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The Importance of Stop Loss Coverage

Self-funding is kind of like riding a bike. It can be good for your health(plan), you’ll have a sense of freedom to do more and it can save you money.

But don’t be fooled, you can still fall and hurt yourself, which is why you wear a helmet.

Stop loss coverage offers the protection, or helmet, every self-funded plan needs.

What is Stop Loss Coverage?

Stop loss coverage is a valuable and necessary product for all business owners who offer health benefits to their employees. With stop loss coverage in place, your company is protected because the stop loss carrier is responsible for reimbursement of any losses that go over a set employee deductible limit.

For smaller companies, this limit can be as low as $10,000. Stop loss insurance coverage provides companies with valuable financial protection that can mean the difference between business success and bankruptcy in the event of a major illness or injury.

Are There Different Types of Stop Loss Coverage?

Yes, stop loss coverage can be classified as specific or aggregate.

  • Specific stop loss insurance, often called individual stop loss, provides coverage against high-dollar claims on an individual employee. Specific stop loss protects a company against catastrophic illness or injury of a plan member or dependent.

    For example, a diagnosis such as cancer, kidney disease or a major accident typically results in hundreds of thousands of dollars in claims within a relatively short window of time. Without the appropriate stop loss insurance in place, this could bankrupt a small to midsize company.
  • Aggregate stop loss insurance provides coverage for the total claims of all plan participants, rather than individual claimants, for the entire plan year. Aggregate coverage limits losses to a predetermined annual dollar. When the total cost of claims goes above the specified aggregate limit, the stop loss carrier is required to reimburse the company.

With stop loss products like these in place, policy-holding companies are protected against high-dollar claims from individual participants or many claims from several covered participants. The example below demonstrates that an aggregate deductible is not always met. When this happens, it can greatly reduce or entirely eliminate any reimbursement by the stop loss carrier. This should be factored in when considering different coverage options.

The graphic below illustrates what can happen when companies choose to forfeit stop loss coverage for medical insurance. Without protective stop loss policies in place, organizations can suddenly find themselves paying out of pocket for cripplingly large claim totals.

3 Claims total $1,375,000

($400,000 is the Specific Deductible. $100,000 is the Aggregate Specific Deductible.)
Claimant Specific Deductible Aggregating Specific Deductible Stop Loss Carrier Reimbursement
Bob: $425,000 $400,000
$425,000 - $400,000 = $25,000 remaining
$100,000 - $25,000 = $75,000 ASD remaining
Sue: $450,000 $400,000
$450,000 - $400,000 = $50,000 remaining
$75,000 ASD - $50,000 = $25,000 ASD remaining
Tom: $500,000 $400,000
$500,000 - $400,000 = $100,000 remaining
Only $25,000 ASD remaining

*Since the ASD is $100,000 the Stop Loss carrier reimburses the employer $75,000 of Tom’s claim. Plus, since the ASD is now met, the carrier payments begin on all new claims during the policy period, once the Specific Deductible is satisfied, including additional claims (if any) from Bob, Sue, and Tom.

It should be noted that stop loss insurance is provided on a reimbursement basis, meaning that companies still must have the short-term liquidity necessary to cover large claims prior to receiving payments from their provider.

Overall, stop loss insurance is an excellent tool for employers. By outsourcing the inherent financial risk of health plans, these policies enable businesses to remain financially solvent in the event of large claims and provide insurance to all eligible employees at a reasonable cost.

To learn more about your best options for stop loss coverage, contact your OneDigital Consultant or visit our Stop Loss Center of Excellence.