For many self-funded organizations, stop-loss provides vital protections against high-cost claims. There’s no mystery why most such groups have such insurance, just look at this stat: the number of employees with annual claims exceeding $3 million recently doubled.

The risk is undeniable. And with such claims becoming more frequent, stop-loss coverage is crucial to protect self-funded employers from huge medical and pharmacy claims. With that said, here’s how stop-loss insurance works to mitigate risk.

Explain Stop-Loss Coverage

Through reimbursement, stop-loss insurance policies shield self-funded organizations against catastrophic medical costs, including large medical and pharmaceutical claims. Such policies cover medical claims that exceed a pre-determined amount.

Self-Funded Organizations

Organizations that wish to maximize their health insurance savings typically go the self-funded route, since administrative costs related to the provision of health benefits are relatively lower.

Also, self-funding eliminates profits an insurance company would otherwise make on insurance coverage. Self-funded health plans, including stop-loss, spend money as medical claims occur. This is as opposed to traditional fully insured coverage, wherein organizations must pay the same level of premiums monthly.

Types of Stop-Loss Coverage

There are two types of stop-loss coverage, and there are several variations for each. The types include “specific” stop-loss, which refers to large claims by a single individual. With this type, the insurance carrier reimburses the organization when the employee’s claims exceed the amount of their deductible.

Then there’s “aggregate” stop-loss, which caps the amount an organization may have to shell out in expenses on the whole plan, aggregately, during a given contract term. With this type of stop-loss, the carrier reimburses the employer following the end of the contract period for aggregate claims.

How it Works

Regarding specific stop-loss, let’s say that an organization fixes its per-employee liability cap at $150,000 for a policy year, and an employee has claims totaling $160,000. In this scenario, the organization is reimbursed for the $10,000 difference.

With aggregate stop-loss, the point at which the carrier is liable is determined by organizational plan enrollment and the aggregate attachment factor. For instance, the employer and carrier may put average expected monthly claims at $300 per employee. Using a relatively complex formula, that factor is set at $450 and is then multiplied by the number of employees enrolled. If that number is 1,000, for example, that puts the aggregate deductible for the month at $450,000.

Should total enrollment remain steady for the year, the annual aggregate will be

$5,400,000, which is the company’s maximum out-of-pocket claims. However, should claims amount to $5,500,000, for instance, the carrier must pay out $100,000.

Expert Care Guidance

To make the most of stop-loss insurance coverage, self-funded organizations should consider getting healthcare guidance.

Mercer, for one, has a strategy that comprises comprehensive coverage terms plus a holistic review that evaluates your current plan and works to find and solve coverage gaps. The consultant also does clinical and operational performance assessments of vendor partners and manages high-cost claim irregularities.

What’s more, care management services such as Mercer’s Health Advantage offer strong care management for employees with serious, chronic, or acute health conditions. According to Mercer, its approach can improve care quality – so important in a tight labor market, such as we have now — while saving organizations, on average, $430 per year per employee.

In sum, now you know how stop-loss coverage works. And since very expensive healthcare claims are increasing, such coverage is essential if you wish to protect yourself from such claims. And remember, Mercer offers a comprehensive approach that can help you establish the right care and claims management strategy for your organization.