A Primer on Stop Loss Contracts
Minimizing financial exposure to catastrophic health care claims is a priority for employers with self-funded health plans, especially as these types of claims become more common due to rapid cost increases. Stop-loss insurance helps self-funded employers protect themselves from higher-than-anticipated health claim payouts by limiting their exposure to employee medical claims that exceed a predetermined amount. This insurance allows self-funded employers to manage their health care costs and protect against catastrophic claims, helping ensure an employer’s financial reserves aren’t drained from abnormal claim severity and frequency.
Stop-loss contracts can differ, offering a variety of options and riders to help employers manage risk tolerance, cash flow and long-term claims. Therefore, as more self-funded employers purchase stop-loss insurance to minimize exposure, it’s vital they understand how these contracts work so they select the coverage that adequately protects their organizations. This article provides an overview of stop-loss insurance and explores stop-loss contracts and their contract periods.
Overview of Stop-loss Insurance
Stop-loss insurance is coverage self-funded employers purchase to manage their health care costs and protect against unexpected or catastrophic claims by establishing a limit for the amount they pay in health claims. This coverage is not a form of medical insurance, and employers can add stop-loss insurance to an existing plan or purchase it independently.
Under a stop-loss insurance policy, an employer’s claims liability is limited to a certain amount called the attachment point. If an employer’s health claims exceed the attachment point, their insurer will usually reimburse them for all additional claims. For example, if an employer’s stop-loss insurance policy has an attachment point of $100,000, their insurer will typically begin providing reimbursement after the plan’s claims exceed $100,000. However, the employer is responsible for paying employee claims before they reach the attachment point.
Types of Stop-loss Insurance
There are two types of stop-loss insurance: specific (or individual) and aggregate (or total claims). Individual stop-loss insurance limits an employer’s liability when an individual employee’s medical claims exceed the attachment point. This coverage helps protect employers against unexpectedly high claims from individual employees. Aggregate stop-loss insurance safeguards employers from the total sum of health claims for an entire group of employees rather than any one employee. Employers can purchase both types of stop-loss insurance to provide their organizations with maximum financial protection.
Stop-loss Contracts
There are three basic types of stop-loss contracts: paid, incurred, and incurred and paid.
Paid Contract
A paid contract typically provides employers with the most comprehensive coverage as it applies to claims incurred on or after the original stop-loss contract’s effective date. This contract is typically only available to employers on renewal, and it does not protect them from potential exposure after the contract ends.
For example, under a paid contract, if an employer’s stop-loss contract becomes effective on Jan. 1, 2023, claims incurred from January 2022 to December 2023 (24 months) and paid from January 2023 to December 2023 (12 months) will be covered. This protects employers from claims that are incurred before the stop-loss policy’s effective date but haven’t been paid. A paid contract is sometimes known as a 24/12 or referred to as having “run-in” coverage.
Incurred Contract
An incurred contract covers eligible claims incurred during the contract period and paid within a specified time of the end of the contract period, typically 90 days. There are variations of incurred contracts that extend the period in which a claim must be paid, such as six or 12 months after the end of the contract period. An incurred contract is also known as a 12/15 or referred to as having “run-out” coverage.
Incurred and Paid Contract
Incurred and paid contracts apply to eligible claims both incurred and paid during the policy period. These contracts operate similarly to fully insured health plans and are usually only used during an employer’s first year transitioning to stop-loss insurance coverage. This type of contract is also known as a 12/12 contract and is often renewed into paid contracts to avoid coverage gaps.
Stop-loss Contract Periods
Stop-loss insurance policies have different coverage periods. Claims eligible for reimbursement under stop-loss contracts depend on when those claims are incurred and the dates they are paid. As a result, if an employer isn’t careful, they could be responsible for claims that occur during their policy’s effective period but are billed outside of that period. For example, suppose an employer renews their stop-loss insurance policy, which becomes effective on Jan. 1, but a claim was incurred on Dec. 1 of the prior year. In that case, it’s likely that the claim won’t be billed until after Jan. 1. With a one-year stop-loss policy, the employer would likely have to pay that claim since it was billed outside of the contract period even though the employer had coverage when the claim was incurred.
Whether a claim is eligible for reimbursement depends on the employer’s stop-loss contract period. Employers can purchase stop-loss policies with differing contract periods to cover employee claims that may otherwise be paid or processed outside of the plan year. The most common stop-loss contract periods are 12/12, 12/15 or 15/12. The first number represents the period in which claims are incurred, and the second number indicates when claims must be paid.
- 12/12 Contract Period
A 12/12 contract period covers eligible claims incurred during the 12-month period and paid during the same 12-month period. A claim that’s incurred during the contract period but is not paid until after the contract period is called an immature claim. To cover immature claims, employers typically purchase a stop-loss contract with a 24/12 contract period when their 12/12 contract period terminates. This covers an employer’s claims incurred the previous year but not paid until after the 12/12 contract period. - 12/15 Contract Period
A 12/15 contract period covers eligible claims incurred during the 12-month contract period and paid in a 15-month period. This protects employers from claims incurred during the contract period but not processed or paid by the end of the contract period. Other common contract periods include 12/18 and 12/24. - 15/12 Contract Period
A 15/12 contract period covers an employer’s eligible stop-loss claims if they’re incurred within the three months before the policy’s effective date and paid during the 12-month contract period. As a result, this contract period extends eligibility for claims during the 12-month contract period as long as they were incurred during either the 12-month contract period or the three months immediately preceding the policy’s effective date. Other common contract periods include 24/12. Most stop-loss carriers commonly add an additional 12 months to the incurred dates each time a 24/12 contract period is renewed (e.g., year one: 24/12; year two: 36/12; year three: 48/12).
Summary
Stop-loss insurance can be an effective strategy for employers to address rising health care costs and better manage cash flow. However, it’s essential that employers understand stop-loss contract periods to ensure their stop-loss insurance policies adequately protect their organizations.
Otherwise, employers may be responsible for expensive claims they thought were covered by their policies.
For more health care resources, contact the Employee Benefits Division of Marshall & Sterling.