The Importance of Stop Loss Coverage
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Article Summary
Stop loss coverage is essential for self-funded employers, acting as a financial safety net that caps liability on high-cost claims. It protects cash flow, improves budgeting, and reduces risk through specific and aggregate coverage. By limiting exposure to catastrophic expenses, stop loss enables employers to maintain flexibility while ensuring long-term financial stability.
Self-funding is like riding a bike as you set the pace, choose your route, and enjoy the freedom and flexibility to tailor your journey. However, you can fall and hurt yourself, which is why a helmet is important for protection.
Self-funding allows an employer to enjoy potential financial savings, freedom and flexibility, though stop loss, or a helmet, is needed to protect the employer’s financial stability and cash flow.
What is Stop Loss Coverage?
Stop loss coverage is a valuable and necessary product for self-funded employers who offer health benefits to their employees.
Financial Protection
Stop loss insurance serves as a crucial safety net, effectively capping employer liability on both individual high-cost claims (ISL) and aggregate net claims (ASL). Should claims exceed the ISL or annual ASL, the insurer covers the excess expense. This protection shields employers from unforeseen high-cost claims and total overall claim liabilities, ensuring financial stability.
Strategic Budgeting
Stop loss insurance enables employers to predict their maximum financial liability, aiding in financial planning and budgeting for healthcare expenses. It offers peace of mind by minimizing exposure, which positively impacts employer cash flow.
Risk Mitigation
Stop loss insurance allows employers to manage the risks associated with self-funding their health plans. Employers can enjoy the benefits of self-insurance, such as cost savings and plan customization, while minimizing exposure to large, unpredictable expenses from catastrophic claims and total overall claim liability.
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
Often called individual stop loss, provides coverage against high-dollar claims. Specific stop loss protects an employer against catastrophic illness or injury of a plan member or dependent.
For example, a diagnosis such as cancer, kidney disease or potential transplant typically will result 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
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 maximum. When the total cost of net claims exceeds the specified aggregate limit, the stop loss carrier is required to reimburse the company.
With stop loss protections in place, policy-holding employers are protected against high-dollar claims from individual participants or total claims from several covered participants.
The graphic below illustrates when specific (ISL) stop loss is purchased. Without protective stop loss policies in place, employers can suddenly find themselves paying out of pocket for cripplingly large claim totals.
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3 Claims total $1,375,000 ($200,000 is the Specific Deductible) |
|
|
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Claimant |
Specific Deductible |
Stop Loss Carrier Reimbursement |
|
Bob: $425,000 |
$200,000 |
=$225,000 |
|
Sue: $450,000 |
$200,000 |
=$250,000 |
|
Tom: $500,000 |
$200,000 |
=$300,000 |
The employer funds up $200,000 for each member and receives a stop loss reimbursement total of $775,000. Without stop loss, the employer would fund the full $1,375,000 in total claims.
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.
Explore OneDigital's Cost Containment Hub for additional strategies to improve cost control, transparency, and long-term plan sustainability. To learn more about your best options for stop loss coverage, contact your OneDigital Consultant or visit our Stop Loss Center of Excellence