QUESTION: We are considering changing our company’s major medical plan from fully insured to self-insured. Are we required to purchase stop-loss insurance? Can you briefly describe how stop-loss insurance works in connection with a self-insured health plan?
ANSWER: Stop-loss insurance is not required for self-insured plans, but many employers find it beneficial to help manage the financial risks of self-insuring by protecting the employer/plan sponsor in the event of catastrophic claims. While very large employers often choose to manage these risks in other ways, smaller employers tend to have less predictable claims costs and fewer resources available to respond to catastrophic claims. Here are some key stop-loss insurance considerations:
What Stop-Loss Insurance Covers. Stop-loss insurance protects the employer against the risk that plan claims greatly exceed the amount the employer has budgeted to cover plan costs. Plan administration costs generally are fixed in advance, and an actuary can estimate claims costs. This information allows the employer to budget for the estimated overall plan cost, but exceptionally large claims can exceed the budget. Stop-loss insurance does not directly pay participants’ benefits. Rather, it reimburses the employer for certain claims properly paid by the plan above a stated amount. (A less common approach for single employer plans is for the plan to purchase stop-loss insurance as a plan asset, in which case the stop-loss insurance reimburses the plan, rather than the employer.) The threshold for stop-loss coverage is referred to as the stop-loss attachment point. A stop-loss insurance policy may have a specific attachment point (which applies to claims for individual participants or beneficiaries), an aggregate attachment point (which applies to total covered claims for all participants and beneficiaries), or both.
Aligning Plan and Coverage Terms. If you choose to purchase stop-loss insurance, it is crucial to line up the terms of the stop-loss coverage with the terms of your plan—otherwise, some claims paid by the plan may not be reimbursed and will remain the employer’s responsibility. This is not always straightforward, so you should consider having legal counsel familiar with the terms of your plan review the proposed stop-loss policy. In particular, watch for discrepancies between the plan’s and the stop-loss policy’s eligibility provisions, definitions, limits, and exclusions. Because stop-loss insurance is not health insurance, the stop-loss insurer is allowed to impose limits and exclusions that are not permitted for group health plans—for example, to exclude coverage of particular individuals or for particular services, or to impose an annual or lifetime dollar limit per individual. You will also need to consider the stop-loss policy’s coverage period (that is, the time period during which claims must be incurred by individuals or paid by the plan in order to be covered by the stop-loss insurance) because it might not line up with your plan year.
Consistent Administration. After purchasing stop-loss insurance, you will need to make sure your plan is administered in accordance with its written plan document; any departures from the plan document that was provided to the stop-loss insurer likely will not be covered by the stop-loss insurance, unless the stop-loss insurer has specifically approved a plan amendment. Thus, if the plan makes any “special exceptions” beyond the coverage provided for in the plan document (e.g., granting early or extended eligibility, waiving conditions, or covering additional services), the stop-loss insurance would not count claims relating to these exceptions toward the attachment points or reimburse your company for these claims after an attachment point was reached.
HIPAA Considerations. Employers shifting from a fully insured to a self-insured health plan should consider their responsibility to protect participants’ and beneficiaries’ health information, including exchanges of information between the plan and the stop-loss insurer.
For more information, see EBIA’s Self-Insured Health Plans manual at Section XVII (“Stop-Loss Insurance”). See also EBIA’s HIPAA Portability, Privacy & Security manual at Section XXVI.B (“Uses and Disclosures for Treatment, Payment, and Health Care Operations”). You may also be interested in our webinar, “Stop-Loss Insurance for Self-Insured Health Plans” (recorded 10/28/2020).
Contributing Editors: EBIA Staff.