What is a stop-loss insurance laser?

Many employers who offer a group health plan self-fund their policy in an effort to increase flexibility and reduce costs. Because self-funding can be financially risky, employers who self-fund often add stop-loss coverage to their health insurance plan as a safety net from unexpectedly high claim volume. But, when an insurer adds a “laser” to your stop-loss policy, it can be a complicating factor that potentially impacts your financial liability.

Before agreeing to a stop-loss laser as part of your insurance policy, you must know how lasers work and why insurers use them.

In this blog post, you’ll learn:

• How stop-loss coverage reduces the financial risk for employers with self-funded insurance plans.
• What stop-loss insurance lasers are, why insurers use them, and how they impact coverage and costs.
• Insights into options like "no laser" policies, capped rate plans, and strategies to manage financial risk.

What is stop-loss insurance?

Self-funded health plans allow employers to cover their employees’ medical costs directly instead of an insurance carrier. Stop-loss insurance is a policy employers buy to reduce the financial risk of self-funded group medical plans. While these plans are becoming more popular, they come with substantial financial risk. To protect your company from unexpectedly high healthcare costs, like if someone needs an expensive surgery, you can buy a stop-loss policy.

Stop-loss coverage kicks in once an individual’s or annual aggregate claims reach a threshold known as the “attachment point” or deductible. This offers employers financial protection from unpredictably high claim costs that could result in catastrophic losses.

Here’s a brief snapshot of how stop-loss coverage works:

• In most cases, employers buy stop-loss plans from an insurance company.
• Stop-loss insurance policies only cover the employer. They don’t financially support employees or their dependents.
• The employer is responsible for paying their employees' medical claim costs out-of-pocket during the plan year, up to the stop loss policy’s attachment point or deductible.
• If an eligible employee’s medical claims—or employees’ aggregate claims—exceed the attachment point, the employer submits the claim to their insurer for reimbursement.
• Reimbursements for eligible expenses in excess of the attachment point only go to the employer—not the employees, dependents, or medical providers.

Get more details about the different types of stop-loss coverage in our blog.

What is a stop-loss insurance laser?

A stop-loss insurance laser is when insurers place a lower coverage level or higher attachment point on an individual or group of people. Most often, these individuals have a known chronic health condition—such as diabetes, heart disease, or cancer—which places them at a higher risk of costly medical claims.

For example, let’s say your stop-loss policy normally kicks in after an individual exceeds $100,000 in medical expenses. For a lasered employee, this may look like $500,000 instead. This means the employer has to pay more for that employee’s medical care before stop-loss coverage kicks in.

The insurance company may require a laser to manage its risk of insuring the group.

The following are some common types of stop-loss insurance lasers:

1. A standard laser. This laser imposes a higher attachment point for a specific individual’s claims—regardless of the claim type.
2. A contingent laser. This laser imposes a higher attachment point for a specific individual’s claims for a specific diagnosis or condition.
3. A limited contract basis laser. This laser restricts the time period during which the policy with cover medical claims.
4. An exclusion laser. This laser excludes a specific individual from stop-loss coverage entirely. In this scenario, the employer is fully responsible for all costs associated with that individual’s claims due to their high-risk medical condition.

Want to offer a self-funded health benefit that doesn’t require stop-loss coverage? Check out our guide to health reimbursement arrangements (HRAs).

How does a stop-loss insurance laser work?

Lasering out high-risk individuals from your stop-loss coverage can lower your premiums. However, it also means you’ll be responsible for paying more healthcare costs for those individuals before your insurer begins to help out.

Here’s how it works:

• An insurance company’s stop-loss underwriters identify high-risk individuals based on various factors.
• Your insurer adds a laser to the policy outlining a higher deductible or lower level of coverage for the high-risk individual or group. In return, you pay a lower premium.
  • The following are a few factors that can trigger the use of a laser:
    • Medical claim history and frequency: If an individual has a history of high-cost claims, the insurer may assign a laser to that individual.
    • The health of your workforce
    • Industry-specific risks: Industries like construction or manufacturing may have higher risks of injury or adverse health conditions.
    • Your group size: For smaller groups, the risk of an individual with higher costs is more significant.
    • Your plan’s standard attachment point
    • Your plan’s premium
• You pay the actual claims for the high-risk individual or group up to the laser’s attachment point.
• The stop-loss carrier pays for any claims that exceed the laser’s amount.
  • For example, if the laser is $500,000, you’re responsible for paying that amount out-of-pocket. The insurer will pay any claims for the high-risk individual or group that exceeds $500,000.

Stop-loss insurance is subject to state regulations and can differ based on the chosen insurance company and plan details¹. Work with a broker to review the pros and cons before including a laser provision to your stop-loss coverage.

Why do insurers use a stop-loss insurance laser?

By adding a laser to your stop-loss coverage, your insurer aims to manage its risk and keep your stop-loss premiums lower by shifting more financial responsibility to you.

Here are some reasons why an insurer may add a laser to an insurance policy:

• They’ve identified high-risk individuals or groups based on their medical history, past claims, or demographics.
• Your stop-loss premium may not be enough for the insurer to cover your group’s potentially catastrophic claims during the policy period.
• Your insurer anticipates multiple individuals reaching or almost reaching your policy’s attachment point.
• Your overall claims frequently exceed the levels the stop-loss insurer predicted.

How does a stop-loss insurance laser affect the overall cost?

A stop-loss insurance laser impacts employers' overall costs in several ways. On one hand, lasering individuals with potentially high claims allows stop-loss insurers to offer more affordable premiums to the employer. However, the employer must pay more of the high-risk employee's medical expenses, which can burst their healthcare budget.

Lasers can also mean higher self-funded plan premiums to mitigate overall risk which can negatively impact morale and satisfaction. These employees may opt out of your medical plan or leave your company for a competitor with better health benefits.

Do you have to opt for a stop-loss insurance laser?

Your insurer can add a laser to a specific individual or group if you have a traditional stop-loss policy. But you have some options if you want to avoid this.

Here are your alternatives:

• You can buy a “no laser” policy for a higher premium rate.
• You can choose a “no new laser at renewal” policy, which prevents insurers from adding a laser when your policy renews.
  • You can also add a capped rate option to this plan, preventing them from raising your premium the next policy year. Using this method, you can forecast your health benefit budget better.
• You can stop offering a self-funded plan and go with a fully-insured group plan—or explore different kind of solution with an HRA.
  • With a group plan, the insurance company takes the financial risk of insuring your employees in exchange for premiums.
  • With an HRA, you set a budget, reimburse employees for their qualifying medical expenses, and let employees choose the coverage that works best for them—without the financial risk that comes with a self-funded group plan.

Learn how this approach gives you more predictability without the burden of stop-loss insurance.

Conclusion

Stop-loss insurance coverage can be beneficial if your company is offering a self-funded plan. Many employers see lasers as a financial burden to stop-loss policies, but they don’t have to be a pain point. There are many ways to prevent or reduce the need for a laser. Speak with an insurance broker who can help you understand your workforce demographics, medical claims history, and potential financial liability.

If you're interested in offering a customized HRA, PeopleKeep can help! Contact one of our HRA specialists to learn more.

1. Stop-loss coverage technical release