Stop Loss Insurance – What it is And How It Works

Stop Loss Insurance - What it is And How It Works

Due to rising costs and federal regulations causing changes in workplace health insurance over the course of the last decade or so, employers have been searching for alternatives to the traditional full coverage model. An attractive option is self-funded health insurance (pros and cons discussed here), where employers fund coverage themselves instead of relying on an insurer. This type of insurance was usually only used by large corporations, but many small businesses have opted for it recently ( 

Self-funded workplace insurance is funded either by a specific account that the employer dedicates for their insurance plans, or they just pay medical bills with cash flow that already exists. Employees who work for self funded employers get their healthcare the same way, bills are just invoiced to the employer instead of the third party full coverage provider. The great part about self-funded insurance is that it can save employers a significant amount of money on what they would otherwise be paying out in unused funds for fully covered policies, and can also save on taxes they would normally be required to pay because they have traditional fully covered plans. Self-funded insurance also options up options for plans that are specific to each employee, instead of a one-size-fits-all plan that you see with most major providers. The bad part is that if employers aren’t careful, a catastrophic claim can be a major loss unless there is some kind of protection in place. This is where stop loss insurance comes in. 

What Stop Loss Insurance Is

Stop loss insurance places a predictable limit on what employers spend on healthcare bills for their employees. Stop loss insurance (more info) is specifically geared towards employers who self-fund their healthcare, in order to protect them from unexpectedly high or catastrophic medical claims from employees. 

How Does Stop Loss Insurance Work?

Stop loss insurance is a financial risk management tool for employers, it is not healthcare. The employer assumes all of the responsibility of insuring their employers, and along with that comes risks that stop loss insurance helps to protect against. Rather than having to pay out of pocket for all employee medical expenses after a self-funded plan exceeds the set limit, the employer is covered through medical stop loss insurance and the stop loss provider absorbs those costs. The stop loss provider will then reimburse the employer, usually at the end of a plan year, rather than paying the costs outright.

There are two different types of stop loss insurance:

  • Aggregate Stop Loss Insurance – This kind will protect an employer against claims that are unexpectedly high, or multiple claims that are exceeding catastrophic. 
  • Specific or Individual Stop Loss Insurance – This type has to do with individual employees. If an employee makes a claim that exceeds the cap placed on their expensenses, then specific stop loss insurance protects the employer from overages. 

While the option exists to choose either or, it is common for most employers to select some combination of both aggregate and individual stop loss insurance. It is highly recommended that all employers with self-funded healthcare obtain some kind of stop loss insurance. For companies with self-funded insurance and over 5,000 employees, 85% of them have stop loss insurance. Once you’ve opted for stop loss insurance, be sure to do your due diligence and find a provider that is right for you. 

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