Total loss limit insurance is a policy designed to limit coverage for claims (losses) to a specified amount. This coverage ensures that a catastrophic event (specific stop-loss) or numerous events (aggregate stop-loss) do not deplete the financial reserves of a self-funded plan. The added stop-loss protects the employer against claims that are higher than expected. If the total number of claims exceeds the aggregate limit, . the loss limit insurer covers the claims or reimburses the employer.
Understanding Total Loss Limit Insurance
Full loss limitation insurance is maintained for self-funded insurance plans in which an employer bears the financial risk of providing health care benefits to its employees. In practical terms, self-funded employers pay for each claim as it is filed instead of paying a flat premium to an insurance company for a fully insured plan. Stop-loss insurance is similar to buying high-deductible insurance. The employer remains responsible for claim expenses below the deductible amount.
Stop-loss insurance differs from conventional employee benefit insurance. Stop-loss only covers the employer and does not provide direct coverage to employees and health plan participants.
How Total Loss Limit Insurance Is Used
Employers use total loss limit insurance as risk coverage against high value claims. Total stop-loss insurance comes with a maximum level for claims. When a maximum threshold is exceeded, the employer no longer needs to make payments and may receive some reimbursements.
Total stop-loss insurance can be added to an existing insurance plan or purchased independently. The threshold is calculated based on a certain percentage of projected costs (called connection points), typically 125% of anticipated claims for the year.
An aggregate stop-loss threshold is usually variable and not fixed. This is because the threshold fluctuates as a percentage of an employer’s enrolled employees. The variable threshold is based on an aggregate attachment factor which is an important component in calculating a stop-loss level.
As is the case with high-deductible plans, most stop-loss plans will have relatively low premiums. This is because the employer is expected to cover more than 100% of the value of the claims it receives.
According to the Henry J. Kaiser Family Foundation’s 2018 Employer Health Benefits Survey, insurers now offer health plans with a self-funding option for small or midsize employers; These health plans incorporate stop-loss insurance with low connection points.
Aggregate Stop-Loss Insurance Calculations
The aggregate attachment associated with a stop-loss plan is calculated as follows
The employer and the loss limit insurance provider estimate the average dollar value of claims expected by the employee per month. This value will depend on the employer’s estimate, but often ranges from $200 to $500 per month.
Suppose the stop loss plan uses a value of $200. This value would then be multiplied by the attached stop-loss multiplier, which typically ranges from 125% to 175%. Using a claims estimate of $200 and a maximum loss garnishment multiplier of 1.25, the monthly deductible would be $250 per month per employee ($200 x 1.25 = $250).
This deductible must then be multiplied by the employer’s plan enrollment for the month. Assuming an employer has 100 employees in the first month of coverage, their total deductible would be $25,000 per month ($250 x 100).
Enrollment can potentially vary by month. Due to enrollment variance, global loss limitation coverage may have a monthly deductible or an annual deductible.
With a monthly deductible, the amount an employer must pay could change each month. With an annual deductible, the amount the employer must pay would be added up for the year and would typically be based on estimates from the initial month of coverage. Many stop-loss plans will offer an annual deductible slightly less than the sum of the deductibles over 12 months.
The deductible or garnishment for total loss limit insurance is calculated based on several factors, including an estimated value of claims per month, the number of employees enrolled, and a loss limit limit multiplier that is typically around 125 % of anticipated claims.
Stop-loss insurance is similar to high-deductible insurance, and the employer remains responsible for claims below the deductible amount.
Comprehensive loss limitation insurance is designed to protect an employer who self-funds their employee’s health plan from higher-than-expected claim payments.