Perhaps its other name "self-insurance" is more descriptive. Instead of paying an insurance company such as Blue Cross Blue Shield money to pay claims (and keep any profits), a self-funded (self-insured) employer or plan puts the money into a trust fund that is overseen by strict Federal government regulation, and that trust fund pays the claims (and keeps any profits on behalf of the plan to offset future expense).

To avoid catastrophic losses, self-funded plans buy re-insurance. In self-funding, the re-insurance has the descriptive name "stop-loss".

Stop-loss is one of those wonderful terms, which means exactly what it says. It is re-insurance for a self-funded plan, which an employee benefit plan buys (arranged by the Third Party Administrator as a normal part of administration) as backup insurance to stop-the-loss from unexpectedly high claims on the plan.

It allows a plan to set in advance, the maximum loss levels it is willing to sustain on any specific situation or on the aggregate of claims on the whole group. Stop loss protects the self-funded employer from losing money due to devasting or catastrophic claims.

Stop-loss usually has two points at which it takes effect. The first is known as the "specific" attachment point. This applies to the cost of one claim or person. For example, open-heart surgery could prove an unexpectedly high expense, but it is only reflected in the expenses for a single individual. Thus the "specific" attachment point might be set at an amount such as $40,000. That means that the stop-loss policy provided by a commercial re-insurer would begin to reimburse the plan or employer, for all charges for that claim above the attachment point of $40,000. In other words, the plan or employer would pay the first $40,000 in eligible claims and the stop-loss policy would take over from there. (Note: Stop-loss reimburses the plan or employer. It is not insurance on the person.)

The second Stop-loss trigger is known as the "aggregate" attachment point. This applies to the total claims of the whole group. The stop-loss insurance policy begins to reimburse for claims when the total of all claims exceed some set amount. Stop-loss is not mandatory. However, Stop-loss provides a safety net, which allows the risk of self-funding to be predictable, and has made self-funding practical for even small employers who can budget for the possible losses.

WHAT ARE THE ADVANTAGES TO SELF-FUNDING?