The Stop Loss policies create no direct liability to those individuals covered under the plan. This feature provides the critical distinction between fully insured plans (subject to State law insurance regulations) and self-funded health plans which, under the provisions of Section 514 of ERISA, are exempt from state insurance regulations.
Employers of only 100 employees and smaller are now entering the self-insured market.
The number of employers choosing to self-insure has been growing dramatically as the cost of health care has risen partly due to the ever increasing burden of regulations and mandated benefits states require of fully insured programs.
An important aspect of self-funded group health plans lies in the requirement that the Employer remain liable for funding of plan claims regardless of the purchase of Stop Loss insurance.
The Employer is required to fund an account, from which the claim payer withdraws funds to pay claims that are the liability of the health plan, and as such the liability of the Employer. Only the employer has a contractual relationship with plan participants and beneficiaries.
Specific stop loss is the form of excess risk coverage that provides protection for the employer plan against a high claim on any one individual. Specific stop loss protects the employer against catastrophic claims by single individuals that exceed a dollar limit (the specific deductible) chosen by the employer. A specific deductible is based on an employer's size and risk tolerance and can range from $25,000 to $350,000 or more. Once the specific deductible is satisfied the employer is eligible to be reimbursed for additional costs.
When an Employer also has Specific Stop Loss on all individual Members only the Member's claims up to the Stop Loss amount (also called The Attachment Point) count towards the Aggregate Stop Loss.
For example, if an Employer has $50,000 Stop Loss on each individual Member and the Member has claims of $125,000 during the year, only $50,000 counts towards the Aggregate Stop Loss. The $75,000 over the $50,000 Stop Loss point is the liability of the Stop Loss Carrier.
Aggregate Stop Loss polices are instrumental in establishing a "maximum liability," for the Employer for any given year.
The Aggregate Stop Loss is the most an Employer will have to fund in any given plan year and can be compared to a plan's guaranteed fully insured cost; i.e., the insurance premium. If the maximum cost does not exceed the plans' fully insured guaranteed cost, self-funding may be a viable option. Since the Aggregate Stop Loss, or Maximum Liability is generally set based on aggregate claims exceeding expected claims by 20% to 25%, it is unlikely that the actual cost to an Employer will be as high as the maximum cost.
Another way to look at Aggregate Stop Loss is an umbrella policy that caps a company's liability within a specified time period. Under the provisions of Section 514 of ERISA, self-insured plans are exempt from state insurance regulations. Exemption from state insurance regulations frees Employers from the costs of insurance benefits mandated by states for fully insured plans. This can save Employers 5% or more in the cost of their Health Plan.