June 12, 2024

Stop-loss insurance is the foundation of limiting catastrophic health care claims for self-funded employers. High-cost claims are becoming more common due to the increasing expenses within the health care system. Stop-loss insurance helps employers limit their exposure. Let’s dive into the basics of stop-loss insurance.

Overview of Stop-loss Insurance

Stop-loss insurance establishes a limit for the amount they pay in health claims. This coverage is not a form of medical insurance. Employers can add stop-loss insurance to an existing plan or purchase it independently.

Under a stop-loss insurance policy, an employer’s claims liability is limited to a specific amount called the attachment point. If an employer’s health claims exceed the attachment point, their insurer will usually reimburse them for all additional claims.

Example: An employer has an attachment point of $100,000. Claims hit $125,000. The employer is responsible for $100,000 while their insurer provides reimbursements for the $25,000 in claims that exceed the attachment point.

Types of Stop-loss Insurance

There are two types of stop-loss insurance: specific (or individual) and aggregate (or total claims).

Individual stop-loss insurance limits an employer’s liability when an individual employee’s medical claims exceed the attachment point. This coverage helps protect employers against unexpectedly high claims from individual employees.

Aggregate stop-loss insurance safeguards employers from the total sum of health claims for an entire group of employees rather than any one employee. Employers can purchase both types of stop-loss insurance to maximize financial protection for their organizations.

Stop-loss Contracts

There are three basic types of stop-loss contracts: paid, incurred, and incurred and paid.

Paid Contract

A paid contract provides employers with the most comprehensive coverage as it applies to claims incurred on or after the original stop-loss contract’s effective date. This contract is typically only available to employers on renewal, and it does not protect them from potential exposure after the contract ends.

Example:  An employer’s stop-loss contract becomes effective on Jan. 1, 2023, claims incurred from January 2022 to December 2023 and paid from January 2023 to December 2023 will be covered.

This contract type protects employers from claims that are incurred before the stop-loss policy’s effective date but haven’t yet been paid.

A paid contract is sometimes known as a 24/12 or referred to as having “run-in” coverage.

Incurred Contract

An incurred contract covers eligible claims incurred during the contract period and paid within a specified time of the end of the contract period, typically 90 days. There are variations of incurred contracts that extend the period in which a claim must be paid, such as six or 12 months after the end of the contract period. An incurred contract is also known as a 12/15 or referred to as having “run-out” coverage.

Incurred and Paid Contract

Incurred and paid contracts apply to eligible claims both incurred and paid during the policy period. These contracts operate similarly to fully insured health plans and are typically used during an employer’s first year transitioning to stop-loss insurance coverage. This type of contract is also known as a 12/12 contract and is often renewed into paid contracts to avoid coverage gaps.

 

Stop-loss Contract Periods

This is where things get a bit more complex. Stop-loss insurance policies have different coverage periods. Claims eligible for reimbursement under stop-loss contracts depend on when those claims are incurred and the dates they are paid. If an employer isn’t careful, they could be responsible for claims that occur during their policy’s effective period but are billed outside of that period.

Employers can purchase stop-loss policies with differing contract periods to cover employee claims that may otherwise be paid or processed outside of the plan year. The most common stop-loss contract periods are 12/12, 12/15 or 15/12. The first number represents the period in which claims are incurred. The second number indicates when claims must be paid.

12/12 Contract Period

A 12/12 contract period covers eligible claims incurred during the 12-month period and paid during the same 12-month period.

A claim that’s incurred during the contract period but is not paid until after the contract period is called an immature claim. To cover immature claims, employers typically purchase a stop-loss contract. This contract usually has a 24/12 contract period when their 12/12 contract period terminates. This covers an employer’s claims incurred the previous year but not paid until after the 12/12 contract period.

12/15 Contract Period

A 12/15 contract period covers eligible claims incurred during the 12-month contract period and paid in a 15-month period.

This protects employers from claims incurred during the contract period but not processed or paid by the end of the contract period. Other common contract periods include 12/18 and 12/24.

 

15/12 Contract Period

A 15/12 contract period covers an employer’s eligible stop-loss claims if they’re incurred within the three months before the policy’s effective date and paid during the 12-month contract period.

As a result, this contract period extends eligibility for claims during the 12-month contract period. But only if they were incurred during either the 12-month contract period or the three months immediately preceding the policy’s effective date.

Other Contract Periods

The most common alternative contract period is 24/12. Most stop-loss carriers commonly add an additional 12 months to the incurred dates each time a 24/12 contract period is renewed (e.g., year one: 24/12; year two: 36/12; year three: 48/12).

 

Stop-loss insurance can be an effective strategy for employers to address rising health care costs and manage their cash flow. However, there are many contract nuances that can make or break that strategy. If the appropriate contract type and contract period are not implemented, employers may be on the hook for expensive claims they thought were covered by their policies.

Have questions about stop-loss insurance? We don’t blame you. It is a complex topic. Hopefully, this post provided a foundation. Our experts would be happy to answer any additional questions you may have. Just click the button below this post to reach out.

 

Some content courtesy of our partners at Zywave.

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Toni Stinson

Authored By

Toni Stinson, CPBS

Director of Apex Academy
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