With more employers opting for self-insurance over fully-funded health plans, the question of how to choose appropriate stop-loss insurance has become critically important. Designed to protect self-insured employers against sudden, catastrophic claims that could lead to unsupportable financial loss, stop-loss insurance is a necessity for most employers. However, deciphering the details of different stop-loss plans in order to choose the best one can be a challenging task, particularly for smaller companies making their first foray into the world of self-funded plans. The following primer on stop-loss insurance can help to guide companies through the basics of this type of coverage and what to watch out for when evaluating particular policies.
How does stop-loss insurance work?
The most important thing to understand about stop-loss insurance is that it covers the employer and not the employees. In other words, it’s still the responsibility of the self-funded employer to pay all health claims, no matter how high. The stop-loss plan reimburses the employer for loss amounts that exceed the deductible for the stop-loss plan.
What are the different types of stop-loss insurance?
Specific (or individual) stop-loss insurance
This form of stop-loss coverage protects the employer against a large claim on any one individual or beneficiary of the plan; that is, it offers protection against the extreme severity of a single claim rather than from a large number of total claims. Under this type of plan, the plan sponsor’s liability is limited to a predetermined amount per person, per policy year. For example, a small employer with a plan providing for less than 75 lives might have specific stop-loss insurance with a deductible of $20,000 per covered individual. Coverage above this deductible for any single person would typically be unlimited.
Aggregate stop-loss insurance
This form of stop-loss coverage protects an employer against the cumulative effects of many smaller claims that may never individually exceed the threshold of the deductible. With aggregate stop-loss, a ceiling is placed on the total dollar amount of expenses that an employer would be required to pay in a given contract period. This ceiling (referred to as the attachment point, the retention level, or the aggregate deductible) is typically expressed as a percentage of total projected paid claims, with 125% often being the standard figure.
While specific and aggregate insurance plans represent two broad categories of stop-loss coverage, many different variations of these forms exist. Generally, all but the largest employers will choose to protect themselves with both types of coverage.
Key terms to know.
In reviewing a stop-loss policy, employers need to be on the alert for a number of “red flag” terms and provisions that could materially increase their claims risk. Employers who are aware of the implications of these provisions will be in a better position to negotiate with their insurance representatives to modify or delete such clauses from their policies. These terms include:
“Actively at work” provisions
In some stop-loss policies, individuals who are not “actively at work” as of the policy period’s start date may be specifically excluded from coverage under the stop-loss plan. For example, an employee who is already in the hospital when a stop-loss policy begins may not be covered by the stop-loss plan even though he or she is still participating in the employer’s self-funded health plan. In such cases, the claim would be paid by the employer with no option for stop-loss reimbursement.
“Experimental or investigational” claims
Not all stop-loss policies will provide reimbursement for treatments or services that are deemed to be “experimental or investigational,” such as a new prescription drug or a type of radiation treatment, particularly when these treatments occur outside of a qualified clinical trial.
Charges beyond “usual and customary”
Most stop-loss carriers will treat payments based on preferred provider only networks as payable under the stop-loss contract, but reimbursements for claims outside of such networks are typically limited to “usual and customary charges” only. This means that the rate used by the stop-loss carrier as the starting point for service payments could be quite different from the rate defined under a self-insured plan.
Midyear changes to premium rates
If a plan participation rate goes above or below the number originally used to set the premium and to calculate stop-loss factors, most stop-loss carriers will mitigate their own risk by reserving the right to change premiums or stop-loss calculation factors. While midyear changes like this may be justified by major events such as mergers, acquisitions, or corporate restructurings, this type of provision is not usually designed with the employer in mind, so self-funded companies should be prepared for its implications.
Choice of law and venue restrictions
Sometimes, provisions found in stop-loss insurance policies may be in conflict with state law regarding issues such as where and when lawsuits can be filed against the insurer. Other provisions, such as a shorter claims submission period, may expose the plan sponsor to risk even when a claim is valid.