Stop-loss health insurance is a policy an employer buys to cap what it pays out when it funds its workers’ medical claims directly instead of buying a traditional group health plan. Under that self-funded arrangement, the employer pays claims from its own money, and the stop-loss carrier reimburses the employer once claims cross a set dollar threshold. It is a ceiling on financial exposure, not health coverage for employees. Self-funding is how most large employers cover their workforce: more than 80% of participants in large employer health plans are in self-funded or mixed-funded arrangements.
What Stop-Loss Actually Covers
Stop-loss comes in two forms, and many employers buy both.
Specific stop-loss (also called individual stop-loss) protects against one person’s catastrophic claims. The employer picks a per-person deductible, called the attachment point, and the carrier reimburses anything above that amount for a single covered individual during the policy year. If the specific attachment point is $75,000 and one employee’s cancer treatment totals $400,000, the carrier covers $325,000.
Aggregate stop-loss protects against an unusually bad year across the whole group. Coverage triggers when total plan claims exceed a ceiling, typically set around 125% of expected annual claims. If actuaries project $1 million in claims, aggregate reimbursement starts once the group crosses roughly $1.25 million. Aggregate matters most for smaller employers, where a handful of expensive cases in the same year can throw off the whole plan. A 500-person plan averages out; a 75-person plan can swing hard.
The Attachment Point Drives Everything
The attachment point is the most important number in the contract. It sets both the employer’s maximum exposure and the premium. Set it low and premiums climb for protection the employer may not need. Set it high and a bad claims year can drain reserves before the carrier owes a dollar.
In practice, specific attachment points range from as low as $10,000 for very small groups to $500,000 or more for large employers. A 50-person company might carry a $20,000 to $30,000 deductible; a 250-person group often lands in the $75,000 to $100,000 range.1Department of Labor (DOL). Public Comment on Stop Loss Insurance
States regulate minimum attachment points to keep stop-loss from functioning as a substitute for regular health insurance. The NAIC’s model act, which several states have adopted in some form, recommends a $20,000 minimum individual attachment point and aggregate minimums that scale with group size: for groups of 50 or fewer, the greater of $4,000 per member, 120% of expected claims, or $20,000; for larger groups, at least 110% of expected claims.2National Association of Insurance Commissioners (NAIC). Stop Loss Insurance Model Act Individual states set their own thresholds, and some impose no minimum at all. Confirm the rule in your state before binding coverage.
Lasering: When a Named Person Isn’t Really Covered
Lasering is an underwriting move where the carrier identifies a specific member likely to generate high claims, such as someone on dialysis or an expensive specialty drug, and either excludes that person or applies a much higher attachment point just to them. If the group’s standard attachment is $50,000 but one member is expected to generate $300,000 in claims, the carrier might laser that individual at $350,000. The employer absorbs essentially all of the expected cost for that person.
The trade is a lower premium for everyone else, because the carrier isn’t pricing in the known high-cost member. Employers often push back on new lasers at renewal, since the whole point of buying stop-loss is to offload the risk they’re most worried about. When a quote comes back with lasers, the question worth working through with a broker or actuary is whether the premium savings actually offset the claims the employer is retaining.
Contract Timing and Where Claims Fall Through
Stop-loss policies run on a 12-month contract. The gaps between policy years are where employers most often get burned, because a claim can be incurred in one year and paid in the next. Three provisions decide whether those straddling claims get covered.
- Run-out (tail coverage): claims incurred during the contract year but not submitted or paid until after it ends. Without run-out, the carrier reimburses only claims both incurred and paid within the same policy year. Run-out periods vary, and some insurers have offered periods as short as three months, while complex claims can take 18 months or more to resolve through appeals and reprocessing.3National Association of Insurance Commissioners (NAIC). Stop Loss Insurance, Self-Funding and the ACA
- Run-in (nose coverage): claims incurred under a prior policy year but paid in the current one. Switch carriers without run-in, and leftover claims from last year become the employer’s problem.
- Terminal liability: covers claims incurred but not yet reported when a policy ends. Most relevant during carrier transitions, where late-arriving claims from the old policy can create surprise exposure.
When switching carriers, the coordination between the old carrier’s run-out and the new carrier’s run-in is where most coverage gaps appear. Getting these provisions in writing before signing is the most important step in any transition.
Level-Funded Plans Bundle Stop-Loss In
Level-funded plans have become a common on-ramp for employers that want the savings potential of self-funding without the full financial volatility. The employer pays a fixed monthly amount that bundles three things: maximum projected claims liability, administrative fees, and built-in stop-loss coverage. In some arrangements, if claims come in under projections, part of the surplus goes back to the employer.
The appeal is predictability. Instead of unpredictable monthly claims swings, the employer writes the same check every month, much like a fully insured premium, and the embedded stop-loss handles anything above expectations. Roughly 42% of small firms now report using a level-funded plan. For employers new to self-funding, level-funding is often the entry point before moving to a traditional self-funded plan with standalone stop-loss.
How Reimbursement Actually Works
Once a claim crosses the attachment point, the employer, usually through a third-party administrator (TPA), submits a claim package to the stop-loss carrier. That package typically includes itemized medical bills, proof of payment, and claims data showing the expenses meet policy terms. Carriers generally require standardized billing forms: the UB-04 for facility charges and the CMS-1500 for professional and supplier services.4Centers for Medicare & Medicaid Services (CMS). Medicare Claims Processing Manual, Chapter 26 – Completing and Processing Form CMS-1500 Data Set
Submission deadlines vary but commonly run between 30 and 180 days from when the claim was incurred. Miss them and the carrier can deny reimbursement even for otherwise valid claims. Many policies also require advance notification when a member’s ongoing treatment looks likely to breach the attachment point, so the carrier can start assessing the case before it fully develops.
After submission, the carrier reviews the claim for policy compliance, medical necessity, and exclusions. Straightforward claims may resolve in 30 days; complex cases involving specialty drugs or extended hospitalizations take considerably longer. Some carriers audit and request additional documentation before paying.
The Legal Backdrop: ERISA and the ACA
Self-funded health plans are governed by the Employee Retirement Income Security Act (ERISA). Under ERISA, anyone with discretionary control over the plan is a fiduciary and must act solely in the interest of participants, for the exclusive purpose of providing benefits and paying reasonable expenses, and with the care of a prudent person in the same role.5Office of the Law Revision Counsel. 29 US Code 1104 – Fiduciary Duties Most employers sponsoring self-funded plans meet that definition.6U.S. Department of Labor. Understanding Your Fiduciary Responsibilities Under a Group Health Plan
ERISA preempts most state laws that relate to employee benefit plans, but preserves state authority over the business of insurance through the “savings clause.”7Office of the Law Revision Counsel. 29 US Code 1144 – Other Laws The practical effect: the self-funded health plan is governed by federal law, but the stop-loss policy backstopping it is a state-regulated insurance product. State rules on attachment points, policy provisions, and underwriting apply to the stop-loss contract even though they cannot reach the underlying plan.
The ACA added requirements that apply to the health plan itself, not the stop-loss policy: coverage of certain preventive services without cost-sharing, no annual or lifetime dollar limits on essential health benefits, and internal and external appeals for denied claims.3National Association of Insurance Commissioners (NAIC). Stop Loss Insurance, Self-Funding and the ACA Other ACA provisions, including rating restrictions and essential health benefit requirements in the fully insured small group market, do not apply to self-funded plans. That gap is why state regulators lean on minimum attachment points: to keep stop-loss from looking so much like traditional insurance that healthier small employers exit the ACA-regulated market and drive up premiums for those who stay.