Self-Funding Basics for Employers Starting a Health Plan · Article 2
What Is Stop-Loss Insurance?
The Safety Net Behind Self-Funded Health Plans
When employers hear the term self-funded health plan, one of the first questions they ask is:
"What happens if an employee has a million-dollar claim?"
The answer is simple: Stop-loss insurance.
Stop-loss insurance protects self-funded employers from unexpectedly large healthcare claims, allowing businesses to enjoy the financial advantages of self-funding without taking on unlimited financial risk.
What Is Stop-Loss Insurance?
Stop-loss insurance is insurance for the employer—not the employee.
Employees continue to use their health plan just as they would under any other group health plan. Claims are paid normally by the plan's Third-Party Administrator (TPA).
If claims exceed the employer's predetermined risk limit, the stop-loss carrier reimburses the employer (or advances funds, depending on the arrangement) for the excess amount.
In other words, stop-loss places a cap on the employer's financial exposure.
Why Is Stop-Loss Important?
Without stop-loss insurance, an employer would be responsible for every dollar of every claim.
While most employees have relatively predictable healthcare costs, serious illnesses, organ transplants, premature births, cancer treatments, and catastrophic accidents can generate claims exceeding hundreds of thousands—or even millions—of dollars.
Stop-loss insurance protects employers from these rare but financially devastating events.
Two Types of Stop-Loss Coverage
Specific (Individual) Stop-Loss
Specific stop-loss protects against one large claim from a single covered individual.
For example:
- Employer's specific deductible: $75,000
- Employee incurs $400,000 in medical claims.
The employer pays the first $75,000.
The stop-loss carrier reimburses the remaining $325,000, subject to the policy terms.
Specific stop-loss is the protection most employers think about when considering self-funding.
Aggregate Stop-Loss
Aggregate stop-loss protects the employer when total claims for the entire group are higher than expected.
Instead of focusing on one individual, aggregate stop-loss looks at the group's total annual claims.
If overall claims exceed the plan's aggregate attachment point, the stop-loss carrier reimburses the excess.
This protects employers from an unusually expensive year, even when no single employee has an exceptionally large claim.
Do All Self-Funded Plans Include Stop-Loss?
No.
Whether stop-loss is included depends on the type of self-funded plan.
LevelMax™
LevelMax™ includes stop-loss insurance as part of the level-funded program.
Employers make one predictable monthly payment that includes claims funding, administrative services, and stop-loss protection.
This makes LevelMax™ an excellent choice for employers seeking the advantages of self-funding with fixed monthly costs.
LevelFlex™
LevelFlex™ also includes stop-loss protection.
Because employers fund claims directly and retain control of their claims dollars until claims are paid, stop-loss provides an essential layer of financial protection against catastrophic claims.
Together, LevelFlex™ and stop-loss allow employers to maximize savings while limiting financial risk.
MEC Flex™
MEC Flex™ does not include stop-loss insurance.
Why?
Because MEC Flex does not cover hospital services or major surgeries—the types of claims that create catastrophic financial exposure.
Instead, MEC Flex generally covers preventive care and selected outpatient benefits.
Without catastrophic claim exposure, stop-loss carriers typically do not offer stop-loss coverage for these types of plans.
Is Stop-Loss the Same as Major Medical Insurance?
No.
Major medical insurance covers employees.
Stop-loss insurance protects the employer.
Employees never file claims with the stop-loss carrier and generally do not know it exists. Their healthcare experience remains the same regardless of whether the employer purchases stop-loss coverage.
Can Small Employers Use Stop-Loss?
Absolutely.
Modern level-funded and self-funded health plans have made stop-loss protection available to many small and mid-sized employers.
Today, businesses with as few as a handful of enrolled employees may qualify for self-funded solutions backed by stop-loss insurance.
The Bottom Line
Stop-loss insurance is one of the key reasons self-funding has become a practical option for employers of all sizes.
It allows employers to benefit from lower costs, greater transparency, and increased flexibility while protecting the business from catastrophic healthcare claims.
Whether you choose LevelMax™ with predictable monthly funding or LevelFlex™ with maximum financial control, stop-loss insurance provides the protection that makes self-funding possible.
Understanding how stop-loss works is the first step toward understanding why more employers are moving away from traditional fully insured health plans and embracing self-funding.