: coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril
Stop Loss Insurance
: an insurance product that protects against unpredictable, unexpected and catastrophic losses; also called excess insurance or reinsurance. Not to be confused with ordinary healthcare insurance.
The average small company that buys health insurance will pay a premium for that coverage. In return, the insurance company will pay the healthcare costs that exceed deductibles, copays and coinsurance. This form of insurance covers ordinary and expected occurrences of healthcare as well as unexpected care.
Health care is really about economics
Here is the economic reality of healthcare. In a given year, 5% of covered members will account for 50% of total costs, and about 50% will incur some form of healthcare expense, however small. In reality, being fully insured is pre-paying for healthcare. It’s paying for predictable, expected healthcare by forcing those costs through an insurance mechanism.
Imaging what your homeowners insurance would cost if every repair and maintenance item went into a claim. Imaging those costs if 5% of the houses in your neighborhood (1 out of 20!) burned, flooded or were devastated by tornadoes each year. And what if 50% of the houses filed a claim for anything from tightening a faucet washer to replacing the furnace–or even having someone come out just to check up on your appliances and plumbing?
Many businesses self-pay for healthcare
Many larger companies self-fund their healthcare. These companies pay for those predictable, expected healthcare expenses. These plans may have no insurance whatsoever but very often carry stop loss insurance to protect against catastrophic high costs for individuals or for aggregated high costs should there be multiple individual losses.
61% of workers are under coverage by company plans that are at least partially self-funded.
In this scenario, companies need to consider several factors in planning for healthcare.
First, where should they set the amount of loss they will shoulder before stop loss coverage kicks in?
Second, what ongoing high-cost individuals do they currently have under coverage? These insurers may make coverage adjustments for individuals who have ongoing predictable expenses. Remember, stop loss is real insurance: something that protects against the unexpected.
Third, what does the company do to reduce the risks of members hitting their stop loss insurance? It makes sense to assure that ordinary scheduled healthcare procedures are priced under the amount of loss that triggers their stop loss.
This might sound complicated, but it’s not. A company with 2000 covered members can predict, for example, paying for at least one total joint replacement and one major back surgery in a typical year. These procedures can be so expensive that they can hit stop loss insurance for companies even if everything goes well.
The best solution is to pay less for care and pay less for insurance
A solution is to think about bundling programs that have defined prices set in advance. Many stop loss carriers recognize that employers accessing favorable bundled prices are less likely to hit file stop loss claims simply because prices are known in advance and overall are significantly lower than unpredictable fee-for-service prices.
So not only do self-funded employers save on those healthcare procedures that can be scheduled, they often qualify for a break on their catastrophic stop loss insurance premiums. An employer can enjoy two benefits from knowing the prices of healthcare it’s likely to buy: better prices and lower premiums for stop loss insurance.
Great bundled prices are a perfect mate for self-funded companies that need stop loss insurance.