The Different Types of Stop-Loss Explained
By Michael Humphrey, MLHR, Sr. Employee Benefits Advisor for The Wilson Agency, a UBA Partner Firm.
With the rising cost of health insurance and the need to provide coverage to employees, we have noticed many employers taking advantage of becoming self-insured. While being self-insured isn’t for everyone, there are definite advantages, such as the possibility of saving money -- especially if you have a healthy staff. But self-insured employer groups typically can only self-insureto a certain level. In other words, they can only absorb so much of the risk associated with health care cost. Stop-loss insurance is an insurance product that provides financial protection against the high cost of catastrophic health insurance claims. Understanding the different types of stop-loss is one of the first steps in knowing if self-funding the right solution for your group.
Here’s how it works: an employer that has a self-funded plan assumes the direct risk for payments of health care claims. When an employee goes to the doctor and submits a claim for it to be paid, it’s the employer who pays it. An employer with a self-funded plan can budget a specific amount of claims they think will be incurred for a given year, but if sudden illness or accidents arise, the total claims can end up being significantly over that estimate. Stop-loss insurance eases the pain of unexpected claims costs by limiting the employer’s liability to a certain amount. There are two ways that this can be done, specific stop-loss insurance and aggregate stop-loss insurance.
Specific Stop-loss Insurance -- Provides the group with protection against a large claim incurred by a plan member. Claims that exceed a specified dollar amount are paid by the stop-loss insurance. This is sometimes referred to as the “employer’s deductible” because they are responsible for paying all claims below the specific stop-loss level, and the insurance company pays all claims exceeding the stop-loss level. However, sometimes specific stop-loss is set at a higher level for a named individual who has been identified as being at a higher risk for claims. This is called lasering and will typically lower the stop-loss insurance premium, but conversely, transfers greater risk to the employer. For example, a group may have a $100,000 specific stop-loss deductible for all plan members except for one person who is on a transplant list and they have a $300,000 specific stop-loss. The $200,000 difference may be offset by the lower premium of the stop-loss insurance.
Aggregate Stop-loss Insurance -- Provides the group with protection in case the claims for the entire group are much greater than expected. This is sometimes referred to as “sleep” insurance so that the group can sleep at night.
When purchasing stop-loss, keep in mind that the more protection you want, the higher the premium you will have to pay. To determine the perfect level of protection, based on your company and budget, contact your nearest UBA Partner Firm.