01.11.22 Featured Blog

What is Stop Loss Insurance and How does it Work?

Prescription drug costs are on the rise, with no sign of slowing any time soon. It’s the same story for insurance premiums. As these costs continue to climb, employers are turning to self-funded insurance plans to help control costs. Self-funded plans allow employers to pay for actual claims, rather than excess fixed costs – But what happens when you have a large unexpected drug claim? That’s where stop-loss insurance comes into play. Stop-loss insurance, also known as excess insurance, is a type of coverage that serves as protection for self-insured businesses in the event of an unforeseen catastrophic claim.

What Is Stop-Loss Insurance?

Unlike traditional insurance, stop-loss covers the employer rather than the employees, or plan participants. This coverage applies to businesses that have opted out of a traditional health insurance plan and have chosen to directly fund their employee benefits. While the rewards of self-funded plans are immense, giving employers greater cost control and ensuring they only pay for actual needs, it comes at the liability risk of a catastrophic claim. One new drug start can easily double, triple or quadruple a self-funded plan’s annual drug spend; therefore many businesses turn to stop-loss for protection to avoid the risk of bankrupting their self-funded health plan. 

Simply put, stop-loss insurance provides monetary reimbursement for costly drug claims after exceeding a predetermined amount. Self-insured employers are only responsible for the claims within the confines of their stop-loss policy deductible. Once a claim exceeds the stop-loss deductible, the stop-loss carrier will reimburse the employer for the amount that surpassed the deductible; this coverage can save a self-funded business hundreds of thousands of dollars in a single year.

Types of Stop-Loss Insurance

There are two types of coverage options: specific and aggregate. Specific stop-loss insurance provides protection against one individual’s catastrophic claim. This type of stop-loss limits the employer’s liability to a specific dollar amount, or deductible, for each covered employee. Employers are only bound to this specific deductible, so if the claim exceeds the predetermined amount, the stop-loss carrier is now responsible for the remaining balance of the claim.

On the other hand, aggregate stop-loss insurance applies to the claims produced by the entire company, not a single individual. Aggregate stop-loss insurance limits the self-funded employer’s overall liability by placing a cap on the total claims amount. So, if the value of all claims combined exceeds the stop-loss deductible, the stop-loss carrier is responsible for compensating the employer. 

These insurance types are not mutually-exclusive — Self-funded employers often purchase these two stop-loss types together for optimal coverage. 

Traditional Stop-Loss Limitations

Stop-loss insurance coverage is an essential part of any self-funded health plan, but many businesses are unaware of its limitations. While stop-loss insurance is designed to mitigate the risk of catastrophic claims, it’s not a complete solution

Typically, stop-loss contracts are one year in length, which can result in a catastrophic claim being covered for just a few months before it is “lasered” out of the contract, leaving the employer exposed the following year. Alternatively, the carrier may issue a massive rate increase (sometimes more than 50%), making coverage unaffordable for the employer. Almost 50% of new specialty prescriptions target chronic conditions, leaving employers financially exposed long-term with up to 90% of claimants remaining on the plan in future years.

RxPharmacy Assurance’s stop-loss product picks up where traditional stop-loss insurance falls off. The supplemental stop-loss coverage is designed specifically for pharmacy risk associated with conditions that have high-cost prescription therapies, covering a broad range of medical conditions. Learn how to achieve multi-year protection that extends beyond traditional stop-loss coverage with RxPharmacy Assurance’s supplemental stop-loss solution.