What business owners should know about stop-loss insurance

When choosing health care benefits, many businesses opt for a self-insured (self-funded) plan rather than a fully insured one. Why? Among various reasons, self-insured plans tend to offer greater flexibility and potentially lower fixed costs.

When implementing a self-insured plan, stop-loss insurance is typically recommended. Although buying such a policy isn’t required, many small to midsize companies find it a beneficial risk-management tool.

Purpose of coverage

Specifically, stop-loss insurance protects the business against the risk that health care plan claims greatly exceed the amount budgeted to cover costs. Plan administration costs generally are fixed in advance, and an actuary can estimate claims costs. This information allows a company to budget for the estimated overall plan cost. However, exceptionally large — that is, catastrophic — claims can bust the budget.

To be clear, stop-loss insurance doesn’t pay participants’ health care benefits. Rather, it reimburses the business for certain claims properly paid by the plan above a stated amount. A less common approach for single-employer plans is to buy a stop-loss policy as a plan asset, in which case the coverage reimburses the plan, rather than the employer.

The threshold for stop-loss insurance is referred to as the “stop-loss attachment point.” A policy may have a specific attachment point (which applies to claims for individual participants or beneficiaries), an aggregate attachment point (which applies to total covered claims for participants and beneficiaries) or both.

Aligning plan and coverage terms

If you choose to buy stop-loss insurance, it’s critical to line up the terms of the coverage with the terms of your health care plan. Otherwise, some claims paid by the plan that you might expect to be reimbursed by the insurance might not be — and would instead remain your responsibility.

Properly lining up coverage terms isn’t always straightforward, so consider having legal counsel familiar with the terms of your health care plan review any proposed or existing stop-loss policy. In particular, watch out for discrepancies between the eligibility provisions, definitions, limits and exclusions of your plan and those same elements of the stop-loss policy.

Because stop-loss insurance isn’t health care coverage, insurers may impose limits and exclusions that are impermissible for group health plans. For example, a stop-loss policy can exclude coverage of specified individuals or services. Or it can impose an annual or lifetime dollar limit per individual.

You’ll also need to look carefully at the stop-loss policy’s coverage period. This is the period during which claims must be incurred by individuals or paid by the health care plan to be covered by the insurance. Specifically, determine whether it lines up with your plan year.

Cost-effective coverage

After buying stop-loss insurance, be extra sure to administer your health care plan in accordance with its written plan document. Any departures from the plan document could render the stop-loss coverage inapplicable. We can help you determine whether stop-loss insurance is right for your business or whether your current coverage is cost-effective.

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