Why Businesses Consider Stop-Loss Insurance
📘 Key Stop-Loss Terms
- Specific Deductible: The per-person claim amount above which stop-loss coverage kicks in.
- Aggregate Deductible: The total claim threshold for the group that triggers additional protection.
- Lasering: When specific high-risk individuals have a higher deductible or are excluded.
- 12/24 Contract: Claims incurred in 12 months and paid within 15 months are eligible.
Key Elements in a Stop-Loss Insurance Policy
To understand how stop-loss works, it helps to break down the two main types:
1. Specific Stop-Loss
This protects the plan against large claims from a single individual. For example, if your specific deductible is $50,000, and an employee racks up $200,000 in claims, stop-loss kicks in to cover the $150,000 above that threshold.
2. Aggregate Stop-Loss
This covers the total claims of all members on the plan. It protects the employer from unexpectedly high overall plan costs. The aggregate deductible is usually set as a percentage of expected claims — for example, 125% of expected annual claims.
Other important features to note:
- Deductibles: The threshold for reimbursement.
- Coverage period: Usually 12/12 (claims incurred and paid in the same 12-month period), but other structures exist like 12/24 or 24/12.
- Lasering: Sometimes high-risk individuals may have higher specific deductibles.
Reimbursements: Paid after claims are incurred and processed by the plan.
Stop-Loss Health Insurance Example – How It Works
Specific Stop-Loss Example
Employer Profile:
– 85 employees
– Specific deductible: $50,000 per person
Scenario:
One employee is diagnosed with leukemia and undergoes intensive treatment. Their total claims for the year reach $220,000.
Breakdown of a $220,000 claim under specific stop-loss insurance
This reimbursement helps the employer avoid a six-figure hit to the budget while ensuring the employee receives the care they need.
Aggregate Stop-Loss Example
Employer Profile:
– 85 employees
– Expected claims: $500,000 annually
– Aggregate deductible: 125% of expected claims = $625,000
Scenario:
Due to several unexpected surgeries and ongoing care needs, total claims for the year hit $660,000.
How it works:
– Employer pays up to $625,000
– Stop-loss carrier reimburses the excess: $35,000
Aggregate coverage protects against the cumulative impact of mid-sized claims adding up across the whole group.
Comparison: Specific vs Aggregate Stop-Loss
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Who Should Consider Stop-Loss Insurance?
Employers new to self-funding and still building reserves can particularly benefit from stop-loss coverage. It’s especially helpful for:
- Small to mid-size employers who are more vulnerable to volatility
- Employers new to self-funding and still building reserves
- Groups with limited predictability in health trends
- Any business that wants to cap its exposure while enjoying the savings of self-funding
Common Mistakes in Evaluating Stop-Loss Examples
Understanding stop-loss insurance is one thing — applying it correctly is another. Here are a few missteps to avoid:
- Focusing only on price: The cheapest stop-loss quotes might come with unfavorable terms or limited coverage.
- Ignoring lasers: Some carriers assign higher deductibles to high-risk individuals — this can severely impact expected reimbursements.
- Overlooking contract terms: Pay attention to the coverage window (e.g., 12/24 vs. 12/12), exclusions, and claims lag policies.
Assuming it works like traditional health insurance: Remember, it’s employer protection — not self-funded health insurance for employees.
Frequently Asked Questions (FAQs)
Can One Employee’s Claim Trigger Both Stop-Loss Types?
Yes. A single employee with an extremely high-cost claim could exceed the specific deductible and contribute to the aggregate deductible. You could receive reimbursements under both coverage types, depending on the plan year’s total spend.
How Do You Model Risk Using Stop-Loss Insurance?
Employers and TPAs typically use actuarial tools or historical claims data to estimate expected spend. These models help set appropriate deductible levels and evaluate the ROI of stop-loss premiums under different scenarios.
What Happens When an Employer Changes TPAs Mid-Year?
If you switch third-party administrators during the plan year, it can create claims processing and eligibility challenges. Ensure your stop-loss policy covers claims across both TPAs and that all data is properly transferred.
Is There a Cap on Stop-Loss Reimbursements?
Most policies include lifetime or annual caps on reimbursement amounts, especially for specific stop-loss. Always check for these limits and review any exclusions that might limit reimbursement.
Conclusion
Stop-loss insurance is a crucial tool for protecting self-funded employers from the unexpected. It lets you take advantage of the flexibility and savings of self-funding — without risking the financial stability of your business when major claims hit.
By understanding how specific and aggregate coverage work in the real world, you’ll be better equipped to evaluate policies, choose the right deductibles, and ensure your benefits strategy is built to last.
📅 Ready to evaluate your stop-loss strategy?
Schedule a consultation with Ethos Benefits to model stop-loss options and uncover hidden risks in your self-funded health plan.
