Self-funded employers of small to mid-sized businesses need to modernize their insurance solutions to protect their assets and retain new talent. While self-funded employee benefits plans offer advantages, a catastrophic claim can result in a significant loss without proper protections.
Stop-loss insurance policies allow employers to pass liability for covered, unpredictable losses to the insurance company. Self-funded employers should clearly recognize these policies as the foundation of a complete risk management strategy for their business. This article explains how stop-loss insurance protects employers from cost volatility while providing their employees with the care they need.
Comprehending Stop-Loss Insurance for Self-Funded Plans
Conventional insurance plans cost a fixed premium that employers pay to their insurance carriers, often with contributions from employees. Self-funded plans pay claims as they’re incurred, and employees may still contribute via payroll deductions, but the employer retains the financial risk.
The primary benefit of self-funded plans is that employers can save on yearly insurance costs by self-funding health expenses. For healthy or young employee demographics, this can result in overall savings.
However, self-funding can expose employers to devastating losses in the event of a catastrophic claim. Examples include:
- An accident or condition that warrants an organ transplant
- Neonatal intensive care and other maternity-related expenses
- Long-term cancer or other illness care
Self-funded benefits plans, when unprotected, can cost employers hundreds of thousands or even millions of dollars due to catastrophic costs. It’s essential to speak with a reputable employee benefits consulting company to identify the best fit for your business.
Why Self-Funded Employers Need Financial Protection
Large or unexpected claims create volatility for self-funded employers. Even years with unusually high numbers of small claims can cause issues, such as:
- Budget distortion
- Cash flow disturbances
- Tax inconsistency
Strategic financial protection can help employers avoid these issues, enabling them to manage large, unexpected, or frequent claims without draining their reserves. Stop-loss protection is their first line of financial defense against rising costs.
What Stop-Loss Insurance Covers That Your Self-Funded Plan Does Not
Stop-loss insurance reimburses employers for covered claims that exceed their deductible. It doesn’t pay the claims or providers directly, leaving the employer in its role as the self-funded sponsor of the benefits plan.
However, this distinction allows employers to gain financial protection while keeping the control and flexibility that attracted them to self-funded plans. Stop-loss coverage is a safety net, though employers should know how the specific type of coverage they buy will influence their costs.
What is Aggregate Accommodation?
Aggregate accommodation is a cash-flow tool for self-funded employers when their total monthly claims exceed their predictions. It allows the plan to partially pay out during months of high activity, instead of waiting until the end of the year. This helps employers lessen the financial impact of unexpected surges in claims.
Example: If a business has already exceeded 75% of its yearly claim limit after 6 months, it may use its aggregate accommodation supplement to smooth out its cash flow.
What is Specific Advance?
Specific advance (advance funding) lets an employer receive reimbursement during a large ongoing claim once the deductible is met or imminent, reducing cash-flow lag. This can allow self-funded employers to pay their deductible directly, without waiting for the claim, helping them address cash flow issues by preventing reimbursement delays.
Essential Takeaway
Specific advance combined with aggregate accommodation allows stop-loss coverage to achieve cash-flow predictability similar to that of a fully insured plan. In theory, this could enable self-funded employers to keep the benefits of self-funding while maintaining more predictable healthcare expenditures.
Types of Stop-Loss Coverage Available
There are two types of stop-loss coverage: specific stop-loss and aggregate stop-loss. Each comes in several variations, but employers should know the broad differences before choosing one or both for their business. Optimal structure varies by industry, claims history, cash reserves, and local market dynamics.
What to Know About Specific Stop-Loss Protection
Specific stop-loss protects the employer against the costs of large claims for single employees. For example, if an employee files a substantial claim, such as after an accident or a cancer diagnosis, specific stop-loss coverage may mitigate these costs.
How Aggregate Stop-Loss Works to Cap Total Claims Liability
By contrast, aggregate stop-loss protects against high total claims based on annual thresholds. If employers with this coverage file a large number of claims during the contract year, the insurance carrier will reimburse them based on their coverage after the year ends.
Choosing the Right Stop-Loss Strategy for Your Business
Choosing between specific and aggregate stop-loss coverage depends on each employer’s needs. In most cases, small to mid-sized businesses benefit from a combination of these coverages to cast a wider safety net.
When to Use Both Specific and Aggregate Protection
Layered protection should balance coverage by both the severity and frequency of employee claims. This mitigates the risks of both high-cost individual claims and frequent smaller claims, leading to more predictable year-on-year insurance budgeting.
However, for some employers, specific coverage may be enough to protect their assets from uncertainty.
Situations When Specific Coverage May Be Enough
Specific stop-loss coverage prioritizes protection for smaller groups, meaning businesses with fewer employees may benefit more from focusing on individual claims than from casting a wider net. If the company has a relatively stable claims history, with few dramatic changes in the yearly number of claims, protection from catastrophic individual cases may be enough.
Questions to Ask When Structuring Your Stop-Loss Policy
When structuring the stop-loss policy to fit the business, employers should ask these questions:
- What deductible makes sense with the business’s financial risk tolerance?
→ High deductibles mean more risk exposure but lower premiums.
- Are the coverage periods clearly defined?
→ Stop-loss contracts can have different coverage periods that determine claim eligibility. For example, 12/12 contracts cover claims made and paid during the 12-month year, while 12/15 contracts give employers a three-month run-out window to pay eligible claims after the 12-month period in which it occurred.
- How are the reimbursement triggers determined?
→ Providers can set different triggers for reimbursement. For example, some policies require employers to submit proof of payment, while others pay out after the claim is filed.
Connect with an Experienced Employee Benefits Consulting Company
Stop-loss insurance coverage provides self-funded employers with a financial safety net that can keep yearly insurance budgets more predictable and sustainable. With less risk from catastrophic or frequent claims, employers can focus on scaling their business and retaining top talent.
New City Insurance is an employee benefits consulting company that provides self-funded employers with competitive strategies to mitigate rising healthcare costs with protection personalized to their needs. We know that employee insurance plans cannot be an afterthought in today’s competitive industries; they are a tool for attracting and retaining top talent in industries where employees demand modernized, transparent, and personalized care.
Contact the New City Insurance team today to learn how our modernized insurance solutions can make your business more competitive, scalable, and cost-effective.