Self-funded health plans give employers greater control over health care costs and the potential for savings compared to fully insured plans, but they also introduce financial risk. Stop-loss insurance protects employers from catastrophic claims. Yet many employers do not fully understand how the coverage works, and those misunderstandings can be costly.

This article reviews how stop-loss insurance actually works, the different types of coverage, and common mistakes employers make when selecting stop-loss coverage.

Stop-Loss Insurance Protects Employers — Not Employees

Stop-loss insurance is not insurance for employees. It is insurance designed to protect the employer from large claims incurred by employees or their dependents.

When an employer self-funds its health plan, it pays employee medical claims directly rather than purchasing a fully insured plan. Stop-loss insurance reimburses the employer when claims exceed a specific dollar amount, or deductible, protecting the company from unexpected financial exposure.

There are two types of stop-loss coverage:

• Specific stop-loss – protection against large claims from a single individual
• Aggregate stop-loss – protection when total plan claims exceed a defined threshold

Most employers carry both.

How Specific Stop-Loss Works

Specific stop-loss protects the employer from high-cost claims incurred by one covered individual.

Example

If an employer purchases a specific deductible of $100,000 and an employee incurs $450,000 in claims during the policy year, the employer pays the first $100,000. The stop-loss carrier reimburses the remaining $350,000.

Common Mistakes Employers Make:

• Choosing deductibles without considering cash-flow impact or available reserves. Many employers focus on premium cost and mistakenly select a higher specific deductible to save money upfront, only to incur significantly higher claim costs below the deductible. Stop-loss decisions should be based on risk mitigation, not just price.
• Ignoring or misunderstanding lasers (higher deductibles applied to known high-risk members). Stop-loss insurers may exclude individuals or apply extremely high specific deductibles at renewal, leaving the employer responsible for funding those claims. Smaller organizations may not have sufficient cash reserves to absorb this risk.
• Failing to align deductibles with overall risk tolerance. Few employers engage an actuary to analyze the appropriate specific deductible level, but doing so can materially improve outcomes.
• Not reviewing the stop-loss policy language. Policies vary widely and may contain exclusions or provisions that are not discovered until a claim is denied or the policy is re-rated mid-term.

How Aggregate Stop-Loss Works

Aggregate stop-loss protects against unexpectedly high total claims for the entire covered group. The carrier calculates expected annual claims based on enrollment, demographics, and prior claims experience. If total claims exceed a predetermined percentage (often 120–125%) of that expectation, the carrier reimburses the excess.

Example

If expected annual claims are $2,000,000 and the aggregate attachment point is 125%, the employer is protected above $2,500,000.

Common Mistakes Employers Make:

• Assuming aggregate coverage replaces proper budgeting. Employers should budget up to the aggregate attachment point and beyond, as aggregate reimbursements are not always immediate.
• Misunderstanding monthly accumulators. Aggregate stop-loss applies to total annual claims. An employer may experience claims at 200% of expected during the year, but no reimbursement occurs unless the total annual threshold is exceeded.
• Overlooking renewal impact. Adverse claims experience can result in significantly higher attachment points at renewal, potentially exceeding the employer’s cash-flow capacity.

What Employers Get Wrong About Stop-Loss

Many employers treat stop-loss insurance as a commodity. In reality, policy language, carrier behavior, and coverage structure often matter more than premium price.

Frequent errors include:

• Selecting the lowest premium rather than the strongest coverage
• Overlooking exclusions, reimbursement timing, and contract provisions
• Working with brokers who lack deep stop-loss expertise. If a broker has not placed hundreds of millions in stop-loss premium, they may be learning a complex coverage at the employer’s expense.
• Failing to plan for renewal risk following large claims

Example

An employer with a $100,000 specific deductible experiences a $1 million ongoing claim. The insurer reimburses $900,000. At renewal, the carrier applies a $3 million laser to that individual, requiring the employer to fund all claims up to $3 million. If this occurs across multiple individuals, financial exposure can escalate rapidly.

Why Broker Expertise Matters

Stop-loss insurance is not standardized. Two policies with similar pricing can produce very different outcomes during a high-claim year.

An experienced stop-loss broker helps employers:

• Structure deductibles strategically using actuarial modeling
• Negotiate lasers at coverage inception and obtain legal review to identify and remove hidden exclusions
• Evaluate carrier financial strength and reimbursement reliability
• Develop multi-year risk strategies rather than focusing solely on annual pricing

HCP National specializes exclusively in complex stop-loss placements for self-funded employers, MEWAs, and risk-bearing organizations. Our team focuses on contract language, reimbursement reliability, and long-term risk strategy — not just premium pricing. Get in touch today.

Bottom Line

Stop-loss insurance is the financial backstop of a solvent self-funded health plan. When structured correctly, it allows employers to manage risk confidently while capturing the advantages of self-funding. When misunderstood or poorly placed, it can expose employers to untenable financial strain.

Understanding how stop-loss insurance works — and partnering with a stop-loss expert — makes a meaningful difference.

Need help evaluating your stop-loss coverage? HCP National works with self-funded employers to structure stop-loss programs that align with cash flow, risk tolerance, and long-term stability — not just short-term pricing. Get in touch today.