Self-funding of health benefits has become a viable option for many employers who seek the benefits of reduced costs, greater plan design flexibility and exclusion from PPACA provisions. A critical component of a self-funded plan is the selection and implementation of stop-loss insurance.
Employers who choose to self-fund may experience claim fluctuation from serious accidents or illnesses, which can significantly impact cash flow and increase their financial risk. Widespread illnesses such as flu outbreaks can have a major impact on cash flow and the bottom line even if a catastrophic claim does not occur. Smaller employers can especially be affected by a major increase in utilization.
Stop-loss insurance allows self-funded employers to limit their exposure to financial risk by covering incurred medical costs after a certain dollar amount threshold has been met. By limiting the liability of the employer to a pre-determined amount, stop-loss insurance makes self-funding possible for both large and small employers. There are two types of stop-loss coverage, with multiple contract terms and options.
Types of Stop-Loss Insurance
Individual Stop Loss is coverage that limits the amount of liability to a set dollar amount per individual per policy year. The limit is referred to as the pooling point, or deductible. This policy will reimburse for claims in excess of the pooling point or deductible amount. Pooling points can range from $10,000 to $1 million or more, depending on the number of covered individuals. The pooling point is typically set to fall between 3 and 6 percent of the annual expected claim amount.
Aggregate Stop Loss is coverage that limits liability of the overall claim fluctuation expressed as a percentage of total expected claims. A typical percentage is 125% indicating that if paid claims exceed expected claims by more than 25%, stop loss coverage will reimburse the employer for the difference. If an employer chooses a combination of both individual and aggregate stop-loss insurance, claims reimbursed under the under the individual stop loss coverage would not apply towards the aggregate stop-loss threshold.
Stop-Loss Insurance Contract Terms and Options
Comparing stop loss policies requires a basic understanding of stop-loss terms and options. Policies are often referred to by the number of incurred months (months in which claims are filed) followed by the number of paid months (12/12, 15/12, etc). Many stop-loss provisions are designed to take into account “Claim Lag” – delays in provider billing or processing delays .
Immature Policy – A policy that only covers medical claims that are incurred and paid in the same policy year. A 12/12 policy would fall into this category.
Run-In Contracts – This type of policy allows for claims incurred and paid by a previous insurer prior to the policy effective date to be covered in the first year of the policy. For example, a 15/12 contract would cover claims incurred 3 months prior to the new policy effective date.
Terminal Liability Contracts – Extends the period that claims are paid by a number of months past the termination date in the last year of the policy.
Paid Stop Loss Contracts – Pays all claims during the policy year, regardless of whether the incurred date falls within the policy effective dates.
Rolling Stop Loss Contracts - (Rolling Run-Out contracts) – Limits coverage to a defined number of paid and incurred months each year. A rolling 12/15 contract, for example, would cover claims during the 12-month policy year or 3 months after.
Incurred Stop Loss – An alternative to the typical paid stop-loss coverage. Because of claim lag it is possible that some claims may be incurred and partially paid in different policy years. Splitting claims between policy years can either eliminate reimbursement or require the employer to cover claims up to the pooling threshold for both policy years. Often this can occur with complex and costly hospital bills. Incurred stop loss contracts accumulate based on incurred dates instead of the paid dates. This eliminates the variable of claim payment timing in order to protect the employer. These contracts also have terminal liability built into the final year of coverage.
Here we have outlined only the basics of stop-loss insurance. Choosing the right stop-loss coverage requires careful consideration by employers who should seek the necessary guidance early in creating their self-funded plan. Stop-loss coverage can vary significantly between different carriers and the carriers themselves also require careful evaluation.