What You Need to Know About Stop Loss Insurance

For employers looking to reduce the burden of ever-rising healthcare costs, self funded health plans have become a popular, viable and effective way to gain control over healthcare expenses, especially when coupled with stop loss insurance.

If you’re not already one of the growing number of employers who use some form of self funding, you may have questions surrounding the definition of a self funded plan, the pieces that comprise self funded health plans, and how those pieces fit together.

Self funded health plans are exactly what they sound like: Instead of paying premiums to a traditional health insurer to handle your employees’ healthcare needs, you – the employer – create your own healthcare plan, effectively eliminating a large layer of fat in the traditional healthcare insurance model.

The Three Moving Parts of a Health Insurance Plan

1. the total healthcare claims of employees (the money you’ll owe for claims made by employees)
2. the administration of the healthcare plan; this is usually handled by a Third Party Administrator, who administers claims and other day-to-day operations of managing your healthcare plan, and
3. the insurance costs that you’ll pay (what you pay for stop loss insurance to protect your company from excessive risk)

Stop Loss Insurance Minimizes Risk in Self Funded Health Plans

Moving to a self funded plan can sound risky. Employers new to self funding rightfully concern themselves with worst-case scenarios, such as what could happen if one or more employees experience a catastrophic event. In those cases of major accident or illness, it’s not unrealistic to imagine that employee claims could easily exceed the money allocated for healthcare claims in self funded health plans.

Stop loss insurance limits the liability for a company that is self funding. Just like most insurance plans that you’re already familiar with, stop loss insurance caps your risk by kicking in when claims exceed a predetermined level.

Kinds of Stop Loss Insurance

Employers can opt for either aggregate stop loss insurance, specific stop loss insurance or some combination of the two.

Aggregate Stop Loss Insurance:

Under an aggregate policy, a cap on the amount that an employer would owe for the total of all employee healthcare claims is determined for the entire plan year. The stop-loss provider will then reimburse the employer for all claims exceeding the cap within the contract year.

Specific Stop Loss Insurance:

Under a specific stop-loss policy, the employer is reimbursed whenever claims for a specific individual exceed the predetermined deductible.

How Are Stop Loss Insurance Deductibles Determined?

Consider the following example of determining an aggregate stop-loss policy deductible:

1. Based on historical claims at the company, the stop loss insurance carrier determines the average monthly claims per employee. For example, let’s assume the Average Monthly Claim to be $200.
2. Next, increase the Average Monthly Claim by a percentage you and your carrier have agreed upon (usually 15%-40%). This figure represents where your healthcare claim liability is capped. We’ll use 125% for illustrative purposes. $200 x 125% = $250 per employee.
3. Next, multiply the result by the number of employees. In this case, we’ll use 70 employees. $250 per month x 70 employees = $17,500. Therefore, $17,500 is the deductible for the month.
4. If the contract term specifies a 12-month period, that figure is multiplied by 12; $17,500 per month x 12 months = $210,000.

As illustrated, $210,000 becomes this employer’s annual aggregate deductible for the year. Should total claims by all of the employees combined exceed that amount, the employer’s stop loss insurance policy will kick in and cover the excess expense.

Even if the annual aggregate deductible sounds large don’t worry, you’ll collect premiums throughout the year in a bank account that will be used to pay your portion of healthcare costs below the deductible.  Additionally, you may be able to get a no interest loan from your stop-loss provider if you have claims above what you have saved at the time.  This loan would be paid back as you place the planned monthly premiums into your health plan’s bank account.

The deductible for specific stop loss is usually set at 5%-10% of annualized expected claims as a rule of thumb.

How to Get A Cost Estimate on Stop Loss Insurance

As you consider self funded health plans, you can work with a TPA (third party administrator) or contact your health plan broker to find out how much any particular stop loss insurance policy would cost your company.