Author: Bill Capece, Director of Business Development
For employers considering a self-funded health plan, one of the most important concepts to understand is stop-loss insurance.
Self-funding can give employers greater control over healthcare costs, access to claims data, and flexibility in plan design. But it also means the employer takes on responsibility for paying covered healthcare claims.
That is where stop-loss insurance comes in.
Stop-loss insurance is designed to help protect an employer from unusually large individual claims and unexpectedly high claims for the entire health plan.
Watch: What Is Stop-Loss Insurance?
Watch our short video explaining how stop-loss insurance works with self-funded health plans:
What Is Stop-Loss Insurance? Self-Funded Health Plans Explained
In this video, JS Benefits Group explains stop-loss insurance in simple terms and discusses why it is an important consideration for employers evaluating self-funded, level-funded, and captive health plan strategies.
What Is Stop-Loss Insurance?
Stop-loss insurance is coverage used with self-funded health plans to help protect an employer from significant healthcare claims exposure.
Instead of an insurance carrier assuming all of the financial risk, as it generally does under a traditional fully insured arrangement, a self-funded employer generally pays covered claims according to the terms of its health plan.
Stop-loss coverage is designed to help limit the employer’s financial exposure when claims become unusually high.
There are two primary types of stop-loss coverage:
- Specific stop-loss
- Aggregate stop-loss
Understanding the difference between these two types of protection is important when evaluating a self-funded health plan.
How Does Stop-Loss Insurance Work?
An employer establishes a self-funded health plan and pays covered healthcare claims. A stop-loss policy establishes certain attachment points.
When eligible claims exceed the applicable attachment point, the stop-loss carrier may reimburse the employer according to the terms of the policy.
For example, suppose a specific stop-loss attachment point is $100,000.
If an individual employee’s eligible claims exceed that threshold, the stop-loss policy may provide reimbursement for eligible claims above the attachment point, subject to the policy’s terms and conditions.
The actual structure can be more complicated, which is why employers should evaluate the entire stop-loss contract rather than looking only at the attachment point.
What Is Specific Stop-Loss Insurance?
Specific stop-loss insurance, sometimes called individual stop-loss, is designed to protect an employer against unusually high claims from an individual covered person.
Examples of potentially high-cost claims can include:
- Major surgery
- Cancer treatment
- Organ transplantation
- Serious accidents
- Complex chronic conditions
- High-cost specialty medications
- Extended hospitalizations
The specific attachment point determines when the stop-loss policy begins providing protection for an individual claimant.
The attachment point, premium, exclusions, contract terms, and reimbursement provisions can vary between policies.
What Is Aggregate Stop-Loss Insurance?
Aggregate stop-loss insurance provides protection against unexpectedly high claims across the entire health plan.
Instead of looking at one individual claimant, aggregate stop-loss looks at the plan’s overall claims experience.
An employer could have many employees with claims throughout the year. Even if no single employee exceeds the specific stop-loss attachment point, total claims for the entire group could become significantly higher than expected.
Aggregate stop-loss is designed to provide another layer of financial protection in that situation, subject to the terms of the policy.
What Is the Difference Between Specific and Aggregate Stop-Loss?
The easiest way to understand the difference is:
Specific stop-loss protects against a very large claim from one individual.
Aggregate stop-loss protects against unexpectedly high claims across the entire group.
Both can be important components of a self-funded health plan’s risk-management strategy.
Why Is Stop-Loss Insurance Important for Self-Funded Health Plans?
One of the biggest questions employers ask when considering self-funding is:
What happens if we have a very large claim?
Stop-loss insurance is one of the tools used to address that concern.
A self-funded arrangement can combine:
- Employer-funded claims
- Stop-loss protection
- Third-party administration
- Provider network access
- Pharmacy benefit management
- Employee benefits administration
- Plan design and cost-management strategies
This structure can give employers greater visibility into healthcare spending while providing protection against certain levels of high claims exposure.
Learn more about Self-Insured Health Plans.
How Does Stop-Loss Insurance Work With a Level-Funded Health Plan?
Stop-loss insurance is also an important component of many level-funded health plans.
A level-funded arrangement generally combines several components into one predictable monthly payment, including:
- A claims fund
- Stop-loss insurance
- Administrative fees
The stop-loss component is designed to provide protection against large claims and help manage the employer’s exposure to unexpected healthcare costs.
Learn more about Level-Funded Health Plans.
What Is the Connection Between Stop-Loss Insurance and Captive Health Plans?
Another strategy employers may consider is a medical captive.
A captive can create a shared-risk structure for participating employers. Instead of an employer taking on all of the volatility associated with individual claims exposure, the captive structure can combine employer risk with a broader pool and reinsurance or stop-loss protection.
Captive arrangements can be particularly relevant for employers that are already evaluating self-funding and want to understand additional ways to manage claims volatility.
Learn more about Captive Insurance Strategies for Employers.
Self-Funded vs. Level-Funded vs. Captive Health Plans
Employers evaluating healthcare funding strategies may encounter several different approaches.
Self-Funded Health Plans
With a self-funded plan, the employer generally pays covered claims directly and uses stop-loss coverage to help limit catastrophic claims exposure.
Learn more about Self-Insured Health Plans.
Level-Funded Health Plans
A level-funded plan generally combines expected claims funding, stop-loss insurance, and administrative expenses into a fixed monthly payment.
Learn more about Level-Funded Health Plans.
Captive Health Plans
A medical captive can provide a shared-risk structure that allows participating employers to pool certain risks while maintaining greater visibility into claims and plan performance.
Learn more about Captive Strategies.
The appropriate strategy depends on the employer’s size, claims experience, financial objectives, risk tolerance, and overall benefits strategy.
Is Stop-Loss Insurance the Same as Health Insurance?
No.
Stop-loss insurance is not the same as traditional fully insured group health insurance.
Under a fully insured health plan, the employer generally pays a premium to an insurance carrier, and the carrier assumes responsibility for covered claims according to the insurance contract.
With a self-funded arrangement, the employer generally assumes responsibility for paying covered claims and uses stop-loss coverage as protection against certain levels of claims exposure.
The financial structure, contracts, administration, and risk can therefore be different.
Can Small and Mid-Sized Employers Use Stop-Loss Insurance?
Yes, depending on the structure of the plan and the employer’s circumstances.
Level-funded arrangements can make self-funded plan structures available to some small and mid-sized employers. Captive arrangements may also be available to employers that meet specific underwriting and participation requirements.
Employers should consider factors such as:
- Number of employees
- Claims history
- Employee demographics
- Current premiums
- Plan design
- Provider network
- Pharmacy costs
- Stop-loss attachment points
- Stop-loss premiums
- Contract terms
- Cash-flow considerations
- Compliance requirements
What Should Employers Look for in a Stop-Loss Policy?
Employers should look beyond the quoted premium.
Important areas to review include:
Specific Attachment Point
What level of claims must an individual reach before specific stop-loss protection applies?
Aggregate Attachment Point
At what level does aggregate protection apply to the plan as a whole?
Contract Terms
Stop-loss contracts can contain important provisions regarding reimbursement, exclusions, definitions, claim timing, and other conditions.
Individual Claim Adjustments
Some stop-loss arrangements can contain provisions that affect the financial protection available for particular individuals. Employers should understand these provisions before selecting a plan.
Claim Funding
Employers should understand how claims are funded throughout the year and how stop-loss reimbursement interacts with the plan’s cash flow.
Renewal Terms
Stop-loss coverage should be evaluated as part of the employer’s longer-term benefits strategy rather than simply as a first-year price.
Does Stop-Loss Insurance Eliminate All Risk?
No.
Stop-loss insurance can reduce certain types of financial exposure, but it does not mean an employer has no risk.
The actual protection depends on the specific stop-loss contract.
Employers should carefully evaluate:
- Attachment points
- Contract language
- Exclusions
- Reimbursement provisions
- Claim timing
- Renewal provisions
- Aggregate protection
- Specific protection
- Administrative costs
- Cash-flow requirements
This is why reviewing the entire funding arrangement is important.
Stop-Loss Insurance and Healthcare Cost Management
Stop-loss insurance is only one part of a broader healthcare cost-management strategy.
Employers evaluating self-funded, level-funded, or captive health plans may also want to examine:
- Provider networks
- Pharmacy benefit management
- Specialty drug costs
- Plan design
- Employee utilization
- Claims data
- Chronic condition management
- Wellness programs
- Direct primary care
- Employee advocacy
- Benefits administration
JS Benefits Group works with employers on employee benefits strategy and healthcare cost management, including self-funded, level-funded, and captive strategies.
Explore Employee Benefits Solutions.
Frequently Asked Questions About Stop-Loss Insurance
What is stop-loss insurance in health insurance?
Stop-loss insurance is coverage designed to help protect employers that use self-funded health plans from certain levels of high healthcare claims.
What are the two types of stop-loss insurance?
The two primary types are specific stop-loss, which addresses high claims for an individual, and aggregate stop-loss, which addresses high claims across the entire plan.
Why do employers use stop-loss insurance?
Employers use stop-loss coverage to help manage the financial risk associated with self-funding their health plan.
Is stop-loss insurance required for a self-funded health plan?
Requirements and plan structures can vary. Employers should review the specific plan and stop-loss contracts with qualified benefits professionals.
Does a level-funded health plan include stop-loss insurance?
Many level-funded arrangements include stop-loss protection as part of their overall funding structure.
Can stop-loss insurance reduce employer healthcare risk?
It can help limit certain financial exposures, but the amount and type of protection depend on the specific policy and its terms.
What is a medical captive?
A medical captive is a risk-sharing arrangement that can allow participating employers to share certain healthcare risks while maintaining greater visibility into claims and plan performance.
Learn more about Captive Strategies for Employers.
Should Your Business Consider a Self-Funded, Level-Funded, or Captive Health Plan?
There is no single funding strategy for every employer.
The appropriate approach depends on your organization’s workforce, claims experience, current healthcare costs, financial objectives, risk tolerance, and overall benefits strategy.
A detailed benefits analysis can help an employer compare its current fully insured arrangement with alternative funding strategies.
Watch the Stop-Loss Insurance Video
Want a quick explanation of stop-loss insurance and self-funded health plans?
Watch: What Is Stop-Loss Insurance? Self-Funded Health Plans Explained
Explore Your Health Plan Options
If your organization is evaluating self-funded health insurance, level-funded health plans, captive strategies, or healthcare cost-containment strategies, JS Benefits Group can help you evaluate the available options.
Request a Free Benefits Consultation
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Visit JS Benefits Group or call 877-355-6070.
JS Benefits Group
Employee Benefits Consulting & Strategy
Newtown, Pennsylvania
Serving PA, NJ, NY, DE, MD & Beyond
This article is for general educational purposes and is not insurance, legal, tax, or financial advice. Stop-loss coverage varies by carrier and contract. Employers should review specific plan documents and consult qualified professionals before making benefits decisions.
