Understanding Stop-Loss Insurance: A Practical Guide

Many mid-sized and large employers choose to self-fund their employee health plans, meaning they pay employees’ medical claims directly rather than purchasing fully insured health coverage.

While self-funding offers flexibility and potential cost savings, it also exposes the employer to significant financial risk. Stop-loss insurance exists to limit that exposure.

This guide explains how stop-loss insurance works, what types exist, and why it is foundational in self-funded health plan structures.

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What Is Stop-Loss Insurance?

Stop-loss insurance is a policy purchased by an employer to protect against large or unexpected healthcare claims under a self-funded employee health plan.

It does not insure employees directly. It insures the employer against excessive claims costs.

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What Problem Does Stop-Loss Insurance Solve?

Stop-loss insurance addresses two major financial risks:

1. A single employee incurring very high medical costs.
2. Total claims for the entire group exceeding expected levels.

Without stop-loss coverage, a single catastrophic illness could significantly impact employer finances.

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Who Typically Uses Stop-Loss Insurance?

Stop-loss insurance is commonly used by:

• Mid-sized employers (often 50+ employees)
• Large employers with self-funded plans
• Organizations seeking greater control over health plan design
• Employers aiming to reduce long-term insurance costs

Small employers typically use fully insured plans instead.

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Types of Stop-Loss Coverage

Stop-loss insurance generally comes in two forms:

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Specific Stop-Loss (Individual)

Protects against high claims from a single individual.

• A deductible (attachment point) is set per employee.
• Once claims exceed that amount, the stop-loss carrier reimburses the employer.

Example: If the specific deductible is $100,000 and one employee incurs $400,000 in claims, the insurer reimburses $300,000.

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Aggregate Stop-Loss (Group)

Protects against total claims exceeding expected levels for the entire group.

• A maximum total claims threshold is established.
• If total claims exceed that threshold, the insurer reimburses the excess.

This protects against overall plan volatility.

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How Stop-Loss Insurance Works

At a high level:

1. The employer establishes a self-funded health plan.
2. Stop-loss coverage is purchased with defined deductibles.
3. Employees incur medical claims.
4. The employer pays claims up to the stop-loss thresholds.
5. Claims above those thresholds are reimbursed by the stop-loss insurer.

Claims reimbursement may lag, requiring strong cash flow management.

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Key Coverage Components

Stop-loss policies typically include:

• Specific Deductible (Attachment Point)
• Aggregate Attachment Point
• Maximum Reimbursement Limit
• Run-In / Run-Out Provisions
• Contract Basis (12/12, 24/12, etc.)

Understanding contract timing is critical.

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Contract Types (Timing Structure)

Stop-loss policies are written based on claim timing:

• 12/12: Claims incurred and paid within the policy year
• 12/15: 12 months incurred, 15 months paid
• 24/12: 24 months incurred, 12 months paid

These structures affect reimbursement eligibility.

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What Stop-Loss Insurance Typically Does Not Cover

Common limitations include:

• Claims below attachment point
• Improperly administered claims
• Non-covered medical services under the health plan
• Claims outside contract timing terms
• Regulatory penalties

Stop-loss coverage relies on proper plan administration.

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Regulatory Considerations

Stop-loss insurance:

• Is regulated at the state level
• Is not considered traditional health insurance for employees
• May have minimum attachment point requirements in some states

Employers must comply with ERISA and ACA rules for self-funded plans.

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What Affects the Cost of Stop-Loss Insurance?

Premiums are influenced by:

• Group size
• Employee demographics
• Industry
• Claims history
• Attachment point levels
• Plan design
• Geographic location

Lower attachment points increase premium cost.

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Advantages of Self-Funding with Stop-Loss

Potential benefits include:

• Plan design flexibility
• Cash flow advantages
• Transparency into claims data
• Avoidance of certain state mandates
• Long-term cost control (if claims are well-managed)

However, financial volatility remains a key risk.

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Smart Questions to Ask a Broker or Consultant

• What are the specific and aggregate attachment points?
• What contract basis is being used?
• What run-in/run-out provisions apply?
• How are claims audited?
• What cash reserves are recommended?

Understanding risk tolerance is essential before self-funding.

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When Stop-Loss Insurance Makes Sense — and When It Might Not

Stop-loss makes sense if:

• An employer is self-funding health benefits
• The group size is large enough to manage volatility
• The employer has strong cash flow
• Long-term savings potential justifies risk

It may not be appropriate if:

• Group size is very small
• Cash reserves are limited
• Risk tolerance is low

Stop-loss insurance is a financial risk management tool—not a substitute for proper health plan administration.

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Cheat Sheet

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Key Takeaway

Stop-loss insurance allows employers to self-fund employee health benefits while limiting exposure to catastrophic or excessive claims. It protects the employer—not the employee—and requires careful financial planning, contract management, and risk tolerance evaluation.