Self Funding and Stop Loss

With health care costs rising, both small and large businesses are exploring different funding mechanisms to see if self funding is a viable option and may help control costs.

For those not familiar with self funding, it’s an alternative way to fund your health insurance. Rather than buying a group medical policy to cover employees, the employer partners with vendors to provide the services typically performed by the insurer. With self funding, an employer uses the money it would otherwise pay to an insurer to pay for claims and administrative services performed on their behalf. A broker or benefits consultant may help evaluate this option. A third-party administrator (TPA) is hired to receive and manage claims, and the employer authorizes the TPA to draw money from the bank account to pay claims. Normally, the TPA utilizes a preferred provider organization (PPO) networks, wellness programs and other managed care elements in place.

Safety through Stop Loss Insurance

Most medical claims are routine and predictable, so employers can set aside a predetermined amount each month to cover them. Occasionally, catastrophic claims occur, so employers purchase a stop-loss insurance policy to protect against those unexpected claims.

Stop-loss insurance will reimburse employers for the unexpected large claims. Most employers, self fund their group health plan but actually it’s partially self funded. Typically, employers don’t pay for all of their employees’ medical expenses. Employers pay for the smaller, routine claims, and the stop-loss insurer reimburses for the larger, catastrophic claims.
There are two main types of stop-loss — specific and aggregate — that employers can purchase.

Specific stop loss insurance protects the employer from bearing all the cost if an individual becomes very ill and has a catastrophic claim. The employer picks a specific deductible and is responsible for all claims below the deductible. The stop-loss insurer will reimburse the employer for all eligible claims above the deductible. For example, if the stop loss specific deductible was set at $25,000 and an individual incurs a claim in the amount of $75,000 the stop-loss insurer will reimburse the employer $50,000.
Aggregate stop-loss insurance protects the employer from bearing the cost of ALL individuals' claims within a year. If claims surpass the aggregate deductible, the stop loss insurer would reimburse the employer for all claims above the set benchmark. For example, the employer group incurs $1.5 million in annual claims and the employer group’s expected annual claims were set at $1 million and their aggregate corridor was set to 125% of expected claims, the attachment point was $1.25 million. The stop-loss insurer would reimburse the employer $250,000 under the aggregate coverage. An aggregate corridor is the difference between the expected claims amount and the attachment point is where aggregate stop-loss coverage begins to reimburse for claims exceeding the set amount. If needed, other routine, low-dollar employee benefits, such as dental, vision or short-term disability can be covered by aggregate stop-loss insurance.

Most employers buy both types of stop-loss coverage as they are additional tools used to help a business mitigate risk when they choose to self-fund their group health plan.