What is Stop Loss/EP3?

Stop Loss, often referred to as large amount pooling, EP3 or drug pooling, is additional protection sold as part of the Employee Health Benefits (EHB) portion of a Group insurance plan. Stop Loss is best compared to a more traditional insurance like house insurance, it is a small monthly charge to protect against a large catastrophic claim that would be a financial burden for the client. It can be used for both fully insured and ASO EHB plans.

Stop Loss works by removing claims that go above the Stop Loss threshold from the clients experience. This helps to protect the client from a wild swing in EHB experience, particularly in the case of smaller groups that don’t have a large number of certificates to spread their experience over.

How does it work?

Let’s take a closer look at a sample group:

A group with no Stop Loss protection

Imagine that the Group above does not have Stop Loss protection and has hired a new employee (Cert 5). It turns out the new employee is taking recurring drugs that cost $15k a year. As a result of this, at the next renewal the EHB experience has increased dramatically. This small group now faces some difficult choices. They could change their EHB plan design, introducing a drug maximum or higher coinsurance. They could cancel their benefits plan, or the EHB portion. They may even consider letting Cert 5 go. All of these options cause new problems.

Now consider the same group with Stop Loss protection:

The same group with a $10k Stop Loss threshold

Once the certificates claims reach the Stop Loss threshold, they are removed from the clients experience, or in the case of an ASO group the claims are no longer the policy holders responsibility. Note that the claims could continue into the hundreds of thousands, and the client would still only pick up the claims below the Stop Loss threshold. Even better, the same thing will happen every year, so even if the claims are recurring the Stop Loss will keep those claims out of the EHB experience (presuming the offered Stop Loss includes recurring claims, which most do).

Stop Loss charges

Stop loss has it’s own separate charge, which can either be a flat $ amount, a flat % amount or an experience rated % amount. Lower Stop Loss thresholds represent a higher risk to insurance carriers and so will come with higher charges. There may be a choice of multiple Stop Loss thresholds, each with their own costs. Note that sometimes higher Stop Loss thresholds are not offered to smaller groups, as carriers do not want them to take on too much risk. Clients may sometimes question why they are being charged for Stop Loss coverage, or why the Stop loss charge has increased, when they have no claims over the Stop Loss. The amount charged is dependant on many factors, including how the Carrier breaks out their Stop Loss pools and the experience of those pools, which new high cost drugs are coming onto the market and a variety of other components. The way stop loss charges are presented differs from carrier to carrier, with some bundling other items into the charge, making an apples to apples comparison more challenging.

Things to watch out for

Not all Stop Loss coverage is created equal. There are various elements that can differ, from what is pooled (drugs vs all of EHB) to how the claims are pooled (per certificate or per insured) to whether or not recurring claims will be pooled. The latter is still a fairly new option, it is considerably cheaper but doesn’t provide as robust protection against recurring high claims.

EP3 Stop Loss

EP3 is a type of stop loss, although a very specific type that is compatible with the CDIPC Industry Pooling initiative. From your clients point of view an EP3 operates almost exactly the same as a traditional stop loss, but do double check how the carrier treats employees not eligible for EP3 coverage, as they will require a separate Stop Loss mechanism in place. The pooling of claims from EP3’s into the wider Industry claims pool is purely a reinsurance mechanism and has no direct impact on your client.

Did we miss anything? Please let us know in the comments below.