Health care insurance companies are among the most profitable companies in the world, because they collect much more in premiums than they pay out in claims. Some employers have dropped health care coverage because of the high cost of premiums; others offer cheaper, less comprehensive policies with higher deductibles and co-pays. A growing number of companies, especially those with over 500 employees, opt to take on the role (and profits) of the insurance company by “self-insuring” their employee health care plan and purchasing stop-loss insurance policies to reduce their risk.
Stop-loss insurance is a type of business insurance for companies that self-insure their employees’ health care coverage. Such businesses effectively act as their own insurance company, paying the covered medical expenses of their employees out of pocket. A stop-loss insurance policy puts a ceiling on the liability of the company for the health care expenses of their employees. It is an insurance contract between the company and the stop-loss carrier, not a health care policy that covers individual plan participants.
Self-insuring can be risky. While some very large companies have adequate financial reserves, catastrophic claims could put a smaller company in financial jeopardy. Having a stop-loss policy means that the insurance carrier will step in and pay the covered expenses that are in excess of the limits established by the policy, stopping the loss that the company would have otherwise incurred.
There are two types of stop-loss insurance policies: Individual Stop-Loss, or ISL, which bases the deductible the employer pays on the individual employee, and Aggregate Stop-Loss, or ASL, which bases the employer deductible on the total of all their employees' claims. Some stop-loss policies cover both. Within these two types, there is a broad range of stop-loss products with varying limits and prices.
Companies that self-insure typically set up a trust fund for health care expenses. The money that would have gone to a health care insurance company (either through employer premiums and/or employee payroll deductions) fund the account and claims are paid from the account. The difference (what would have been the insurance company’s profit) remains with the employer. The amount of interest income from the balance could offset the cost of a stop-loss policy. The administration of claims, as well as the coordination of the stop-loss insurance, does not necessarily have to be performed “in-house” by the employer; it can be subcontracted to a third-party administrator.
Traditionally, stop-loss policies have had a lifetime maximum per individual of $1 to $5 million. Pursuant to the United States health care reform of 2010, lifetime limits must be removed from health care plans, including self-funded ones. Employers are looking to their stop-loss carriers to protect them from uncapped liability. Many of the large carriers, such as Cigna, Aetna and UnitedHealth, have offered unlimited stop-loss (at a price) for some time, but generally uncapped stop-loss policies are difficult to obtain.