Q. What is Stop-Loss (Excess) Insurance?
Stop-loss insurance (also known as excess insurance) is a product that provides protection for self-insured employers by serving as a reimbursement mechanism for catastrophic claims exceeding pre-determined levels.
Q. Who is insured?
A. A significant difference between stop-loss and conventional employee benefit insurance is that stop-loss insures only the employer. Stop-loss does not insure employees (health plan participants).
Q. What Stop-Loss coverages are available?
A. Stop-loss comes in two forms: specific and aggregate.
Specific Stop-Loss is the form of excess risk coverage that provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific stop-loss is also known as individual stop-loss.
Aggregate Stop-Loss provides a ceiling on the dollar amount of eligible expenses that an employer would pay, in total, during a contract period. The carrier reimburses the employer after the end of the contract period for aggregate claims.
A number of variations are available for each of these two products.
Generally, all but the largest employers will want to protect their plan with both specific and aggregate stop-loss coverage. Occasionally, circumstances may be such that specific stop-loss by itself will fulfill the employer’s need for protection.
Q. How is Stop-Loss coverage written?
A. Frequently, stop-loss coverage is written through a trust. Under a conventional group insurance arrangement, the policy is issued to the employer. With a trust, however, the trustee is the policyholder. Employers who apply and are accepted for stop-loss insurance are participating employers in the trust.
Each participating employer is given a participation certificate that outlines the benefits provided by the policy issued to the trustee. These terms are commonly used in connection with the trust:
(1) The TRUST means the trust through which stop-loss coverage is provided to participating employers.
(2) The TRUSTEE is the bank which is acting as policyholder for the stop-loss policy.
(3) The POLICY is the document issued to the trustee.
(4) A PARTICIPATING EMPLOYER is one who purchases stop-loss coverage through the trust.
(5) PARTICIPATION CERTIFICATE is the document issued to the participating employer and is similar in contentto the policy issued to the trustee.
Q. What is the role of the employer’s plan document?
A. The employer’s plan document defines the benefits offered to the employees and is critical in determining liability under the Stop-Loss coverage. Because the employer has great latitude in designing the plan, there may be elements in the document that are not included under the Stop-Loss coverage. The covered portions of the plan document must be approved by the underwriter in order to effect the Stop-Loss coverage. Changes in the plan document, after its initial approval, must be approved before their inclusion in the Stop-Loss coverage.
Q. How is loss defined?
A. Expenses are determined to be eligible for reimbursement based upon two criteria:
(1) The expenses must be eligible under the Employer’s Benefit Plan as approved; and
(2) The loss must be covered under the loss definition in the Stop-Loss policy.
Q. When are claims paid?
A. Stop-Loss insurance is provided on a reimbursement basis. The employer is responsible for payment of all losses under a self-funded plan. With the purchase of Stop-Loss coverage, the employer is still responsible for all losses including those that exceed the deductible. After the losses have been paid, the employer will be reimbursed for the amount of the loss that exceeds the deductible. All reimbursements are paid directly to the employer, never to an employee or to a provider of services or supplies.
Specific claims are generally submitted and processed as soon as the deductible is met. Aggregate claims are usually processed only after the close of the contract period. Occasionally, there are requests for a “monthly accommodation” on the aggregate. This means the employer wants the year-to-date aggregate claims to be compared to the year-to-date aggregate deductible to determine if any amount is payable. Money could change hands during the year. The ultimate amount of the claim should remain the same. There is a business risk in this situation rather than an insurance risk; the employer may not pay back an advance if it turns out in a later month that he isn’t entitled to it.
Q. What happens when someone leaves the self-funded plan?
A. Many employers offer conversion privileges to qualified members leaving the group. This pressure is being reduced to a noticeable extent by the COBRA requirement to extend coverage. Sometimes two complementary products are offered: Medical Conversion and Temporary Medical. Neither plan requires proof of good health, but the approach to coverage varies.
Medical Conversion is similar to a classic insured plan’s medical conversion. The rates are high and the benefits are limited, but usually all existing medical problems are covered.
Temporary Medical is for the self-perceived healthy person leaving the group. The rates are lower and the benefits are more generous, but no pre-existing conditions are covered. This product is also offered only for a limited coverage period.