This is where stop loss insurance comes in as a risk management tool for self-funded plans. It doesn’t insure your plan participants directly, but instead, stop loss insures the plan or plan sponsor (this is oftentimes the employer) from losses that could be catastrophic.
Here’s a hypothetical scenario. Company XYZ’s workforce has been pretty healthy over the last few years, their claim costs pretty consistent. A plan participant is suddenly diagnosed with an aggressive form of malignant cancer and treatment begins shortly after. The expenses associated with such advanced care needs and a combination of specialty prescription drugs begin to multiply as does the cost for a long-term inpatient stay at the hospital.
It’s an unanticipated situation like this that makes stop loss insurance so instrumental. Without this insurance in place, the plan sponsor/employer would be responsible for covering these immense medical claim costs – something that could be a serious financial risk to the company. However, with stop loss insurance, once medical claim costs exceed a predetermined amount, the coverage kicks in to ultimately reimburse the plan/employer for the unanticipated costs. The maximum amount an employer will pay for claims can be specified at both the individual level (Specific Deductible) and the aggregate level for all employees for a plan year (Attachment Point). The decision regarding dollar amounts is based on considerations like the number of plan participants, the company’s financial situation, the total costs of the health plan and more.
For a closer look at how stop loss insurance is set up to protect employers from catastrophic losses, check out this informational article on the Self-Funding Success website: http://www.selffundingsuccess.com/self-funding-101/intro-to-self-funding/the-basics-of-stop-loss-insurance/.