No Fear of the Unknown

Stop-loss insurance mitigates the risk of unexpected claims.

This article accompanies To Self-Insure ... Or Not?

Sunday, October 16, 2011
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There's good reason why more than 60 percent of employee-benefit health plans are using self-insurance -- it's a way for American businesses to pay their own claims rather than buying traditional health insurance.

Self-funding is experiencing its most significant growth in the small-to-medium size market of corporations, as well as phenomenal growth among state and local government employment and religious organization workers, according to a 2011 study by the Society of Professional Benefit Administrators.

For self-insured companies, there is simply no reason to fear unknown costs because there is a sure-fire way to protect against unpredicted or catastrophic claims: Stop-loss insurance protects the entire covered group and reduces exposure to losses resulting from catastrophic and high-dollar claims.

When claims come in a lot higher than expected, the stop-loss kicks in, and employers are only exposed to claims up to a certain point. As a result, employers can stop worrying about every claim that lands on their desk.

While the largest employers may have sufficient financial reserves to cover virtually any amount of healthcare costs, most other self-insured employers purchase stop-loss coverage to reimburse them for claims above a specified dollar level. This is an insurance contract between the stop-loss carrier and the employer, and is not deemed to be a health-insurance policy covering individual plan participants.

According to The Kaiser Family Foundation's 2011 Employer Health Benefits Report (PDF), 58 percent of workers in self-funded health plans are enrolled in plans covered by stop-loss. The value of stop-loss is that it mitigates employer risk on high individual or aggregate claims.

This recent report also shows that workers in self-funded plans in small firms of up to 199 workers are more likely than workers in self-funded plans in larger firms to be in a plan with stop-loss protection.

Furthermore, about four in five (81 percent) of workers in self-funded plans that have stop-loss protection are in plans where the stop-loss insurance limits the amount the plan spends on each employee.

Identifying the Coverage that Best Suits Your Workforce

There are basically two types of stop-loss coverage. Choosing the right level of coverage requires careful thought, along with the input of an experienced administrator -- either in-house staff or subcontracted to a third-party administrator. In addition to coordinating stop-loss insurance coverage, TPAs can also help employers set up their self-insured group health plans, provider network contracts and utilization review services.

Specific Stop-Loss Insurance:

This protects against a catastrophic loss occurring to any one individual covered by the plan. The employer sets the funding deductible at a level appropriate for the size and financial strength of the company.

For small to mid-size employers, this may be as low as $5,000 to $10,000, according to this Introduction to Self Funding by Pro-Claim Plus, a Fort Wayne, Ind.-based TPA.

Since self-funding is now available for companies of virtually every size -- as small as 15 employees in the State of New Jersey or 50 in New York -- this amount can vary. For a very large employer, it could be several hundred thousand dollars.

The employer is liable for the claim payments of an individual up to the chosen deductible, and amounts in excess of that are borne by the stop-loss carrier. The employer will pay a fixed premium each month for this coverage.

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Some specific stop-loss contracts will not require the employer to fund the claim and await reimbursement; the administrator pays the claim directly from the carrier's account.  

Aggregate Stop-Loss Coverage:

While specific stop-loss coverage protects the employer against a single catastrophic claim, aggregate stop-loss coverage protects against excessively high claim experience throughout the entire plan. Through actuarial studies, employers can estimate smaller, predictable claims, although these projections are based on large, industrywide samples, and are therefore subject to variations and fluctuations in small groups.

To protect against such fluctuations, which could severely impact an employer's cash flow, employers can purchase protection wherein the stop-loss carrier will pay the claims, which exceed their forecast by a particular amount.

This coverage will usually include a monthly accommodation provision, which will cap the employer's maximum monthly claim payments and further protect against negative cash-flow fluctuations.

The eligible claims paid, which fall under the specific deductible, are accumulated and if the total exceeds the employer's maximum exposure the stop-loss carrier must pay all further claims.

It should be noted that the average per-employee claims cost at which stop-loss begins paying benefits is $78,321 for workers in small firms with self-funded plans, and $208,280 for workers in larger firms with self-funded plans, according to the Kaiser Family Foundation and Health Research and Educational Trust.

See this example for the way stop-loss insurance would work for a self-insured employer.


Joseph Berardo, Jr., is chief executive officer and president at MagnaCare, which is based in New York. He is responsible for the strategic management and financial performance of MagnaCare's business operations. He can be reached at (212) 867-3606.

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