Choosing to self-fund a company’s health benefits has numerous benefits. However, there are also some risks involved. When large claims occur, it can be difficult to come up with the out-of-pocket funds to pay them without negatively impacting cash-flow. This is where stop loss insurance can come in handy. What is stop loss insurance, exactly? Also referred to as excess insurance, stop loss is a special insurance that offers employers protection against catastrophic losses. It is often sought after by employers who use self-funding with their employee benefit plans, but are not willing to assume the massive losses that could potentially occur from using such plans. With stop loss insurance, the insurance company is held liable for any losses that go over the set deductible.
There are two primary types of self-funded insurance. These include the following:
- Specific Stop Loss Insurance – This type of stop loss provides excess risk coverage and protection for employers against high claims on any single individual. With specific stop loss insurance, employers are protected against the abnormal severity of a single claim, instead of the abnormal frequency of total claims.
- Aggregate Stop Loss Insurance – With aggregate stop loss, you are provided with a ceiling on the dollar amount that you are willing to pay during a contract period of eligible expenses. Once the contract period has ended for aggregate claims, the insurance carrier will then reimburse you.
How Stop Loss Insurance Works
Stop loss insurance acts as a risk management tool for employers who do not want to take on full responsibility when a catastrophic claim arrives. While your employees may be healthy most of the time, all it takes is one major illness or injury to incur a medical bill of tens of thousands of dollars. If this happens and an employer is unable to pay, it can result in serious financial setbacks. In some cases, a business may be forced to close down. In addition, if you fail to pay your employee’s medical bills your company could be held liable to lawsuits.
With self-funded health insurance, you are in an arrangement in which you provide health benefits to employees using your company’s own funds. This is different from fully-insured health insurance plans in which employers’ contract with an insurance company to help cover the medical bills of employees and their dependents. With self-funded health insurance, the employer takes on all the risk for the payment of claims. A plan document establishes the terms of eligibility and covered benefits.
When you have stop loss insurance, your out-of-pocket responsibility is capped at the agreed-upon amount. That means if a claim exceeds the set threshold, all additional expenses would be covered by the stop loss policy. However, the employer would still be responsible for the initial payment up to the limit. In addition, most stop loss policies also have coverage limits. Be sure to carefully compare policies to find insurance coverage that has an appropriate limit for your organization’s needs.
Who Should Acquire Stop Loss Insurance?
While every company is different, stop loss coverage should be considered by every self-insured company. With stop loss insurance, you can avoid the serious risks that come with having self-funded health insurance. However, the amount of coverage you need will ultimately depend on your workforce. For example, if your organization has a workforce of healthy, young, and mostly unmarried individuals, then your business is going to face far less of a risk than if your workforce was made up of older individuals with families. You will also want to shop around for policies as coverage and terms can vary greatly.
A majority of businesses who use self-funding insurance are midsize to large companies. However, this does not mean that smaller businesses cannot benefit from stop loss insurance. Regardless of the size of your business or the number of employees you have, companies in all industries face the same types of risks when it comes to unexpected employee illnesses and injuries. An employee could trip, fall, and break a bone, suffer severe burns, or develop complications from the flu. There is often no way to foresee these events occurring so you want to be prepared.
Benefits of Self-Funding and Stop Loss Insurance
If you have not yet made the move to self-funding, you may be wondering if the savings are worth it. There are a number of benefits that self-funding can provide to employers. There is often more flexibility when it comes to customizing your insurance plan and you can set up your plan in a way that aligns with your business goals. Employers who use self-funding also have more control over choosing, coordinating, and monitoring their plan vendors. Unlike traditional health insurance where the insurance carrier keeps any remaining funds when health claims are lower than expected, employers are able to retain these funds.
Self-funding insurance is often less costly for employers as there is no premium state-levied taxes and you do not have to pay profit or risk margins to the insurance company. In addition, employer health plans are not subject to most state insurance mandates and laws. When you combine your self-funded insurance with stop loss coverage, the benefits are increased even more. Stop loss provides companies with practical coverage that helps your business remain financially safe. This means you do not have to worry about facing financial ruin if you receive a massive medical claim that you did not plan for.
Learn More About Stop Loss Insurance Today
As stop loss plans can sometimes be confusing, it is important to carefully review the terms and conditions of each policy before making your decision. There are a number of contracts that you may encounter, such as incurred and paid (12/12), incurred and paid with run-out (12/15), incurred and paid with 6 months run-in (8/12), incurred and paid with 12 months run-in (24/12), and paid contracts. To learn more about stop loss insurance or for help choosing a policy for your business, contact the employee benefits consultants at BBG Broker today.