How group medical stop-loss captives work
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Each employer that participates in a group medical stop-loss captive maintains its own self-funded health benefits plan separate from that of the other member employers. The employer can dictate its own plan rules, including levels of coverage such as copays and deductibles, provided they comply with federal laws governing self-funded employee benefit plans. The participating self-funded employers also can choose their own third-party administrators and provider networks.
The way the self-insured employers are connected is via the stop-loss program, which is purchased from a medical excess insurer that issues a separate policy to each captive member. The stop-loss policy has a specific deductible, which applies to each plan participant; and an aggregate attachment point, which applies when the total amount of a single employer's health benefit plan's claims reaches a certain level, usually 125% of expected claims.
The captive enters into a reinsurance agreement with the medical stop-loss insurer that transfers responsibility for payment of claims that exceed the deductible amounts accepted by each employer up to a preset cap, usually somewhere between $250,000 and $500,000 per plan participant. The reinsurance agreement also limits the total amount of claims the captive is responsible for paying.
To fund this layer of risk, the stop-loss insurer pays a portion of the stop-loss premium collected by each captive member to the captive. Under this arrangement, the captive is only acting as a reinsurer, and the stop-loss insurer is said to be “fronting” the captive.
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Medical stop-loss captives make self-funding easier for mid-market firms
A growing number of midsize employers seeking to self-insure their health benefits for the first time are discovering that group medical stop-loss captives can provide them with some added protection from potentially catastrophic losses.
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