Why You Need Stop-Loss Coverage

As brokers and employers prepare to design next year’s plans and programs - many are making the switch from fully- to a self-insured plan. Employers have an advantage from self-insuring primarily because it reduces the fees and expenses associated with a carrier’s premium for a fully-insured plan. However, self-insuring exposes significant risk if an employee files more claims than expected and the expenses from these excess claims can add up quickly. Therefore, employers will often invest in what’s called “stop-loss insurance” to mitigate the risk of financial vulnerability.

So, what exactly is stop-loss coverage and how does it help employers save money?

There are numerous factors to consider when determining what the appropriate level of coverage and deductible amounts are for your organization. These factors include cash flow, group size, demographics, and historical claims experience. Before switching to a self-insured plan, it’s important to note that there are many different options for stop-loss coverages. Below you will find a brief introduction to the different stop-loss options, contracts, and basic terminology.

When deciding which type of stop-loss coverage is the most appropriate for your organization, some employers will find that it is in their best interest to utilize a combination of the different types of stop-loss coverage. Here is a quick overview of what these different stop-loss policies may look like for your organization.

Specific Stop-Loss
Specific stop-loss insurance, also known as individual stop-loss insurance, places a cap on a predetermined dollar amount on an individual member’s claims. This type of stop-loss insurance protects your business from the high medical costs from a single claim.

For instance, if an employee was suddenly diagnosed with a chronic condition, their health costs can quickly accumulate. With specific stop-loss insurance included in your self-funded plan, your coverage will kick in once your employee’s claims exceed your pre-determined dollar amount.

For example, let’s say the predetermined cap on member claims you, the employer, will cover up to $75,000. If your member were to file a $125,000 claim, your stop-loss insurance will cover $50,000. You will only be responsible for the first $75,000.

Aggregate Stop-Loss
Aggregate stop-loss coverage places a cap on the total health spend amount across your entire company. This type of stop-loss focuses on protecting your organization’s claims as a whole, rather than the claims of a single member. Aggregate Stop-Loss will go into effect if the total paid claims exceed the established cap amount, and the employer will be reimbursed for the excess spend.

The cap at which the insurance carrier is liable is determined by the stop-loss carrier and is generally determined based on enrollment of the employer’s insurance plan and on the aggregate attachment factor. The process for determining the aggregate attachment factor includes:

• First, the stop-loss carrier determines the average expected monthly claims PMPM based on the employer’s history.
• This average is then multiplied by a percentage ranging from 110%-150%, the most common being 125%.
• That determined amount is then multiplied by the employee enrollment on a monthly basis to establish the aggregate deductible.

Aggregate stop-loss can be especially important for an organization in the event of flu season or if you have a larger demographic diagnosed with diabetes or cardiovascular conditions. For example, let’s say the established expected monthly claim for your organization with 1,000 employees enrolled in your plan is $300 PMPM. When multiplied by 125%, your individual employee monthly aggregate attachment is $375, and your entire organization will see a monthly aggregate of $375,000. If your enrollment remains the same over the entire year, the annual aggregate will total $4,500,000 and will be the maximum your organization would pay out of pocket. If claims were to reach $5,500,000, the aggregate stop-loss coverage would kick in and your stop-loss carrier would cover the additional $1,000,000.

Stop-Loss Captive
One additional vehicle to securing stop-loss coverage is through a stop-loss captive. A captive is, in short, an insurance company that’s an extension of a larger insurance company. In the stop- loss space, captives provide a way for like-minded, self-funded employers to come together to obtain stop-loss coverage while minimizing insurance risks for all of them. Typically, captives are adapted by medium-sized employers with anywhere from 50 to 200 employees. And while a captive may include dozens of companies extending from a larger insurance provider, each maintains its own self-funded benefits and unique stop-loss policy.

Stop-Loss Insurance Terminology
When preparing to meet with a stop-loss carrier, it’s important to familiarize yourself with a few terms unique to this type of coverage. Some terms you can expect to see on your stop-loss contract include:

• Paid: A paid contract will cover all claims that are made during the policy year
  
• Incurred and Paid Contract (12/12): Under this contract, claims must be incurred and paid during the twelve-month plan year
  
• Incurred and Paid with Run-Out Contract (12/15): With this type of contract, only claims that were paid in the three months following the end of the plan year are covered
• Incurred and Paid with 6 Months Run-In Contract (18/12): This contract will only cover claims incurred in the six months prior to the end of the plan date and paid during the new plan year

Why Invest in a Stop-Loss Insurance Policy?

By incorporating stop-loss into their insurance policy, self-funded employers are limiting their risk and safeguarding themselves against high claims.

In 2016, a study revealed that 70% – 75% of Stop-Loss policyholders were reimbursed by a Stop-Loss carrier for at least one high claim.

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.