Catastrophic and unexpected healthcare claims are on the rise. This increase in catastrophic claims is, in part, the result of medical and pharmaceutical advances, such as specialty drugs and cell and gene therapies, as well as medical price inflation. As a result, many employers with self-funded health plans are actively looking for ways to minimize their financial exposure to potentially catastrophic claims. A popular strategy is stop-loss insurance.
This article provides a general overview of stop-loss insurance and outlines some considerations for employers to keep in mind when deciding whether to purchase this coverage.
What is Stop-Loss Insurance?
Stop-loss insurance helps self-funded employers protect against higher-than-anticipated claims by limiting their exposure to claims below a predetermined amount. In other words, such coverage can prevent abnormal claim frequency and severity from draining an employer’s financial reserves.
Stop-loss plays an important role in helping employers manage their health care costs by setting a ceiling for the employers’ cost. Stop-loss insurance is not technically health insurance, because it does not pay the provider directly. Instead, it reimburses the employer for claims that exceed a certain amount.
How Does Stop-Loss Insurance Work?
A stop-loss policy limits an employer’s liability to a certain amount (also called an attachment point). This helps ensure that abnormal claims do not drain the employer’s financial reserves.
With stop-loss insurance, the insurance company will reimburse the employer for claims that exceed the attachment point. For example, if an employer has a stop-loss policy with an attachment point of $500,000, the insurance company will reimburse the employer once the plan’s claims exceed $500,000. In our example, the employer will be required to pay claims up to $500,000 out of its general assets.
Types of Stop-Loss Insurance
There are two types of stop-loss insurance: individual (or specific) and aggregate (or total claims). An employer needs to understand both types of stop-loss insurance in order evaluate which type of stop-loss it needs. In many cases, an employer will purchase both specific stop-loss and aggregate stop-loss.
Individual Stop-Loss Insurance
Individual or specific stop-loss insurance limits an employer’s exposure for claims incurred by an individual employee. Once an employee’s medical costs exceed the specific attachment point, the insurance company will reimburse the employer for these claims.
Aggregate Stop-Loss Insurance
Aggregate stop-loss insurance kicks in once the employer’s costs in the aggregate exceed the aggregate attachment point. Aggregate stop-loss limits an employer’s exposure for its entire workforce. After an employer has reached its aggregate attachment, stop-loss will reimburse the employer for all subsequent medical costs, even if a particular employee has not yet reached the specific attachment point.
Stop-Loss Insurance Considerations
Each business is unique. Deciding whether stop-loss insurance is necessary depends on a business’ specific needs, workforce characteristics and risk tolerance. Reviewing all relevant factors (e.g., rates, policy terms and potential exposures) can help employers decide whether purchasing this coverage makes sense. Employers should consider the following factors when evaluating whether to purchase stop-loss.
Understanding the Attachment Point
The attachment points for individual and aggregate stop-loss insurance differ. The specific or individual attachment point will be lower than the aggregate attachment and is a specific dollar amount. An employer is only responsible for an individual employee’s claims up to that amount.
While the aggregate attachment point is also a specific amount, it is usually determined as a percentage of expected claims. A typical attachment point for aggregate stop-loss tends to be between 120% and 125% of expected claims. The aggregate attachment point can depend upon a variety of factors, such as the employer’s size, employee demographics and overall risk profile.
Evaluating Coverage Limitations
Stop-loss insurance is subject to medical underwriting. As a result, a stop-loss insurer may refuse to cover certain conditions or require higher claim thresholds for those conditions. For example, if a plan participant consistently has high-cost claims, a stop-loss insurer may refuse to cover that participant or may require a higher claim threshold for the participant. This practice is known as lasering.
Monitoring Increasing Costs
While stop-loss insurance can help employers reduce their financial exposure, if health claims are higher than anticipated, the cost of coverage can increase annually. Rising claims can also make it more difficult to obtain rates from other providers.
Summary
Selecting the right insurance policies can have major financial repercussions for employers. Having sufficient coverage can lower employers’ insurance costs, reduce their risks and keep their workers healthy. Stop-loss can make all the difference in helping employers mitigate their financial risks, especially as catastrophic health claims are increasing.
Understanding stop-loss will allow employers to make the best policy decisions for their business. For more healthcare resources, contact RMC Group today at 239-298-8210 or rmc@rmcgp.com.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as professional advice. © 2023 Zywave, Inc. All rights reserved.
