Choosing to self-fund a health plan is a major decision. If a plan sponsor decides to self-fund they are responsible for paying all medical claims for anyone on their plan (employees and dependents)—which means that rising health care costs, expensive new medical treatments or unexpected health claims could place their core business in financial jeopardy. To help avoid this risk, many plans purchase stop-loss insurance
As the International Foundation’s newest e-learning course Self Funded Health Plans: Understanding Stop-Loss Insurance explains, stop-loss insurance, also called excess-loss insurance, is a contract between a self-funded benefits plan and an insurance carrier that provides financial protection when claims to the plan exceed a specified dollar amount over a set period of time (usually 12 months).
If you’re trying to determine whether stop-loss insurance is right for your organization, there are several key factors to consider, but start with these three:
1. Plan Size
- Large plans, such as those with over 3,000 employees, are generally more likely to self-fund because annual claims are more predictable. These large self-funded plans are also likely to purchase specific stop-loss insurance with higher deductibles and lower premiums.
- Stop-loss insurance is increasingly critical to smaller plans due to an increase in frequency and costs of catastrophic claims, as well as the ACA elimination of annual and lifetime limits on claims for essential health benefits.
[New Online Course: Self Funded Health Plans: Understanding Stop-Loss Insurance]
2. Funded Level of Reserves and Desire to Preserve Steady Cash Flow
- The more money a plan sponsor keeps in reserve to pay for future health claims, the less likely it needs stop-loss insurance. The desired level of reserves will be different for different plan sponsors depending on their risk tolerance, cash flow, accounting practices, etc.
- In general, reserves totaling less than ten months of expected claims put employers at a higher risk of bankruptcy. For organizations that cannot or do not want to carry large reserves, stop-loss insurance can make sense. Volatile timing and level of claims put pressure on cash flow and reserves. Stop-loss insurance can smooth out the amounts that need to be added to reserves on a regular basis.
[Related Reading: The Pros and Cons of Self-Funded Health Plans]
3. Any Significant Changes to Your Plan’s Demographics Due to Mergers and Acquisitions
You’ll want to consider demographics such as:
- Average age of health plan participants: Does the average age skew older or younger than the general population?
- Occupations of participants: Are the employees’ jobs more or less hazardous than other occupations in general?
- Geographic regions: Do the participants live and work in regions of the country where the population has poorer health than average?
Want to Learn More?
Check out the Foundation’s newest e-learning course: Self Funded Health Plans: Understanding Stop-Loss Insurance. If you’d like to learn even more about self-funding, check out the online course Self-Funded Health Plan Basics.
Brenda Hofmann
Communications Manager at the International Foundation
