What Is Stop Loss Insurance and Do You Need It?

There are a number of different types of readers that come to my site, including many entrepreneurs. Being in business for yourself comes with many unique challenges, including insurance for you and any employees you may have. Nobody likes paying for insurance until you need it, and even then, you expect it to cover you in the event of a loss. Let’s explore why this may not always be the case, and how you can protect yourself against paying out of pocket.

 What is stop-loss insurance?

Many startups and established businesses self-insure, which means they manage the premiums paid themselves, and pay for all claims themselves. While on paper it can seemingly help reduce risk (by only paying for actual claims), a large payout can wipe out a company. In an effort to avoid such a catastrophic loss, there are ways to protect against such a loss. Self-funded plans can really benefit from Stop Loss Insurance coverage, also called excess insurance.

 Stop Loss Coverage

Stop loss coverage as applied to medical or health plans protects the business from needing to completely self-fund employee health benefit plans. If and when a catastrophic claim (or series of them) occurs, this coverage would kick in. The stop loss level refers to the dollar amount for which anything spent above the limit will activate the insurance coverage. It protects the business from needing to pay an excess of health insurance claims. Stop loss coverage resembles high-deductible insurance.

In many cases, large companies self-insure. Smaller firms may not be able to do so. They also can not afford to pay insurance company premiums for every employee and certainly not as the firm scales. A combination of self-funding and stop loss coverage can allow smaller firms self-insure.

 Types of Stop Loss

Although other variations exist for stop loss, it generally refers to two types of coverage: specific and aggregate. The specific coverage protects against extreme losses for an individual person the employer covers. This pays when an employee experiences a serious injury or contracts a catastrophic illness. The coverage would begin paying for the individual’s health coverage when their claims reached a specific threshold amount.

Aggregate coverage protects against extreme loss for the entire group when the total claims would exceed a specific threshold amount. In this case, the threshold would be represented as a percentage of the cost of projected claims, for example, 125% of the cost of projected claims.

Good to call out though that the insurer will reimburse the employer. This means that the employer still must make the payments initially. An employer can add it to an existing insurance plan or purchase an independent policy.

 Little Details to Know

Although most examples suggest setting the stop-loss at 125% of the cost of projected claims as the aggregate threshold, the aggregate stop-loss threshold actually fluctuates during each year according to enrollment and the aggregate attachment factor.

You can calculate the annual attachment point by multiplying the monthly enrollment by each month’s aggregate retention factor. Many factors influence policy retention factors including the number of claims, the group’s premium experience, the geographic area’s expected medical costs, contract terms and medical trends.

 Is Stop Loss Coverage Right for Your Firm?

Deciding if stop loss coverage would work for your firm take time and a thorough review of your finances. To make the basic determination of whether you should use stop loss coverage, answer the following three questions:

·  What is the size of your company? Mid-sized companies often use other methods, but most newly started or small businesses cannot afford to self-insure only. Large businesses want to avoid the expense of large-scale self-insurance and need additional means to reduce risk. This means that small and large businesses have become the most frequent users of stop loss coverage. The option of group medical stop-loss captives let numerous organizations pool together and distribute the risk. Group stop-loss captives typically appeal the most to firms with 50 to 200 employees.

·  Are your employees mostly young or mostly older? Companies with a large population of young, healthy employees take on a larger cost when they join an insurance pool of older population employees. Conversely, firms with more older employees benefit because they spread their risk more thinly.

·  Do you have available collateral? Some stop loss coverage plans require the employer to post collateral. While it is not common in health insurance, stop loss is the exception. Your firm could need $50,000 or more at the time of insurance purchase for collateral.

 Other Things to Understand

Signing up for a stop loss captive insurance policy does not mean everyone uses the same benefit plan. Each firm still functions independently, sets up and runs its own health benefits plan. That means your firm gets to decide its own coverage, copays, deductibles, provider networks and network administrators.

Many captives use both a deductible for each member and an aggregate attachment point. They also usually feature a reinsurance plan through the medical stop-loss insurer. Group medical captives require a specific number of membership years. Employers face monetary penalties if they exit the plan early.

When choosing self-insurance, even with a stop-loss plan, the insurer takes on farmore than simply the insurance costs. The employer also takes on the following:

·  claim fluctuation

·  holds the reserves and receives the interest

·  controls plan design

·  owns all data collected

·  assumes plan maintenance

·  assumes compliance responsibility

·  assumes fiduciary responsibility

You’ll need to choose between a bundled or unbundled plan. With an unbundled plan, you’ll obtain all the plan elements separately. You’ll need a third-party administrator (TPA) for claims adjudication, a stand-alone stop loss carrier, a pharmacy benefit manager (PBM) and a stand-alone network provider. Using a bundled carrier requires paying higher administration costs but provides higher network discounts. It won’t be as flexible an unbundled plan and may have a lower level of service compared to a third-party administrator. An unbundled plan has much lower administration fees and greater design flexibility. It also has more carriers for you to track and administer and lower network discounts than a bundled plan.

Stop loss insurance isn’t right for everyone. You decide if it is right for your business. If you need to self-insure, it is an important form of risk mitigation. Analyze your company size, your median employee ages plus the range of ages and your finances to determine if you can afford the collateral payment. After that, if you want to move forward, you’ll need to talk to an insurance broker or agent to get started on finding a suitable plan whether bundled or unbundled. An insurance professional can help you determine whether stop loss coverage will work for your company.

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