Self-Funding & Stop-Loss Insurance: How They Work Together

Rising healthcare costs have led many businesses to explore alternatives to traditional fully insured health plans. Self-funding has become popular, offering employers more control over healthcare expenses. However, self-funding comes with financial risks, especially when employees incur high medical costs. To protect against excessive claims, businesses rely on stop-loss insurance.

Stop-loss insurance is a safety net, preventing employers from paying unmanageable healthcare expenses. But how exactly does it work? How does it fit into a self-funded health plan? This guide explains the role of stop-loss insurance, its benefits, and how businesses can use it to manage healthcare costs effectively.

What Is Stop-Loss Insurance?

Stop-loss insurance is a special type of coverage for self-funded employers that protects against unexpectedly high medical claims. Unlike traditional insurance, which covers all employee healthcare costs, stop-loss insurance only kicks in when claims exceed a predetermined limit.

How Stop-Loss Insurance Works

• Employer Pays Claims Up to a Certain Limit – The company funds employee medical expenses until they reach the stop-loss threshold.
• Stop-Loss Insurance Covers Excess Costs – The insurance provider covers the additional expenses once claims exceed the set limit.
• Predictable Risk Management – Employers gain financial protection while controlling healthcare costs.

Stop-loss insurance allows businesses to take advantage of self-funding while minimizing financial risk.

Types of Stop-Loss Insurance

Stop-loss insurance comes in two main forms: specific stop-loss and aggregate stop-loss. Each type serves a different purpose in managing self-funded healthcare costs.

1. Specific Stop-Loss Insurance

Protects against high claims from a single employee.

The employer sets a deductible per employee, and once an individual’s claims exceed this amount, the insurance covers the remaining costs.

Example: If the specific stop-loss limit is $50,000 per employee, and one employee incurs $100,000 in medical expenses, the employer pays the first $50,000, while the stop-loss insurer covers the remaining $50,000.

2. Aggregate Stop-Loss Insurance

Protects against high total claims for the entire workforce.

The insurance kicks in when the total annual claims for all employees exceed a set threshold.

Example: If a company’s expected total claims are $500,000, but actual claims reach $700,000, the stop-loss insurer covers the extra $200,000 above the set limit.

Employers often combine specific and aggregate stop-loss insurance to protect against individual catastrophic and unexpected high total claims fully.

Why Do Employers Need Stop-Loss Insurance?

Self-funding provides cost savings, but without stop-loss insurance, employers take on unlimited financial liability for medical claims. Businesses use stop-loss coverage to:

1. Control Financial Risk

Stop-loss insurance prevents businesses from paying extreme medical costs out of pocket.

Protects against catastrophic claims, such as hospital stays, cancer treatments, or long-term care.

2. Gain Budget Predictability

Reduces cost volatility, making it easier to forecast healthcare expenses.

Employers avoid the unexpected financial strain of high claims.

3. Enable Self-Funding for Small Businesses

Small and mid-sized businesses benefit from self-funding’s cost savings without excessive risk.

Stop-loss coverage makes self-funding an option for businesses that might not otherwise afford it.

Stop-loss insurance is key in making self-funded health plans viable for businesses.

Self-Funded Plans vs. Fully Insured Plans: Why Stop-Loss Matters

Many employers choose self-funding over fully insured plans to lower costs, but without stop-loss insurance, self-funding carries significant financial risk.

Key Differences Between Self-Funded & Fully Insured Plans

Self-funded plans with stop-loss insurance offer employers cost efficiency and flexibility, while fully insured plans shift financial risk entirely to the insurer but come with higher premiums.

How Stop-Loss Insurance Premiums Are Determined

Stop-loss insurance rates vary based on several factors, including company size, workforce health, and coverage limits.

Factors That Affect Stop-Loss Premiums:

• Company Size – Larger groups often receive better rates due to risk distribution.
• Employee Demographics – Age, location, and health status impact pricing.
• Claims History – Businesses with high past medical claims may face higher premiums.
• Attachment Points (Deductibles) – Lower stop-loss limits increase premium costs, while higher limits reduce them.
• Plan Design & Coverage Options – More comprehensive coverage increases premium rates.

Employers should compare multiple stop-loss insurers to find the best balance between cost and coverage protection.

Stop-Loss Insurance & Captive Arrangements

Some businesses join stop-loss captive programs to reduce costs further. A captive arrangement pools multiple businesses together to share risk and negotiate better rates.

Benefits of Stop-Loss Captive Programs:

• Spreads risk among multiple employers, lowering costs.
• Increases purchasing power for better stop-loss terms.
• Allows businesses to share in cost savings if claims are lower than expected.

Captive arrangements help small and mid-sized businesses access stop-loss insurance with improved pricing.

Conclusion

Self-funding and stop-loss insurance work together to provide businesses with cost-effective health coverage while reducing financial risk. Employers who self-fund healthcare plans gain flexibility and potential savings but need stop-loss coverage to prevent catastrophic losses.

Key Takeaways:

Stop-loss insurance protects self-funded businesses from high medical claims.

Specific stop-loss covers individual catastrophic claims, while aggregate stop-loss limits total workforce claims.

Businesses benefit from lower costs, more flexibility, and risk control than fully insured plans.

Stop-loss insurance makes self-funding possible for mid-sized and smaller businesses.

Choosing the right stop-loss coverage and self-funding strategy ensures businesses maximize cost savings while maintaining financial security. Employers should carefully evaluate coverage options, risk levels, and insurer partnerships to build a sustainable healthcare plan for their workforce.