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Stop loss insurance helps self-insured businesses limit liability in the event of a catastrophic health claim or large number of claims. Stop loss insurance places a cap on the business’s liability for an individual employee’s claims, as well as aggregate claims across the company.
As a small business owner, you hope to protect yourself and your team with the best small business insurance, but insurance costs have been increasing over time. According to the Bureau of Labor Statistics, the total cost of employee benefits for small businesses with fewer than 50 employees rose by nearly 40% between 2004 and 2019.
Due to rising costs, many small business owners are considering self-insurance. Instead of contracting with a health insurance carrier, self-insured businesses set aside money to pay employees’ health claims out of pocket. While self-insurance can provide flexibility and cost savings, there are also big risks. To minimize potential liability, employers with self-funded insurance plans can buy stop loss insurance. In this guide we’ll explain what stop loss insurance is, how it works, how much it costs, and where to purchase this coverage.
Stop loss insurance goes hand in hand with self-funded insurance plans. Self-insurance or self-funded insurance is when an employer assumes the risk of paying for employees’ insurance claims out of pocket. Self-insurance is most common with small business health insurance. Under a self-funded plan, there’s no third-party insurance carrier that will collect premiums from you and pay claims on your behalf.
Typically, a self-insured employer stashes away funds in a special bank account to cover claims. The business has the choice to process claims on its own or to contract out claims processing to a third party administrator (TPA). A TPA can also provide access to preferred provider networks and handle other administrative tasks.
Self-insurance has grown in popularity because it provides businesses with more flexibility. For instance, employers can set their own rules on copays and deductibles, collect employee premiums, and choose their own provider network to suit the needs of their employees. Businesses also get more control over their cash flow because you pay claims as they arise, instead of paying a fixed monthly premium to an insurance carrier. Self-funded plans aren’t subject to state taxes on health insurance premiums, so businesses can also save money in that way.
Of course, the biggest downside to self-insurance is the risk. Since you’re paying insurance claims out of your own pocket, self-funded plans are a viable option only for businesses with sufficient financial reserves to cover health care costs. Stop loss insurance allows small businesses to self-insure while limiting risk exposure. If you purchase stop loss insurance, you’ll be reimbursed for claims above a certain amount. We’ll dig into the details on stop loss insurance in the next section.
Self-funded health insurance plans come with some inherent risks. An unexpectedly costly claim (called catastrophic claims by health insurers) or an unusually large number of smaller claims can wipe out your financial reserves and put your business in danger. Stop loss insurance limits these risks.
There are two main types of stop loss insurance:
Individual stop loss insurance, also called specific stop loss insurance, places a cap on the dollar amount of an individual employee’s claims. Let’s say one of your employees is suddenly diagnosed with a chronic illness, or becomes pregnant. In these situations, the employee’s health costs could quickly increase. If you purchase stop loss insurance, the coverage will kick in once the employee’s claims exceed a specific dollar limit.
For example, suppose you are willing to cover individual employee claims up to $50,000. This $50,000 limit is called your individual stop loss deductible. If an employee files a $125,000 health insurance claim, the stop loss insurer will cover $75,000. You’ll only be responsible for the first $50,000.
Aggregate stop loss insurance places a cap on the total dollar amount of claims across your company, after which the coverage will kick in. This insurance isn’t based on the health insurance claims of any one employee, but rather your business’s claims exposure across your entire team.
This type of stop loss insurance can be important for something as simple as an especially tough flu season that results in multiple employees getting sick and filing claims. You also might face demographic changes, such as several employees becoming pregnant in the same year.
Aggregate stop loss insurance is usually tied to your business’s expected claims exposure for the year. As an example, let’s say you expect to have $100,000 in total claims. Stop loss insurers often start coverage at 125% of your projected claims for the year—$125,000 in our example. If your employees filed $200,000 in total claims, the insurer would cover $75,000. You’d need to pay the first $125,000, which is called your aggregate stop loss deductible or aggregate attachment point.
In most cases, small businesses need both types of stop loss insurance to ensure maximum protection. This is because claim size and the number of claims can affect your finances. It might turn out that a single employee submits unusually costly claims, or a high volume of lower-dollar claims can drain your finances.
Note that some states, including California and New York, have regulations on stop loss insurance and the size of individual and aggregate deductibles. For example, New York only allows businesses with more than 100 employees to buy stop loss coverage. And California prohibits individual stop loss deductibles below $40,000. We recommend working with an insurance broker who’s licensed in your state when you’re ready to purchase stop loss insurance.
Stop loss insurance premiums vary widely among businesses, but usually range from $15 per month to $100 per month, according to a survey by Aegis Risk. The biggest factor that affects cost is the individual stop loss deductible. The higher that deductible, the less likely it is that the stop loss insurer will be obligated to pay, and consequently, the lower your premiums will be.
Here’s a breakdown from Aegis Risk of how premiums change in sync with the individual stop loss deductible that you choose:
The aggregate stop loss deductible will also impact the monthly premium, but to a lesser extent. Adding aggregate stop loss insurance adds on an average of $7.13 to your monthly premium.
Self-insurance is growing more popular among small businesses as health costs rise. And if you manage your self-insured plan correctly, and purchase good stop loss insurance, you can actually end up saving money.
Here are some strategies for minimizing the costs of self-insurance and stop loss insurance:
When budgeting, you should remember that stop loss insurance premiums aren’t the only cost for a self-insured employer. Your total costs include the dollar amount of employee claims that you have to pay out of pocket, administrative costs, TPA fees (if using a TPA), and stop loss insurance premiums.
Another way to save money on self-insurance and stop loss coverage is to enroll in a level-funded plan. With a level-funded plan, you contract with an insurer and pay a monthly fee which covers three elements:
At the end of the policy period, the insurer reviews the claims history of the business. If there’s money left in your claims allowance fund, the insurer will return the overage to you. And your monthly fee might decrease for the following year if only a few claims were filed. Level-funded plans are a sort of hybrid between self-insurance and regular group health insurance, making them a good option for small businesses.
Often, the best place to buy stop loss insurance is through a TPA. The main job of TPAs is to process claims and complete other administrative tasks. However, TPAs often offer stop loss coverage themselves or through a partner insurance company. If you’re already using a TPA for administrative needs, then purchasing stop loss coverage through them can be cost effective.
It’s also possible to buy stop loss insurance through an insurance carrier. Here are some of the most popular carriers for stop loss insurance:
Sun Life Financial provides stop loss insurance and receives high customer ratings for sales, underwriting, and claims service. This insurer can work with businesses that have as few as 35 employees. We like Sun Life because they go beyond offering insurance. Sun Life will connect you to third-party services, such as medical bill review and claims negotiation firms, to help lower your insurance costs.
Sun Life also offers a service called stop loss benchmarking to help you choose the correct individual and aggregate deductibles. As part of this service, Sun Life will help you predict your risk profile and show you claims histories for peer companies in the same industry. They even will work with you to make sure that your self-insured plan complies with all federal laws. Self-insured employers must comply with the federal Employee Retirement Income Security Act (ERISA).
Tokio Marine HCC is another leading provider of stop loss insurance, but they only work with businesses that have at least 50 employees. They provide individual deductibles ranging from $10,000 to $1 million. Their standard aggregate deductible is 125% of expected claims.
Tokio Marine offers something called advance funding. When you receive a claim from your employee that exceeds your stop loss deductible, Tokio Marine will send you the money to pay the claim, minus the deductible. This gets money in your hands sooner, so you don’t have to wait for the claims processing to finish. Tokio Marine has several technical and medical personnel on staff, who can guide you in running your self-insured program.
Optum is another carrier that provides stop loss insurance, focusing on customizing the coverage for the risk tolerance and demographics of your business. In some circumstances, Optum might be able to provide a refund of up to 15% of premiums if you have an excellent claims history. Optum’s main value-add is the range of other services they provide for your team. Your employees can go to Optum to find wellness and health resources, which in turn should help reduce claims and your reliance on stop loss coverage. They also offer health savings accounts (HSAs) for employees to save for health care costs.
EBSO offers level-funded stop loss insurance plans to businesses with 25 or more employees. With a level-funded plan, small businesses can more confidently start or transition to self-insurance. The business pays a fixed amount each month to cover the costs of administration, stop loss coverage, and claims funding. EBSO uses part of the monthly fee to pay claims as they come in. If there’s any overage at the end of the year, EBSO will send a check to the business.
Stop loss insurance protects your business from high health care expenses. Small businesses that self-insure already face higher risks than businesses that purchase health insurance from a traditional insurance carrier. Stop loss insurance helps lower this risk, so there’s no danger to your business from an unpredictably large claim or high volume of claims.