Understanding the Basics of Stop Loss Insurance

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I. Introduction: What Is Stop Loss Insurance?

Stop loss insurance is a form of insurance coverage intended for self funded employer health plans. Due to rising medical costs, many companies and organizations are opting out of health insurance and instead choosing to fund their own employee medical plans. Stop loss insurance, also sometimes known as excess insurance, provides a bridge for administrators of these types of medical plans to mitigate the risk of extreme financial loss from severe medical claims.

II. Types of Stop Loss Insurance

There are two major types of stop loss coverage: specific and aggregate.

Specific stop loss insurance covers employers when an individual employee/dependent undergoes expensive medical treatment that result in unforeseen costs to the self funded health plan. A specific stop loss insurance plan will then reimburse the employer for the difference when a claim cost reaches a certain level. claims amounts over deductible not included in expense total for aggregate coverage.

The other major category of stop loss insurance is aggregate coverage. Aggregate stop loss insurance plans are meant to insure employers when the total yearly medical claim expenses for all employees are higher than expected. This type of coverage will begin paying for claim costs once a specific threshold is exceeded. A common payout threshold is often 25% higher than the annual projected medical cost amount.

The cost of a stop loss insurance plan depends on several factors regarding both the employer and employees. The size and industry of a company are major pricing factors, as well as the level of risk an employer is willing to undergo. At the individual employee level, previous claims history as well as demographic information such as employee ages and genders will affect a stop loss insurance quote as well. Even the geographical location is an important factor to consider, as medical costs can vary greatly by zip code. These variables all impact medical costs and therefore stop loss insurance as well.

III. Stop Loss Insurance Plan Options

For self funded employee medical plan administrators considering exploring stop loss insurance, it is important to understand some basic contracts terms and coverage options within the industry. First, research whether a plan offers reimbursement based on an incurred or paid claims basis. This distinction is important across the entire insurance industry, and can affect whether stop loss insurance claims are eligible for payment based upon timing components. Incurred claims consider eligibility based on the date that medical service were rendered, while paid claims consider eligibility to be the date which an employer paid for medical expenses.

Common plan variations specific to stop loss include the 12/12, 12/15, and 15/12 designs. The 12/12 plan option means that an employer can be reimbursed for claims that were incurred and paid during 12 month contract period. The 12/15 plan offers an employer protection from common lag time in processing claim payments, covering claims that were incurred within 12 months with an additional 3 month window for payment. A similar concept is the 15/12 plan, which instead actually extends the incurral window by 3 months to account for lag in employee reporting. While other variations such as a "run-in" contract or even a 24/12 contract may be available, these popular options offer plenty of flexibility for all self funded employee medical plans.

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