Under a self-funded plan, employee health claims are paid directly by the employer or through a trust. However, the employer or trust is subject to the risk of large individual claims, or high incidence of claims on the whole group in the aggregate. Proper design of the self-funded program includes special coverage known as employer stop-loss insurance to protect the plan from these catastrophic claims situations. There are basically two types of stop-loss insurance: specific stop-loss and aggregate stop-loss.
This coverage protects the plan from large losses on any one participant who suffers serious accident or illness during the plan year. It accomplishes this by limiting the plan liability on any individual to a specific dollar amount (deductible). If an individual's claims exceed that dollar amount, the stop-loss coverage reimburses the plan for all eligible claims incurred and paid for the remainder of the covered period. Experts in self-funded plans consider specific stop-loss to be the primary protection of the plan assets and to be essential to the financial solvency of the plan.
This coverage protects the plan from total claim costs which significantly exceed expected costs during the plan year. It accomplishes this by limiting the plan liability for total claims, not including those covered under specific stop loss, to an aggregate dollar amount (deductible). If the plan’s claims exceed that dollar amount, the stop-loss coverage reimburses the plan for all eligible claims exceeding the deductible for the covered period. Aggregate stop loss works in conjunction with specific stop-loss to protect plan assets and to be essential to the financial solvency of the plan.