How Self-Insured Employee Benefits Stop-Loss Works

How Specific Coverage For Self-Insured Employee Benefits Works

Specific coverage is designed to protect an employer from claims arising from a single person’s treatment for a condition excess of a self-insured retention.

The employer will only be responsible for its' self-insured retention, and any amount excess of this is passed to the specific coverage. As well as ensuring that the self-insured retention is not too large in relation to the company's finances or appetite for risk, the employer will need to be comfortable that sufficient coverage is purchased so that all large losses are fully covered.

How Aggregate Coverage For Self-Insured Employee Benefits Works

Aggregate coverage reimburses the self-insured employer for the total paid losses in any one policy period which exceed a predetermined amount.

Unlike Specific coverage, which responds on a per person basis, the aggregate protection responds to an accumulation of individual losses. Losses to an aggregate cover can be much more predictable than specific losses, which can vary by size, and a finite limit can be attached to the coverage in terms of how much the policy will pay in any one year. 

The projected loss experience can be calculated on the basis that no more than the self-insured retention can be included in the amount going to the aggregate section.

The employer is expected to be able to fund the normal expected claims as well as additional "gap" amount, known as margin. These two elements are combined to form what is known as the Annual Aggregate Deductible or Aggregate Attachment Point.

The monthly Aggregate Deductible is calculated by multiplying each month's number of covered employees and covered dependant units by the appropriate monthly deductible factors as calculated by the insurer.

The sum of 12 monthly deductible amounts is the Annual Aggregate Deductible which is subject to a minimum monetary amount and normally a provision that the monthly Aggregate Deductible can never be less than 95% of the previous month's Aggregate Deductible or as agreed.

Types Of Specific And Aggregate Cover

(i) Incurred and Paid Contracts

Specific and Aggregate contracts are normally initially offered on an incurred and paid basis. In other words, only eligible medical expenses that are diagnosed and paid during the policy period are recoverable.

(ii) Paid Contracts

When the policy is renewed, it has the effect of becoming what is known as a paid contract as claims incurred in the prior 12 months (but not prior to when the employer first purchased the coverage), are covered. Imposing this restriction protects the stop-loss insurer from unknown claims that were not advised at the time of underwriting, and which are not covered by the new administrator's managed care and large case management programs. 

There are however a couple of variations to this rule as follows: 

a) Incurred in 15 months and paid in 12 months (15/12) Contracts 
Incurred in 15 months and paid in 12 months (15/12) coverage provides cover for medical expenses that were incurred in the three months prior to the new carrier's initial inception date and paid during the first 12 months. This approach is often desirable to groups that are already self-funded and who can demonstrate to the new insurer that they are unlikely to have a costly run-out of claims.

b) Incurred in 12 months and paid in 15 months (12/15)
Incurred in 12 months and paid in 15 months (12/15) coverage provides cover for claims that are incurred during the contract period and paid by the employer within the contract period or in the three months after termination of the contract. This coverage provides some security for those employers worried about the possibility of not being able to obtain renewal coverage for any reason and being left uninsured. 

(iii) Aggregating Specific Option

The aggregating specific option is a product variation that may be attractive to an employer who is able to assume a fixed amount of additional risk beyond the stated individual’s specific stop-loss deductible. This fixed amount varies by employer group and is determined during the underwriting process. 

As with any variation from the normal employer stop loss product, the employer needs to understand the associated risks and rewards. In essence, the aggregating specific amount becomes an additional liability, for which the employer is responsible before specific stop-loss reimbursements will occur.

The aggregating specific option lowers the premium for the specific premium of the policy by creating an additional retention. This retention is a fixed dollar amount and is in addition to the employer’s underlying specific deductible.

Once an individual claimant on the employer’s plan reaches the underlying specific deductible, the employer will continue to be on the risk for the claims until the total additional retention has been exhausted. Once an individual or a combination of individuals have met their specific deductibles and the amounts exceeding the deductibles have exhausted the additional retention, the employer’s stop-loss carrier reimburses the employer for the specific stop-loss liabilities as normal.

(iv) Specific Advance Funding

The specific advance funding option provides groups with cash flow assistance for specific stop loss claims. This specific advance option is requested in writing at the time of quotation and is made a part of the policy via an addendum. Specific advance funding on specific stop-loss claims is available to employers for covered expenses when the specific deductible is paid in full by the employer prior to any claims being considered for advance funding.

(v) Specific Terminal Liability

The specific terminal liability option provides three months of paid claim run-out protection on the specific stop loss cover in the event the employer terminates their stop-loss policy. The claims must be incurred prior to the end of the policy period to be considered eligible by the stop loss carrier. The employer must select the specific terminal liability feature at the beginning of the policy year.

Also in this section

Initial Considerations for Self-Insuring Employee Benefit Trusts
Administering a Self-Insured Employee Benefits Trust
Appointing an Employee Benefit Trust Plan Administrator
Selecting an Employee Benefits Trust Stop-Loss Provider
Self-Insured Employee Benefits In The USA - How The ERISA Act of 1974 Works