A self-funded plan holds all the risk—and potential rewards—of running a health plan. To help mitigate that risk, self-funded plans purchase stop-loss insurance (sometimes called reinsurance), which is essentially insurance for your health plan. Stop-loss insurance does exactly what its name promises: it stops your losses after a certain point. There are two types, often purchased together, that limit the plan sponsor’s risk.
Specific Stop-Loss
Specific stop-loss focuses on a specific individual’s claims. Stop-loss helps manage the monthly cash flow fluctuation by reducing the plan’s exposure from high-cost individuals. The specific stop-loss deductible is set based on the number of participants in the plan, as well as the plan sponsor’s ability and willingness to take a risk.
For example, John Smith is enrolled on your self-funded health plan. He has leukemia, and his claims for the year total $350,000. This would be a catastrophic loss for your plan—except for the fact that you have stop-loss insurance in place. Your specific stop-loss deductible is $100,000. The health plan pays John’s $350,000 claim, but then the stop-loss carrier reimburses the health plan for $250,000. In the end, the health plan was only responsible for the $100,000 portion of that large claim.
Some stop-loss carriers may seek to limit their financial obligations with a tool called a laser. A laser is put on an individual, or multiple individuals, who are likely to be ongoing high claimants, usually because of chronic conditions like heart disease, high cost medications, or diabetes. Lasers raise the specific deductible for just the individuals identified.
For example, your stop-loss carrier informs you at renewal that they want to add a laser on John Smith because he is likely to have just as high claims next year as he did this year. The laser in this case raises his specific deductible to $500,000. During the plan year, John’s claims once again add up to $350,000—but the stop-loss carrier doesn’t reimburse the health plan this time around, because his claims haven’t reached the new specific deductible. In the same plan year, another employee incurs $350,000 in claims. The stop-loss carrier reimburses $250,000 of those claims as normal, because no laser had been placed on this individual.
Aggregate Stop-Loss
Aggregate stop-loss coverage reduces the health plan’s exposure to high levels of utilization for the group as a whole. This is the cheaper of the two, often called sleep insurance. When determining coverage, stop-loss underwriters start by calculating the expected claims of the plan. This can involve forecasting based on past claims or a health questionnaire for your employees.
Then, underwriters create a risk corridor by adding a “buffer” percentage, usually 25%. At the top of this risk corridor is the attachment point—that is, the point where the actual claims on the plan equal 125% of what the underwriters calculated the expected claims to be. Anytime total claims get above this attachment point, the stop-loss carrier steps in to cover any amounts above the risk corridor.
