Self-funded group plans offer financial and logistical incentives, especially to employers of mid-sized businesses with predictable health spending, but they also carry risks. Stop-loss coverage is designed to help employers protect against catastrophic claims and mitigate the risks of unpredictable benefits spending. However, there are different types of stop-loss coverage that employers should speak with an employee benefits consultant about.
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Below, we assembled a guide for employers with self-funded group benefits plans to help them consider when and how stop-loss coverage can reduce their insurance-related risks. When choosing a plan, employee benefits consulting services should always be considered to help personalize group plans, including stop-loss coverage, for each business’s needs and financial goals.
The Importance of Stop-Loss Coverage in Self-Funded Plans
Self-funded plans, which shift responsibility for paying health coverage costs to the employer, work best when employers can tolerate normal claim variability and have protection in place for outlier, high-cost events. This means that catastrophic health claims could severely impact the business’s ability to pay for its employees’ healthcare.
Why Employers Need Protection Against Catastrophic Claims
High-cost claims are usually unpredictable, which can easily overload a business’s planned insurance workflow and destabilize its healthcare spending. When an employee receives a cancer diagnosis or is involved in a serious accident, these costs can destabilize the business.
How Stop-Loss Insurance Provides Financial Stability
Stop-loss coverage provides a financial safety net from such events. It reimburses the plan sponsor for claims that exceed a preset threshold, helping employers manage volatility while still benefiting from self-funding. This insurance covers expenses that exceed a certain threshold, depending on the policy, allowing employers to take advantage of the benefits of self-funding their group plans while mitigating some of the financial volatility that can accompany healthcare planning.
Types of Stop-Loss Coverage to Evaluate
“Stop-loss coverage” is a term that includes two distinct policy types: specific stop-loss and aggregate stop-loss. Both of these terms and their differences should be clearly recognized by self-funded employers to make sure the coverage they buy matches their risk tolerance.
Specific Coverage for Individual High-Cost Claims
Specific stop-loss coverage protects employers against the costs of individual claims when those claims exceed a particular limit. For example, if an employee is diagnosed with cancer, specific stop-loss coverage would place a limit on the employer’s liability for that employee’s health costs.
Aggregate Coverage for Overall Plan Usage
Instead of a per-member coverage limit, aggregate stop-loss coverage places a limit on overall plan usage, protecting employers from the cost of claims exceeding that limit. This protects self-funded employers if total plan claims for the year exceed an expected ceiling, even when costs come from multiple employees rather than a single large claimant.
Note – These policy types are not exclusive. In other words, employers can buy both types of policies to provide a broader amount of protection for their workforce
What are Attachment Points?
In employee benefits plans, attachment points refer to the amount that employers pay before their stop-loss coverage starts covering the rest. As there are two types of stop-loss plans (specific and aggregate), there are also two types of attachment points.
For specific plans, the attachment point is the amount that employers must pay on a single employee’s claim before stop-loss coverage begins the reimbursement process. For aggregate plans, the attachment point is the total amount that the group of covered employees must incur. This does not have to be divided equally among those employees.
Specific Attachment Example: If your specific attachment point is $75,000 and an employee incurs $300,000 in claims, the employer pays the first $75,000, and stop-loss reimburses the remaining $225,000 (subject to policy terms).
Aggregate Attachment Example: If expected annual claims are $2,000,000 and the aggregate attachment point is set at 125%, the plan is protected once total claims exceed $2,500,000.
Impact of Attachment Point on Premiums
When attachment points are set higher, the monthly premium will likely be lower because the employer’s risk exposure increases. The opposite is also true: lower attachment points reduce risk but increase costs, since the insurance company will expect to pay more per claim.
Assessing Organizational Risk Tolerance
To choose the correct attachment point for their organization, employers should evaluate their financial reserves and assess their claims history. Comparison of these values determines which attachment points will be sustainable coverage thresholds. Reviewing their claims history can also help them identify which groups of employees file the most claims or the most expensive claims so that they can choose the right aggregate or specific stop-loss coverage plan.
Employers should also review key stop-loss contract provisions that can affect protection, including lasered individuals (higher limits for specific members), exclusions or limitations, and run-in/run-out coverage for claims that cross policy years. An employee benefits consultant can help model how these terms impact real risk.
Balancing Cost Savings With Risk Management
The right level of stop-loss coverage, with an appropriate attachment point, can balance monthly premium savings against the employer’s potential financial exposure. An employee benefits consultant can help determine the right balance of risk and savings based on the business’s cash reserves, its employees’ risk level, and the employer’s risk tolerance.
Connect with an Experienced Employee Benefits Consultant
While self-funded benefits plans have financial advantages, they can also expose self-funded employers to additional risks. Stop-loss coverage provides employers with a way to mitigate these risks by covering employee health costs over pre-set limits based on individual or group plans.
At New City Insurance, our goal, as an employee benefits consulting firm with nearly 20 years in the business, is to give self-funded employers a way to personalize their benefits strategy by balancing their premiums with their risk tolerance. The right stop-loss coverage can turn employee benefits from a challenge into a competitive advantage by strengthening employee satisfaction and retention, providing more complete and transparent healthcare coverage.
If you’re evaluating self-funding or re-marketing stop-loss, our team can help you model attachment points, compare specific vs. aggregate options, and review contract terms to fit your risk tolerance and budget.