Back to basics on stop-loss insurance

When an employee has a health issue requiring expensive treatment, the associated high-cost claims can be significant for their benefits plan sponsor. But it’s impossible to predict when a large claim will arise, so stop-loss insurance, which takes the claim off the employer’s shoulders, is one option to help protect against these unexpected costs.

As a type of insurance policy that sits on top of a benefits plan, stop-loss is available to both fully- and self-insured plan sponsors. When choosing stop-loss insurance, an employer selects a threshold up to which it can reasonably cover claims — ranging from between $10,000 and $100,000 — and any claims beyond that will be covered by the policy.

Read: 28% of U.S. employers made changes to health benefits in 2018: survey

Outside of health benefits, stop-loss works well for out-of-country coverage. If an employee has a medical emergency while travelling for work, costs around hospitalization and repatriation could be high, says Mike Sullivan, co-founder and chief executive officer of Cubic Health Inc. “You can’t tell when it’s going to happen so . . . [travel] lends itself well to stop-loss and catastrophic risk management, because it truly is a really low frequency and it can be a very high cost.”


The chance a self-funded plan sponsor will have a stop-loss claim in a given policy year

The likelihood a plan sponsor will have an injectable stop-loss claim

The likelihood a plan sponsor will have a stop-loss claim for cancer

The chance a plan sponsor will have a birth-related stop-loss claim

The chance a plan sponsor will have a US$1 million claim

Source: Sun Life Financial
report (U.S.), 2018

Mitigating risk

The main benefit of stop-loss insurance is its ability to protect an employer from catastrophic claims. For self-insured groups, it primarily acts as a budgeting tool so there aren’t any unexpected hits that could affect accounting, says Sullivan.

On the other hand, stop-loss can become costly, he adds, noting that, while a claim may be mitigated in the first year, premiums can rise in the following years, essentially providing only short-term stabilization. This is especially difficult if the claim is reoccurring, which is the case for most drug claims.

“Stop-loss doesn’t help you avoid cost; it simply helps you prevent against an unexpected surge in costs in a given year,” says Sullivan. “It’s not a substitute for plan management.”

Another drawback is that most plans only have a single market for stop-loss insurance, he says, meaning employers can only purchase it from one group, typically their own health insurer, which limits them to that insurer’s quote.

Read: A look at how some ASO plan sponsors are impacting stop-loss premiums

As new drug therapies enter the market, risk increases and coverage can become more expensive, which forces employers to make difficult decisions about what they should cover in their benefits plans, says Robert Crowder, founder and president of the Benefits Trust.

To limit risk, employers can use a pre-existing condition clause for an employee’s first year of employment by setting benefits to a specific limit so they can’t bring in unexpected expenses, he says. Another option is to put a limit on drug reimbursement levels or incorporate provincial drug programs into the benefits plan.

Sullivan also notes there are some alternatives for plan sponsors involving specialty groups, such as reinsurance companies, which put packages together to insure larger plans. However, he adds, these are uncommon exceptions.

Read: Just a quarter of plan sponsors review claims data regularly: Sanofi

While stop-loss prevents large, unexpected claims from affecting a plan sponsor, it’s important to understand that issues can still arise after a claim is made. And employers should be aware of all the available options, says Crowder, so they can make a decision before it’s too late.

Helen Abbott is a former editorial assistant at Benefits Canada.