As health insurance costs continue to increase, more employers are turning to self-funded benefits as a way of controlling costs. This strategy can be financially beneficial because employers have more control over managing claim costs, but self-insured employers still need protection against unexpected losses. Stop loss insurance can provide that protection.
The Struggle to Find Affordable Health Insurance
According to the U.S. Bureau of Labor Statistics, in December 2024, employers spent an average of $3.54 per civilian worker per hour on health insurance, accounting for 7.5 percent of total compensation.
Employer health insurance costs tend to increase each year, often in excess of economic inflation. For example, KFF says the average family premium increased by 24 percent between 2019 and 2024, and by 52 percent between 2014 and 2024.
These rising costs are difficult for both employers and employees. To make matters worse, paying pricey premiums doesn’t always guarantee affordable health care. In the Commonwealth Fund 2023 Health Care Affordability Survey, 43 percent of people with employer coverage said it is somewhat or very difficult for them to afford health care, and 29 percent of people with employer coverage said that either they or a family member had delayed or skipped necessary health care or prescription drugs due to cost.
Self-insurance has emerged as a possible solution to these issues.
Self-Insurance vs. Self-Funded Plans
A self-funded plan is another term for self-insurance, which is an alternative to the more traditional fully-insured health plan arrangements.
- With a fully-insured health plan, an employer buys a group health plan from an insurance carrier on behalf of its employees. In exchange for a premium, the insurance carrier agrees to cover medical claims. There may be deductibles and copays or coinsurance costs that apply when a policyholder uses coverage, but the carrier takes on the risk. The carrier also has control over the plan design.
- With a self-insured health plan, the employer has more control over the claims. The employer still typically pays claims through an insurance carrier or third party administrator that oversees the claims process and provides support. Employees will still need to pay premiums through payroll deductions, as well as deductibles, copays and coinsurance. From the employees’ perspective, a self-funded plan doesn’t necessarily seem any different from a fully-insured plan. However, in a self-funded model, the employer – not the insurance carrier – is taking on the risk and has more control over the plan design.
Advantages and Disadvantages of Self-Funded Plans
Self-funded plans are popular, especially among large employers, and in recent years, even small and mid-size employers have started to pursue this option. But, there are both advantages and disadvantages to consider before pursuing a self-funded benefits strategy.
One potential advantage of self-funded plans is that the employer can customize health coverage in a way that may not be possible when using a fully-insured plan. Additionally, self-funded plans may not be subject to some of the state regulations that govern fully-insured plans due to ERISA preemption.
Another advantage is that employers may be able to help control costs through self-funding by using cost control measures, such as disease management programs, to help prevent and manage claims. If they are able to keep claims down by implementing effective cost control strategies, self-insurance could be financially rewarding.
However, managing a self-insurance program can be challenging. While certain regulations do not apply to self-funded plans, many others do, so employers need to ensure they are compliant.
Furthermore, designing a cost-effective plan can be difficult, especially as health care costs and prescription drug costs continue to rise. If claims are more numerous or more severe than expected, self-funded plans could end up losing money. However, there is a way for self-funded employers to guard against extreme losses: stop loss insurance.
What is stop loss insurance?
Stop loss insurance is designed to protect self-funded employers from higher-than-expected medical claims costs. This coverage is typically provided on a reimbursement basis, with the regulations and restrictions governing stop loss insurance varying significantly between states.
When setting up a self-funded health plan, the employer and the insurer determine the expected cost of covered claims, as well as the maximum risk threshold for the employer. The employer can then purchase a stop loss insurance policy that will provide coverage in the case of catastrophic medical claims that exceed this threshold.
Stop loss insurance can also be referred to as reinsurance. This is an important risk management strategy that protects insurers from the risk of insolvency if losses are much higher than anticipated. Since self-funded employers are taking on more risk, they can use stop loss insurance as a risk management approach to protect their business.
Specific vs. Aggregate Stop Loss Insurance
There are two main types of stop loss insurance:
- Specific stop loss insurance provides coverage if a medical claim for a single employee exceeds a pre-determined threshold.
- Aggregate stop loss insurance provides coverage if the medical claims for all covered individuals exceed a pre-determined threshold in a policy year.
Both types of stop loss plans can provide important protection. To understand why, consider the following scenarios:
- A self-funded company with 200 employees is typically successful at managing claims costs through targeted strategies. One year, though, an employee requires a heart transplant surgery. This single claim would wipe out the company’s reserves, leaving nothing left for the claims the employee will incur during recovery – not to mention the claims that other employees will incur. Specific stop loss insurance is designed to protect employers against this type of catastrophic claim.
- A self-funded company has 500 employees. Most of these employees are young and healthy, so the company’s yearly medical costs tend to be relatively low. Then, one year, two workers are diagnosed with cancer, multiple workers start taking an expensive weight loss drug, and five individuals become pregnant. Due to these factors, many higher-than-normal claims occur during this one year. Aggregate stop loss insurance is designed to cover atypical losses like this.
Is a self-funded plan with stop loss coverage right for you?
If you’re looking for a way to provide quality health coverage while controlling costs, a self-funded plan with stop loss coverage could be a good option. However, it’s also important to consider the resources you’ll need to comply with state and federal regulations and to keep claims costs under control.
Higginbotham can help you explore your self-insurance and stop loss insurance options. We offer a wide range of employee benefit solutions, as well as captive insurance options, to help employers take care of their workers while keeping costs under control. Talk to one of our benefits specialists to learn more.
