Many employers understand the importance of protecting their business in these unprecedented times. Health care costs are on the rise and without adequate coverage, some companies could be on the hook for catastrophic claims. Stop-loss insurance is often used in captives, level-funded, and self-funded plans by employers who do not want to assume full liability for losses that arise from extremely high medical claims.
Despite its widespread use across many industries, stop-loss insurance remains misunderstood by businesses.
What Is Stop-Loss Insurance?
Stop-loss insurance is often used by businesses that have chosen to forego traditional health insurance in favor of other arrangements like self-funded plans. With this type of insurance, employers are protected against high medical claims that could put companies at risk for financial losses. It can also save organizations money that would otherwise be spent on high-cost traditional health plans.
There are many reasons why companies choose to carry stop-loss insurance. First, it can eliminate monthly premiums that would typically be paid to a traditional health insurance company, giving businesses access to more cash flow that they can invest in their organizations. Second, stop-loss insurance can also provide business owners with peace of mind by having an extra layer of protection against exorbitant health care costs.
Stop-loss insurance is purchased from a separate carrier than traditional health coverage. When shopping for insurance, employers will come across two main types: specific stop-loss insurance and aggregate stop-loss insurance.
Specific Stop-Loss Insurance
Also referred to as individual stop-loss, specific stop-loss insurance is a type of insurance plan that provides risk coverage against high-value health care claims on an individual. Instead of protecting an atypical number of health care claims, specific stop-loss insurance protects businesses against exceedingly high claims from single individuals.
Specific stop-loss insurance prevents companies from suffering sudden and unexpected high claims by putting a cap on the amount that an employer will pay for any one individual claim. For example, if an employee suffers a serious car accident and requires months of hospitalization or needs heart transplant surgery, these events could result in catastrophic medical bills. Even the cost of routine health care services, such as childbirth, could skyrocket if complications suddenly arise.
A specific stop-loss insurance policy is best suited for a business that is more concerned with health care costs associated with a specific employee, rather than costs associated with a group of covered employees as a whole. With this kind of insurance, if an employee’s medical bills exceed the predetermined limit outlined in the policy, the employer is reimbursed the difference in cost. Coverage can also be adjusted over time as the company’s risk tolerance increases or decreases.
Aggregate Stop-Loss Insurance
Aggregate stop-loss insurance covers the total claims of all covered members within a business rather than individual claims like with specific stop-loss insurance. With this type of insurance, losses are limited to a certain amount over a period of time outlined in the plan contract. If the total claims exceed the aggregate limit, the employer is reimbursed for the difference. An aggregate stop-loss threshold is generally variable and not fixed as it fluctuates as the percentage of an employer’s enrolled employees.
Aggregate stop-loss plans protect employers against unusually high medical claims from individuals, as well as high claims frequency for all covered employees. Putting a cap on the amount that an employer has to pay across an entire plan year helps businesses better budget for health care costs with accuracy.
This type of stop-loss insurance is best suited for organizations that are more concerned with their overall costs rather than the costs of any individual employee. Aggregate stop-loss insurance works similarly to high-deductible insurance as the employer maintains responsibility for any medical claims that fall below the deductible amount. This deductible is determined based on multiple factors, such as the number of enrolled employees, the approximate value of claims per month, and a stop-loss attachment multiplier that is typically around 125 percent of anticipated claims.
How This Type Of Insurance Works
Stop-loss insurance is not a type of medical insurance but rather a risk management and financial tool that businesses can use to protect against catastrophic health insurance claims. Alternative health insurance options like self-funding can save businesses money but without a health insurance provider involved, the employer is fully responsible for all qualifying medical costs. Costs stay low when employees are healthy; however, if one or more employees suffer a serious illness or injury, medical costs can quickly soar.
With this kind of insurance, the employer’s out-of-pocket expenses are capped at an agreed-upon amount. Any costs that exceed this threshold are covered by the insurance policy. Coverage is provided to employers in the form of reimbursements, meaning that the employer will still need to cover the initial payment but will receive money back for covered claims. Many companies choose to receive these reimbursements at the end of the policy year for ease and convenience. However, employers that want to maintain more cash flow during the year can negotiate monthly payments with their stop-loss insurer instead.
Businesses can choose to obtain just one type of insurance, either specific stop-loss or aggregate stop-loss. Most employers, however, carry both types of insurance to achieve maximum protection.
How Stop-Loss Insurance Is Used in Captives, Level-Funded, and Self-Funded Policies
When it comes to risk-financing strategies, modern businesses have access to numerous options for protecting themselves against losses. Captives, level-funded, and self-funded policies can all be used to give companies more control over their finances.
Businesses that have traditional health insurance plans are forced to pay hefty fixed-cost premiums regardless of actual claims costs. These premiums, deductibles, and co-pays often increase year-to-year. To avoid rising health insurance costs, many employers are choosing alternatives to traditional fixed-cost health insurance with options like captives, level-funded, and self-funded policies.
These options give businesses greater control and flexibility that can result in significant cost savings. Stop-loss insurance coverage is a critical component of these types of plans as they help cover claims that exceed the plan’s limit. Although stop-loss insurance can be a money-saving strategy, claims will still be incurred at the same cost and rate. Businesses must determine if this kind of insurance makes good financial sense for their company.
Why Choose New City for Group Captive Insurance
For many small- and mid-sized businesses, self-funding has become a favorable long-term strategy that enables employers to see exactly where their health care dollars are going. There are countless benefits of self-funding, such as flexibility, prescription customization, improved cash flow, and price transparency. Stop-loss insurance is an important component of self-funding as it prevents companies from having to take on the full impact of catastrophic claims.
When shopping for insurance, it is important to speak with a knowledgeable insurance expert who can provide guidance on the best insurance options. The experienced team at New City Insurance can help businesses determine if they are making the right choice for their company with the least amount of risk by reviewing their premium rate history, current employee census, and the cost of the current plan. To learn more or to request a consultation, contact the professionals at New City Insurance.