, employers have the ability to affect their future rates, and improve the health of their population overall.
These health analytics platforms can also illustrate to employers their specific historical cost trends, and see their forecasted spend. Employers, therefore, are utilizing this technology to understand the savings opportunities of incorporating stop-loss into their insurance policy.