What is Stop Loss Insurance?
Stop Loss Insurance is the coverage an employer purchases to help protect a self-funded plan from catastrophic loss. In designing a medical plan, the employer reviews how to protect the plan against catastrophic loss. Purchasing Stop Loss Insurance effectively transfers the risk of catastrophic losses to an insurance carrier. Stop Loss Insurance is frequently referred to as “Reinsurance” coverage. There are two types of coverage that can be purchased, either together or on a stand-alone basis, namely:
Specific – deductible amount the employer selects as his maximum liability per covered person
Aggregate – maximum amount of claims liability for the entire group
Specific stop loss coverage protects the employer’s self-funded plan from catastrophic claims on each individual covered under the plan. The employer establishes a specific deductible amount based on his/her tolerance for risk and the stop loss carrier reimburses the employer for eligible medical expenses that exceed the specific deductible level. It is important to note that stop loss insurance policies are reimbursement contracts; however, most stop loss carriers provide provisions that allow the employer to fund only the amount of the specific deductible, this is referred to “specific advance” provision.
The cost of specific coverage is based on the manual table of the particular carrier which is then adjusted based on the demographics of the group. Some of the factors that may affect the cost of the specific stop loss coverage are as follows:
- Census, Age/Sex Factor of the Group
- Schedule of Benefits
- PPO Network
- Ongoing or Potentially Ongoing Large Claims
Aggregate Stop Loss coverage protects the employer’s self-funded plan against total plan losses above a predetermined amount called an aggregate attachment point (overall limit of claims liability). The aggregate attachment point is usually set by an underwriter after reviewing the claims history of the employer’s medical plan. Although most stop loss carriers will not offer aggregate coverage unless there is claims history available, there are some stop loss carriers that will offer aggregate coverage based on manual tables and the employer’s fully-insured premium history. Some of the factors that may affect the aggregate attachment point level are as follows:
- Claims Experience
- Medical Inflation Trend
- Monthly Enrollment
- Frequency of large claim losses under the specific deductible level
- Margin (Corridor set by the stop loss carrier between expected claims and the aggregate attachment point).
Understanding medical stop loss contracts is a very important process in providing an employer financial assurance of protection under a self-funded plan.
Stop Loss Contracts
When changing Stop Loss Carriers, there are always some claims still not received and processed by your current administrator during your contracted plan year. You need to be sure these claims are the responsibility of either your current Carrier or you new Stop Loss Carrier.
If you have a fully insured plan, the present insurer is responsible for paying claims incurred prior to the change date. If you are self-funded, you need to determine who you want to administer, and who can assume the risk for these outstanding claims. If you select the current administrator to pay for those claims incurred prior to the change, then you have entered into a “run-out” contract. If the new administrator is to process and protect the plan against the claims incurred prior to the change, then you have entered into a “run-in” contract. The following are examples of various types of contracts offered:
- 12/12 – Benefits must be incurred and paid within the contract period. This is the least expensive of all plans and has the maximum risk exposure to your company at the end of the plan year.
- 12/15 – An increasingly popular contract, claims incurred during the 12-month period and PAID by the end of the 15th month are covered. This gives the employer three months of coverage beyond the plan year to pick up incurred, but not yet paid claims.
- 15/12 – This contract provides three months of run-in coverage when taking over a previously self-funded 12/12 contract. It provides limited coverage for claims incurred but not paid during the 90 days prior to the effective date of the new contract.
Incurred – the date on which a covered medical service is rendered.
Paid – the date payment checks, drafts or electronic payments have been issued, mailed or otherwise delivered to the payee with sufficient funds on deposit. Note: Each carrier has particular wording on the definition of a paid claim and it is important to read the policy and understand the provisions.
Other available “run-out” contracts available are:
- 12/18 – claims incurred in current 12 month period and paid within 6 months after end of term.
- 12/24 – claims incurred in current 12 month period and paid within 12 months after end of term.
Other available “run-in” contracts available are:
- 18/12 – claims incurred during six month period prior and during current 12 month period and paid within current 12 month period.
- 24/12 – claims incurred during 12 month period prior and during current 12 month period and paid within current 12 month period
- Paid – This is an extension of the 24/12 contract, whereby all previous claims paid during the current 12 month period are covered.