Stop-loss insurance is a key part of the self-funded group’s risk management program. While self-funding health benefits has its advantages, these plans do carry greater financial risk than purchasing traditional, fully-insured health plans from major carriers.
It’s important to understand both how stop-loss insurance works and how much it costs.
Costs for Groups with Self-Funded Health Insurance
When a group self-funds their medical benefits, they incur two types of costs: fixed and variable.
Fixed costs include fees for TPAs, consultants, stop-loss insurance premiums, and anything else that does not depend on the group’s claims. These are typically 10 to 20 percent of the overall costs for a self-funded group, hopefully on the lower end.
Variable costs are claims, which are made up of how much a group pays for doctor’s visits, prescriptions, surgeries, procedures, and other claims incurred by covered members. These can range anywhere from 70 to 90 percent of the overall costs for a self-funded group.
Given that variable costs are the largest expense for a self-funded plan, it makes sense for groups and consultants to focus their efforts there. Additionally, the word variable gives away that there is much more opportunity to effect spending!
Still, fixed costs are still costs, so let’s look at stop-loss premiums as part of a group’s overall fixed costs.
What does Stop-Loss Insurance Cost?
Stop-loss insurance comes in two varieties, specific and aggregate.
Specific stop-loss insurance reimburses a self-funded group for a large claim from one individual.
Aggregate stop-loss insurance reimburses a group when the plan’s overall costs rise above a certain figure, usually 125 percent of expected claims.
A group is much more likely to file a claim for hitting it’s specific stop-loss deductible than for the aggregate deductible. Still, both are valuable for a group and it’s important to seriously consider the deductible amounts on specific and aggregate stop-loss insurance. 75 to 85 percent of employers have a stop-loss claim in a given policy year, according to research by Sun Life (2020 Sun Life Stop-Loss Research Report).
Like with auto insurance, stop-loss insurance costs less with higher deductible amounts. However, the deductible amount is really important for each group, based on their risk tolerance.
Overall, stop-loss premiums may constitute 10 to 20 percent of the overall plan costs, with variability due to what deductibles the group chooses.
A small employer with 50 employees may be much less able to weather a $75,000 or $100,000 claim or more on any one member, so they choose to use a lower deductible. To this point, California SB 161 says that the lowest specific stop-loss attachment point for a small employer, defined as having less than 100 employees, is $40,000. This means a small-employer with self-funded benefits has to absorb the first $40,000 of claims for each member, until the sum adds up to the aggregate stop-loss.
A small employer may pay 25 percent of it’s maximum costs for specific stop-loss premium, while a larger employer pays a much lower percentage for specific stop-loss insurance with a much higher deductible of say $150,000.
A claim against aggregate stop-loss insurance is much less common and as a result, it may cost 3 to 5% of maximum costs for the group.
Self-funded medical benefits provide multiple ROI opportunities for an employer. They have many ways to invest their time and resources in reducing spending, and stop-loss premiums are one such area. As consultants, we do see a significantly greater ROI in uncovering savings within variable plan costs, the claims, of a self-funded group.