What is Stop Loss Insurance?

More and more companies are choosing to forego the traditional method of funding health insurance and are instead opting for a self-funded insurance program. 

For many companies, this is a great way to reduce expenses because the employer gets to drop any collected but unspent premiums to the bottom line. (In a fully-funded scenario that profit would go straight to the insurance company.) That said, self-funding is also a gamble, since an employer can also experience a plan year in which medical claims are higher than collected premiums.

This is where stop loss insurance comes into play.

What is Stop Loss Insurance?

Stop loss insurance is essentially insurance for an employer’s self-funded insurance plan (the technical term is Reinsurance or Excess Insurance). It caps the amount an employer would be responsible for paying in the event of a catastrophic claim, or series of catastrophic claims.

Stop loss caps come in many shapes and sizes and are typically driven by the risk tolerance of the company putting them in place. Stop loss insurance can prevent you from ending up in a number of financially dangerous situations because of employee illness or injury, including:

• Decimating your budget (or your emergency reserves) for the year out of a need to cover employee healthcare costs.
• Being unable to pay employee healthcare costs, then finding yourself being sued as a result.
• Losing great employees due to the fact that you're no longer providing the coverage they expected (and used to receive) from their employer.

How Does Stop Loss Insurance Work?

There are two key types of stop loss insurance — individual and aggregate coverage:

• Individual Stop Loss Insurance, also called specific stop loss, provides protection for the employer against an excessive claim by any one individual. This is particularly useful in the event of scenarios like cancer, chronic illness, or catastrophic injury, all of which can incur medical costs that can quickly skyrocket out of control. This type of stop loss insurance protects your business when you're put in a situation where one employee's medical costs have the ability to destroy your business' financial stability. 

• Aggregate Stop Loss Coverage, also called total claims coverage, is intended to set a total dollar amount for a business and cover any claims that go above that amount. Rather than being based solely on the medical costs incurred by one employee, it's based on all of the medical costs that occur across employees over the course of the plan year.

What Type of Companies Take Out Stop Loss Insurance?

It’s estimated that about 80 percent of companies with more than 500 employees are choosing to switch to self-funded insurance. According to the Kaiser Family Foundation, 57 percent of all workers were enrolled in a self-funded insurance plan covered by stop loss insurance in 2016 - this number has most definitely grown since then.

As most companies with self-funded plans are large and midsize employers, most companies enrolled in stop loss insurance coverage are also of the same size employers. That being said, self-funding is also booming with smaller companies (some with as few as 10 enrolled employees) . The growth in the popularity of self-funding with smaller companies is being enabled by something called level funding, which will be the topic of an upcoming blog post. Smaller companies also like self-funding because it allows them to move away from ACA community ratings, as well as the more burdensome regulations that come with fully-funded plans.

In some cases, employers may think they're relatively safe and don’t need to purchase stop loss insurance. Perhaps they have a young, mostly unmarried, child-free workforce made up of fairly healthy employees. They may wonder if the risk to the company's financial stability is really all that high with such low-risk employees.

The reality is that all companies choosing to self-fund their employee health coverage can benefit from carrying stop loss insurance. Catastrophic events happen, babies are born prematurely, people find out they have chronic illnesses they never realized they had, and age takes its toll on our bodies.

A seemingly healthy workforce can fall into medical disarray in what feels like the blink of an eye. The costs associated with the treatment of any medical event can add up — and fast. Stop loss insurance ensures that, while the care can get expensive, there will eventually be a reprieve for your company. 

By taking out a stop loss insurance policy, every company can be better prepared for the health catastrophes that impact their employees. 

Do You Really Need Stop Loss Insurance?

Let’s say your company is relatively small and your employees are mostly young and healthy. Perhaps these are the exact reasons you choose to switch to a self-funded insurance strategy instead of fully insuring in the first place. Do you really need stop loss insurance? Consider some of these scenarios. 

Scenario 1: One of your employees has cancer. 
The expense associated with cancer rises fast and it can decimate your business's finances. It may seem unlikely for healthy 20-somethings to be diagnosed with cancer, but it happens more often than you may believe. According to the American Cancer Society, testicular cancer is “largely a disease of young and middle-aged men,” with the average age for men to be diagnosed being just 33. Lance Armstrong was diagnosed with Stage 3 testicular cancer at 25. Do you have the funds to cover the surgeries, the chemotherapy, and all the other medications associated with a possibly long, drawn-out bout with cancer? 

Scenario 2: Your office suffers its way through a particularly nasty flu season. 
Nearly all of your employees end up falling ill one after another. All of them are visiting their Doctors to see if they can get any medications to help them recover. Worse yet, several employees become hospitalized with symptoms, and one nearly dies. After this year's flu season, this example doesn't seem that outlandish. Is your business prepared for that type of sudden medical expense across so many of your employees?

Scenario 3: On the way back from a conference, several employees are in a car accident. 
All of them are seriously injured, requiring more than just an ambulance ride for three or four —  long hospitalizations, surgeries, and physical therapy will also be necessary. Can your business support the mounting medical expenses as employees work their way back to health? 

Scenario 4: Your company goes through a baby boom.
It seems to happen in groups — at some point or another, it will feel like all of your employees are pregnant.

Even if every woman has a healthy pregnancy, that means at least three ultrasounds, at least three rounds of bloodwork, and at least 14 office visits, per person — and that’s all before anyone even gives birth, which is expensive even when everything goes smoothly. And God forbid someone has a premature birth, which can sometimes lead to a million dollar claim. Is your company prepared for those expenses?

Making the Decision

As long as employees stay relatively healthy and don't experience significant injuries, it can be cheaper for employers to self-fund their insurance coverage than to work with fully funded plans. However, an aging workforce or one with substantial employee medical expenses can wreak havoc on the cost of providing health insurance — especially for smaller businesses, which is why larger employers are more likely to take the risk.

The more people that are paying into your group, the more money you have in the pool to cover major claims. This is the same reason that larger groups typically have more affordable insurance rates than small businesses. There are simply less people to spread the risk over in a small business scenario.

Stop loss insurance is a practical measure for any company that has chosen to self-fund its health insurance costs instead of opting for fully funded insurance. Stop loss insurance can make sure your company is safe in the event that employee healthcare expenses significantly exceed your initial estimates — and that means you won't face financial ruin because your workforce had an unusually tough health year.

Whether or not self-funding is right for your company depends on many factors. It’s best to speak to your employee benefits broker before making the decision to do so — but if you do decide to self-fund, purchasing stop loss insurance is one of the best ways to protect yourself, your company, and your employees in the event of a catastrophic medical event.

Do you still have questions about stop loss insurance? Are you ready to learn more about the insurance coverage that's right for your company? Contact us today to learn more about how we can help!