Medical Stop Loss Coverage

While employers take on the financial risk when self insuring, they are able to limit their risk through the purchase of medical stop-loss insurance policies.

The stop-loss policy is one of the most crucial elements of a self insured plan.  Compared to many other types of liability coverage the medical stop loss policy form is fairly straightforward, often having fifteen or fewer pages with a relatively small amount of standard exclusions. 

However, the different contract types and variations in terms and conditions can be confusing.

Types of Coverage

There are two forms of stop loss coverage: individual (or specific) stop loss and aggregate stop loss.

Individual (specific): 

This coverage protects against large, catastrophic claims incurred by a single individual.  Individual stop loss reimburses the employer when claims for an individual exceed a specific deductible.  Deductibles typically range from as low as $40,000 to as high as $500,000 depending on several factors including group size and risk tolerance.  

Under the PPACA employers are now prohibited from capping lifetime limits for “essential health benefits”.  Therefore, it is important for employers to insure with carriers that also provide unlimited lifetime benefits to the extent they want their stop loss coverage to mirror their obligations under the healthcare reform.  

Aggregate:

This coverage protects against higher than anticipated claim activity for the plan as a whole.  Once the total paid claims exceed the threshold for the plan, the carrier reimburses the employer for the overage. 

The aggregate stop loss threshold fluctuates throughout the year based on enrollment and is established based on something known as the “aggregate attachment factor”.  The attachment factor is determined as follows:

  1. The stop loss carrier determines the average expected monthly claims per employee per month (PEPM) based on the employers loss history.  For example, $250 PEPM;
  2.  That figure is then multiplied by a percentage ranging from 110%-150% (typically 125%).  For example; $250 x 125% = $312.50;
  3. $312.50 is established as the aggregate attachment factor. 

The factor is then multiplied by the enrollment on a monthly basis to establish the aggregate deductible (attachment point).  For example;

  1. If we assume that between individuals, individuals +1 and families the employer has 500 employees enrolled in his plan the initial month then; $312.50 x 500 = $156,250.  $156,250 is the aggregate deductible for the month.
  2. If we assume the enrollment stays the same for the year we can project the annual aggregate by multiplying the monthly product by 12.  $156,250 x 12 = $1,875,000

Assuming enrollment stays level, the maximum out of pocket claims for this employer would be $1,875,000.  However, the actual aggregate deductible will fluctuate monthly based on enrollment.  

Aggregate policies are typically issued with $1,000,000 annual limits or less frequently $2,000,000+ or unlimited. 

Contract Terms

One of the more confusing components of the coverage, contract terms define the period which a claim must be both incurred and paid to qualify for reimbursement. This allows the policy to provide coverage for the 'lag' from the date the medical service is provided to time of claim payment. All stop loss contracts cover claims incurred and paid within their 12 month policy period, but the terms for covering 'run-in' or 'run-out' will differ.

Making sure contract terms on renewal coverage fully integrate with an expiring contract is critical to avoid unintended coverage gaps.

Contract Type

Description

Incurred and Paid (12/12)

Covers only incurred and paid within the policy period. Typically only used for initial year.

Incurred and Paid with run-out (12/15)

Covers claims paid in 3 months following the end of the plan year.

Incurred and Paid with run-in (15/12)

Covers claims paid during the new plan year that were incurred during the prior 3 months.

Paid

Covers all claims paid during the policy year. Most comprehensive form of renewal coverage.

Incurred and Paid with 6 months run-in (18/12)

Covers claims paid during the new plan year that were incurred during the prior 6 months.

Incurred and Paid with 12 months run-in (24/12)

Covers claims paid during the new plan year that were incurred during the prior 12 months.

Additional Considerations

Disclosure

A carrier will require final disclosure of all known high claimants or high risk individuals before providing a 'firm' rate quote. No rate should be considered final until completion of this task.

Lasering

Upon rate quote or renewal, a carrier may place a higher deductible on certain individuals or even exclude them from coverage. Be sure to understand your carrier's philosophy on renewal lasering.

Specific Advance

Stop loss policies are initially written as indemnity policies.  In others words, the employer pays the claim and the carrier then reimburses them.  Specific advance is a claim reimbursement service where the plan only to funds the claim up to the specific deductible and then submit an advance funding request to the carrier.  A check is then provided to the plan to fund the remainder of the claim.

Aggregate Accommodation

Aggregate Stop Loss policies do provide reimbursement until the end of the plan. 

Similar to Specific Advance, Aggregate Accommodation provides for an advance of reimbursement if the plan exceeds their aggregate during the plan year.  This policy feature can help smooth out cash flow for the plan if it pays more claims than expected.