Understanding Stop Loss and Extended Healthcare Plan Design

Robert Crowder, founder and President of The Benefits Trust, has over 30 years of experience serving pension and employee benefits clients. In 1994, he founded The Benefits Trust as a Third Party Administrator serving small and mid-sized business across Canada. Through Rob Crowder's dedication and leadership, The Benefits Trust has grown into the successful benefits provider that it is today.

Understanding Stop Loss and Extended Healthcare Plan Design

Health benefits are essential components of any well-rounded compensation package. And while they’re helpful for any employee who needs coverage of medical and health care expenses, employers also need to ensure they’re protected against the potentially catastrophic costs that come with some medications, procedures, and products.

About Stop Loss Coverage

Stop Loss coverage is a layer of insurance that can be applied to a health benefits plan. It absorbs claims above a certain threshold to protect the employer from having to fund large claims, while also protecting the member and ensuring they have the coverage they need. When plan members are given a devastating diagnosis of cancer, or diagnosed with a potentially life-altering condition like multiple sclerosis, it helps them cope with the situation when they know they’ll have the support they need for medical expenses.

As a contract between an employer and an insurance provider, Stop Loss includes coverage for prescription drugs, and hospital and nursing care over a specific threshold, depending on the size of the group plan and its ability to absorb larger claims.

How It Works

How Stop Loss coverage works depends largely on the type of benefits plan the employer has provided to employees.

How It Works with Health Care Spending Accounts (HCSAs)

Under a Health Care Spending Account, the plan member is protected with Stop Loss coverage. A member submits claims through their HCSA or pays them out of pocket until they reach the deductible level, with eligible claims then being reimbursed to them when submitted, for the remainder of the year.

The employer’s risk is protected by the HCSA maximum, but Stop Loss coverage ensures that even if the member’s medical expense exceeds the HCSA maximum, they aren’t stuck paying out of pocket.

How It Works with Administrative Services Only Plans (ASOs)

Under a regular ASO program, the Stop Loss coverage protects the client from exposure to a catastrophic claim. Coverage for drugs, hospital visits and stays, and nursing care can accumulate quickly throughout the year and on an ongoing basis. A potential claim of $100,000, for example, could lead a company to bankruptcy or result in the company dropping their health benefits plan altogether if it becomes unaffordable.

Stop Loss protection limits the risk for the client, but can be removed from ASO plans by applying maximums to the drug, hospital and nursing care coverage. Though the employer’s risk remains slightly higher due to the possibility of multiple types of claims being reimbursed for one individual, this option transfers the risk of a large claim back to the member, requiring them to pay for items over and above the stated maximums. However, there are many programs that can assist in these situations – specifically for high-cost drugs – that members may or may not qualify for depending on their annual household income.

Here’s a numerical example:

Member Claim Amount Plan Sponsor Responsibility* Stop Loss Insurance Recovery
$150,000 $7,500 $142,500

*Stop Loss attachment level

Pre-Existing Conditions and Stop Loss Coverage

As with many insurance options, Stop Loss coverage does come with some limitations. A pre-existing conditions clause accompanies the Stop Loss coverage offered for HCSAs and ASOs to protect the employer from unknown financial risks that a new employee brings with them when they join a company. This clause typically states that covered members or dependants who have had treatment or consultation for, or diagnosis of a medical condition, up to 12 months prior to becoming eligible, and have received treatment for the condition up to 24 months after becoming eligible for their benefits plan will be ineligible for Stop Loss coverage, and the patient’s reimbursements will be limited to a specific amount – typically $5,000.

We hope this has been a helpful overview of Stop Loss coverage, but for any additional information and how it can be applied to client benefits plans, feel free to reach out to us at The Benefits Trust and we’ll be happy to help answer any questions! You can connect with us here!

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