Understanding stop-loss for self-funded insurance
Updated: May 17
Each year as health premiums continue to rise, choosing a self-funded plan becomes increasingly popular with groups who want to take control of their healthcare spending. By choosing self-funded plans, businesses only pay for their populations' claims and not inflated premiums in a traditional fully funded health insurance plan.
Since employers only pay for the claims as they occur, they increase the likelihood of saving money on healthcare costs. However, it also means employers assume all the financial risk associated with their health plan. Because of this, self-funded plans have safeguards in place to protect groups from paying out large claims. Stop-loss insurance should be a part of any self-funded plan to limit financial risk and hedge against large claims or overuse by plan members.
Employers can think of stop-loss as a financial safety net. It’s important to note that stop-loss is not health insurance, but rather business liability insurance.
There are two types of stop-loss insurance for self-funded plans that can be purchased to make sure the employer isn’t assuming all the risk:
1. Specific Stop-Loss Insurance protects from large, catastrophic claims like cancer treatments. The stop-loss carrier pays out the claim once the employer has met their deductible on an individual member.
2. Aggregate Stop-Loss Insurance protects the plan from over-utilization by a company’s entire population. So even if every employee broke an arm and a leg, companies only pay a set amount before their aggregate stop-loss insurance kicks in.
HOW TO PICK THE BEST PLAN FOR YOUR MEMBERS
Stop-loss plans are not a one-size fits all. To find a plan that best fits your unique needs there are four key factors to consider:
1. How many employees do you have?
Smaller companies usually pay a higher per employee per month (PEPM) than larger ones. There is an inverse relationship between a company's individual stop-loss (ISL) deductible and their risk; meaning, smaller deductible means less risk, as opposed to larger deductible means your company needs to have the financial backing to take on more risk.
2. What is your company’s past claim’s history?
Carriers will gather as much data as they can on your claims history to see what your actual spending is year-over-year. This will also allow them to recommend whether Specific or Aggregate coverage, or even both, will be best for your company.
3. What is your risk tolerance?
A company who has little to no turnover might understand their population’s health a little more than a younger company that has incurred a lot of turnover. Only the company can decide what level of risk they are comfortable with. For example, a larger company might be able to take on more risk because they have more financial backing compared to a smaller company.
4. What contract term best fits your company’s needs?
First, we need to understand what each term means for your company.
12/12 - You are only covered within the 12 months of your contract date.
12/18 - All claims that are incurred within 12 months but paid within 18 months. Also known as a “run-out” policy.
15/12 - Supplies coverage 3 months prior to contract date. Also known as a “run-in” policy.
Additionally, run-in and run-out policies can extend to 18, 24, and up to 36 months.
But why would anyone need coverage beyond their contract dates? Wouldn’t all claims be paid during your coverage period? Not necessarily.
Coverage gaps can leave employers exposed and responsible for paying large claims beyond their deductibles. A 12/12 contract might make the most sense, and although cheaper, the employer group is taking on more risk. While run-in or run-out contracts offer less risk and give you greater coverage, ensuring your company doesn’t fall into a gap of coverage.
When employers are looking to cut their healthcare costs, they should consider alternatives to the historic fully insured health plan model. Fully insured carriers retain the profits from inflated premiums that may leave employers over-paying for what their population needs. On the other hand, self-funding gives employers the opportunity to only pay out claims as they’re incurred and cut their healthcare costs. Interested in taking your next steps with Novo Connection? Contact one of our team members today to see what plan best fits you.