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Refreshing Insights

An increasing number of small and mid-sized businesses are turning to self-funded health insurance models to help battle rising healthcare premiums. While this move isn’t right for every business, there are many benefits to self-funded health insurance. If your employee population is generally healthy, the quality of coverage and care options can often exceed those offered through traditional fully insured plans.

One of the concerns many employers have about self-funded health insurance, however, is the risk of catastrophic claims that could exceed coverage and leave the company liable for paying large expenses.

This is where stop-loss coverage comes into play. Stop-loss is, in essence, an extra layer of insurance that an employer purchases to protect itself from paying healthcare costs that exceed the allowable covered expenses under the self-funded plan.

For example, if your health insurance plan insures each employee for $50,000 worth of claims, and one employee has an emergency event that requires surgery and a lengthy hospital stay, his or her medical bills could far exceed the $50,000 threshold. That’s when stop-loss coverage kicks in to cover the difference.

Without stop-loss coverage, a small company that experiences a million-dollar claim could be responsible for paying the entire amount.

If you are considering a self-funded plan, you will want to partner with an insurance broker who not only understands the healthcare needs of your employee population, but also the potential financial burden on your organization. The correct stop-loss coverage is integral to a successful self-funded health plan.

A good broker will help you determine which health plan and stop-loss coverage is right for you. To help you choose, we have put together a brief tutorial on types of coverage, and common practices among carriers.

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Types of Stop-Loss Coverage

Stop-loss coverage is purchased through a separate carrier from your healthcare coverage. Most employees won’t even know it’s in place, making it one of the unsung heroes of your employee benefits program.

Stop-loss obviously benefits the employer by protecting you from the financial liability of catastrophic claims, but it also protects you from huge fluctuations in premiums year over year. This benefit is then passed through to your employees as stable payroll deductions for their premium contributions year over year—creating a positive employee experience with the health plan.

There are two types of stop-loss coverage an employer should consider, and an experienced broker can help determine which will best meet your needs.

Individual, more commonly called specific stop-loss, covers excessive claims for an employee, his or her spouse and children on an individual basis.

Aggregate covers claims for an entire group when its claims exceed a specified amount determined by the insurance carrier over the course of a year.

Choosing the type of coverage is rarely either/or for newly self-funded companies. It’s far more common for employers with fewer than 200 employees to purchase both types when they first venture into the self-funded insurance model to make sure both exposures are covered.

After a few years, the company will have a better idea of the average costs of claims and might adjust both healthcare coverages and stop-loss coverages. For example, if you look at claims over the course of a few years and see that you never came close to needing the aggregate stop-loss coverage, you might choose to drop that coverage.

If, on the other hand, you discover you’ve gotten close to the aggregate limits during that time, you might want to reassess your health plan limits as well as keep your aggregate coverage in place. Typically, aggregate coverage isn’t very expensive, so some companies choose to keep this coverage for the peace-of-mind it offers.

It is important to review your plan each year with your broker to examine your claims and make recommendations based on your employee population and claims history.

Common Practices Among Stop-Loss Carriers

Who you use as a stop-loss carrier is important—there are a lot of companies in the marketplace that sell stop-loss coverage but have contracts with lots of gray areas that could result in claims not being paid or having payment delayed. An experienced broker will be able to explain the contracts and point out potential barriers to coverage.

There’s also a practice common among stop-loss carriers called “lasering.” Beware of this practice. In essence, these companies target (or laser) employees who’ve had large claims in the past due to severe illnesses or chronic conditions, and severely limit the amounts paid for those high-risk individuals.

For example, instead of that individual’s stop-loss claims being covered after a $50,000 limit, the stop-loss carrier can dictate that it will only pay after $250,000. This puts the entire responsibility for the difference back on the employer if the individual exceeds his or her designated healthcare coverage.

For an additional premium, specific stop-loss coverage may be purchased with a “no laser” agreement, meaning the insurance company cannot apply a higher stop-loss to one individual. In most cases, it’s worth the additional premium.

How to Ensure Quality Stop-Loss Coverage

Educating yourself on all aspects of self-funded insurance, including stop-loss coverage, will help you feel confident that you receive the best value healthcare plan—and that your employees receive the best coverage.

Self-funding isn’t for everyone, but if it’s something you’ve been considering we are happy to answer your questions—without a high-pressure sales pitch. We invite you to contact us today to learn more about how self-funding can help you gain control of your healthcare costs. Interview us today to see if we can help.

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A collection of articles from the McClone team with the helpful knowledge and insights to ensure your organization is well protected.