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Blog, Healthcare Costs
December 5, 2022

What Is Stop-Loss in Health Insurance?

3 minute read
A man stops a line of falling blocks from knocking over more blocks, to illustrate how stop-loss works in health insurance.

Increasing numbers of employers—with companies of various sizes—are considering self-funded healthcare models. Large corporations and small businesses alike are adopting cost-containment solutions within self-funded healthcare to help mitigate rising costs and exorbitant premiums from traditional private health insurance plans.

While switching to a self-funded plan can enable employers to better control their healthcare spend, the persistent risk of catastrophic claims may cause volatility in a plan’s financial performance. Stop-loss insurance plays an important role in self-funded plans because it reduces the risk of such catastrophic claims. If you’re considering a move to a self-funded plan, or you’re already there, you may be wondering “what is stop-loss in health insurance?”

This article will discuss stop-loss insurance, how it works, and the most common types.

What Is Stop-Loss in Health Insurance?

Stop-loss insurance, sometimes called reinsurance, is a policy type designed to protect against catastrophic or unpredictable losses. Essentially, it does exactly what the name implies: it enables employers to cap the expenses they cover when paying for employee medical bills.

Stop-loss insurance itself is not health insurance. Instead, it’s a corporate-level insurance policy designed to mitigate the impact of catastrophic healthcare claims. Self-funded plans offer employers an excellent path to savings and better benefits for employees, while stop loss insurance protects the plan when unexpected losses are incurred.

Instead of paying monthly premiums to a fully insured carrier, self-funded plans pay providers directly for medical expenses incurred by enrollees, thus assuming the risk tied to those claims.  If those claims become catastrophic in nature, then stop-loss would be structured to cap the risk to the employer.

When an employee becomes severely ill or suffers a serious accident, it can become extremely costly for employers. If an employee is diagnosed with cancer, for example, their employer could be facing over $150,000 in medical care, according to AARP. This kind of expense often exceeds what most companies can pay.

This is exactly the kind of expense that stop-loss insurance addresses by putting a cap on what employers are responsible for paying. If costs for medical services exceed that cap, a stop-loss policy pays out those additional costs. While this means employers will have to pay insurance premiums for a stop-loss policy, the amount is often far less than those of fully insured health plans, which translates to huge potential net savings.

It’s important to remember that while stop-loss policies will cover expenditures exceeding a certain threshold, they remit payments using a reimbursement process. This means that employers must cover the initial payment.

It’s also worth knowing that there are two types of stop-loss insurance:

  • Individual stop-loss. Commonly referred to as specific stop-loss, this kind of insurance covers claims for a specifically designated employee, their spouse, and dependents on an individual basis.
  • Aggregate stop-loss. As the name suggests, this type covers claims for a group in excess of a specified annual threshold.

While most certainly advisable to use one type of stop-loss coverage, depending on the circumstances, many employers use a combination of both to ensure the best risk management.

For instance, individual stop-loss may work well for an employee with a compromised immune system who is predisposed to contracting illnesses. However, if a virus outbreak occurs, the cost of the overall claims could drive up prices for the rest of the workforce. This is the kind of situation where aggregate stop-loss comes in handy.

Should My Company Invest in Stop-Loss Insurance?

If your company is considering becoming primarily self-funded or has already switched, it is highly recommended that you also enroll in some form of stop-loss insurance. Affording access to quality healthcare benefits employees and employers alike with improved productivity and employee retention. Healthcare is one of the most important benefits employers can offer employees.

But it’s also extremely expensive. While self-funded healthcare plans offer a powerful alternative to costly insurance models, without a stop-loss insurance plan to back them up, they leave employers vulnerable to catastrophic medical costs. It may seem like a fine distinction, but coupling stop-loss insurance plans with self-funded healthcare is the best way by far to balance quality of care and cost.

6 Degrees Health for Industry Leading Self-Funded Plans

Now that you understand what stop-loss is in health insurance, you’ll want the best self-funded plan to go with it. 6 Degrees Health was founded by industry veterans to restore balance and accountability to U.S. healthcare reimbursement.

Our reference-based pricing model offers self-funded plans an alternative to the costly traditional network-based healthcare models.When combined with an effective stop-loss plan, your organization will be protected from unpredictable medical disasters and control overall healthcare spend.

Still wondering “what is stop loss in health insurance?” Speak to a representative today to find out how our reference-based pricing model can help you realize the true benefits of healthcare.

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