April 20, 2020

Self-funding 101: Stop-loss insurance

Dean Graham

Learn about one of the most important financial elements of any self-funded health plan.

When an employer is ready to take back control of their healthcare costs, switching to self-funding is often one of the most important steps they can take. By paying for members’ healthcare directly, rather than relying on an insurance carrier, companies can gain transparency into the uses of their healthcare dollars and create opportunities for significant savings.


But what if an employer switches to self-funding, and then an employee has a serious accident? What if an expensive illness threatens to drain the entire healthcare budget? For self-funded insurance to make sense, there has to be some sort of protection against catastrophic claims.


This is where stop-loss insurance comes in. By incorporating stop-loss into a self-funded health plan, benefits advisors can give their clients the transparency and savings potential of self-funding, without exposing them to unmanageable risk. In this blog post, we’ll break down the basics of stop-loss insurance, and how you can use it to set your clients up for success.


How stop-loss insurance works

Stop-loss insurance is designed to do exactly what the name implies: stop an employer’s losses. Employers pay a stop-loss carrier monthly premiums (significantly less than they would pay a regular insurance carrier, of course) in exchange for coverage that kicks in at a certain level of healthcare spend. For example, if an employer has stop-loss coverage starting at $2 million, then they would only be liable to pay up to $2 million for members’ healthcare. After that the stop-loss carrier would pay for eligible care.


There are two categories of stop-loss coverage: aggregate and specific. Aggregate coverage limits your overall healthcare spend across members. Specific coverage limits your spend on any particular member. So you could have aggregate coverage limiting your total spend to, say, $2 million and/or specific coverage that means you never have to pay more than $200,000 per employee.


Managing risk

Of course, stop-loss insurers also want to limit their liability. So before they provide a quote, they’ll usually want to take a close look at your groups’ healthcare information to check for any high-risk individuals. If you have an employee who could reasonably be expected to need extremely expensive care, there are two options. The stop-loss carrier might just raise their premium quote in order to hedge against the risk of a high-cost individual. Or, they might request a “laser.” 


A laser essentially means that a specific individual or condition is exempt from the general terms of the stop-loss agreement. For example, if the carrier is worried about one individual in particular, they could decide to offer aggregate coverage that kicks in at $2 million excluding claims spend for that particular individual. They may include specific coverage for the high-risk individual, but at a higher amount. This allows the carrier to keep premiums lower for the group as a whole, while still controlling their own risk.


How to get a competitive stop-loss quote

So what does this mean for benefits advisors interested in writing self-funded plans? If you want to get your clients on board with self-funding, you’ll need to present a proposal that isn’t just a little better than the incumbent—it needs to be so much better that it justifies the extra work for your client. An important part of putting together a competitive proposal is getting good stop-loss quotes.


Here are a few things you can do to make sure you get competitive stop-loss quotes:


Collect comprehensive group health data

Like I mentioned earlier, stop-loss carriers need to make sure they’ve been able to identify any high-risk individuals or situations in order to manage their own risk when they take on a new group. They can only do this if you provide detailed, up-to-date claims or group health information. The more they know, the more comfortable they’ll be giving you a reasonable quote.


It’s best to provide recent claims data from the group’s incumbent plan. If this isn’t available, you can also have the group fill out Individual Medical Questionnaires (IMQs). The important thing is just that the information is detailed, and that it’s recent—no claims information that ends six months ago.


For a more detailed look at the information you should be collecting during RFP process, download our RFP Checklist


Look for a TPA with strong stop-loss relationships

Relationships are an important driver across the insurance industry, and stop-loss is no different. At Flume Health, we’ve worked hard to build strong relationships with stop-loss carriers, and our groups consistently have lower claims spend than the stop-loss expected amount. The carriers know this, and it makes them more likely to give us competitive quotes. So when you’re putting together a self-funded plan, don’t just think about stop-loss insurance in a vacuum. Look for a Third-Party Administrator that has the relationships and credibility to help you create the best proposal for your client.


Tell a good story about your client

While stop-loss carriers look at a lot of data when evaluating a group, it’s not all math and numbers. They also respond well to a good story. So make sure you’re also adding some color to the RFQ (request for quotation) by talking about why the group is switching to self-funding, and what they’re hoping to achieve.


Conclusion

As more and more companies make the switch to self-funding, it’s important for benefits advisors to understand the role that stop-loss insurance plays in making these plans work. That way, you’re able to work the stop-loss carriers to provide the best possible quote for your groups.


And if you’re looking for a TPA with the know-how and relationships to help with this process, let us know.


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