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What is a “stop-loss” provision in health insurance

Dino Christoforakis
Dino Christoforakis

Editor in Chief & Licensed Insurance Agent.

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  • Stop-loss insurance is financial protection for the insurers in case of extremely costly catastrophic healthcare claims
  • Both standard insurers and self-insuring businesses can get stop-loss provisions
  • Stop-loss provisions make self-insurance options more affordable for businesses by absorbing some of the risks
  • The deductible amount can be very high for small businesses and there may be large gaps between out-of-pocket maximums and the deductible amount
  • Self-insurers do not have to offer every service demanded by the Affordable care Act and the premiums are tax deductible
  • The right stop-loss provision can make self-insurance a better option for small businesses


Healthcare reform has many businesses on the hunt for the most affordable options to offer employees. The steadily rising costs of healthcare have many nervous at the thought of an employee or qualified family member suffering a catastrophic illness or injury.

As costs mount, the employers and insurers can sustain a hard financial hit once the employee reaches the out-of-pocket limit. Stop-loss provisions are designed to protect both self-insuring employers and insurers themselves from taking the heavy hit.

Every individual that signs up for health insurance through an organization or employer will have to meet an annual out-of-pocket amount. This generally amounts to a few thousand dollars, depending on the plan.

Everything over this amount has to be paid by insurance. When a company decides to self-insure this can be a big financial problem if an employee or covered family member is dealt an expensive catastrophic health diagnosis. Premature births and aggressive cancer are two examples of expensive health problems that have to dealt with and can prove costly.

Companies that self-insure will often add a stop-loss provision so that once they meet their deductible an insurance company will pay the remainder. It is one sensible way that the company can protect their assets from what could be a financial disaster.

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Who qualifies for a stop-loss provision?


Any size company that offers self-insurance can get a stop-loss provision to stay protected from the risk of catastrophic health events. They will pay a premium based on the number of employees covered and the deductible amount desired. Once the annual deductible amount is reached, the insurer will pay the rest of the claim that calendar year.

An insurer qualifies for stop-loss coverage as well. It works the same way as the provision for self-insuring companies.

Once the annual deductible is met the stop-loss coverage will kick in and pay the remainder of the claim for that year. It is a way of dividing up the risks to a manageable level for everyone.

How Stop-Loss Provisions Make Self-Insurance a More Attractive Option

Businesses that take on healthcare coverage and offer employees an affordable option through self-insuring seem to like the lowered cost. It is far less expensive to pay for basic medical care than constantly haggle for the level of premiums everyone can afford.

There is risk involved when it comes to the unpredictable nature of health, but a stop-loss provision helps bring the risks of enormous medical bills down.

What are the drawbacks to stop-loss provisions?


There are a couple of drawbacks to stop-loss provisions for smaller companies. The premiums can be high and the gap between what the employee pays out-of-pocket and the deductible amount for the stop-loss coverage might be too much for a smaller struggling company.

One example is an employee that has an out-of-pocket maximum of $6,500 and the stop-loss deductible is $300,000. The self-insured company will have to foot a bill of $293,500 before the benefit kicks in. This is still a lot of money for a smaller sized company to pay out

Stop-Loss Provisions as a Way to Avoid the Costs of the Affordable Care Act


The Affordable Care Act has businesses scrambling to find a way to offer employees coverage. A few are opting to self-insure, but there is risk involved that many cannot afford to take.

Stop-loss provisions have made it possible for many smaller employers to grab this option, but only as a way to try and avoid the higher costs of the demands with ACA.

Self-insuring is easier on the tax end and employers can offer what they want to offer, avoiding the mandated coverage of marketplace insurance. Employees get a few basic healthcare services and the company can avoid high premiums.

It seems to be a win-win situation, but it can turn into a nightmare without stop-loss provisions in place.

One major illness or injury can bring in a downpour of high medical bills. Without the right preparations, it can bring a smaller company to a standstill. Larger companies might have the means to absorb high medical costs, but smaller ones are vulnerable.

Is self-insurance with stop-loss provision the Affordable Healthcare Coverage solution?


With the right planning, this can be the perfect solution for a lot of companies. It requires careful planning and funds build-up to sustain the coverage during a time of catastrophic health emergencies. There needs to be plenty of money in reserve to pay up to the deductible amount while handling the normal coverage needs at the same time.

Not every small company will be able to use the stop-loss provision due to the high cost of premiums and deductible amount. It is a gamble that some are not willing to take. For those companies that can manage the cost, it has been the solution worth looking for.

Stop-loss provision is a protective barrier that keeps businesses afloat that have initiated self-insurance for employees and have been hit hard by major medical bills.

It helps keeps costs under control and gets the medical bills paid. There is no way to predict when someone will get sick and to what extent. This is one way that an employer can keep healthcare costs affordable without assuming all of the associated risks. It is beneficial to everyone involved.

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[su_spoiler title=”References:” icon=”caret-square” style=”fancy” open=”yes”]

  1. http://d1kfg1up44ss41.cloudfront.net/wp-content/themes/converio/js/html5.js
  2. http://www.gfoa.org/strategies-managing-health-care-costs
  3. https://www.washingtonpost.com/business/capitalbusiness/self-insurance-could-be-small-business-option/2014/11/17/32267186-6b72-11e4-9fb4-a622dae742a2_story.html?utm_term=.b0a4c1738001
  4. http://www.usatoday.com/story/money/business/2013/03/14/some-small-businesses-choose-to-self-insure/1988481/
  5. https://en.wikipedia.org/wiki/Stop-loss_insurance


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