What is the purpose of an annual stop-loss limit in health insurance?

The annual stop-loss limit in health insurance serves the critical function of capping the total amount an insurer has to pay within a policy year for the insured’s healthcare costs. This means that once the insured's expenses reach a predetermined level, the insurer will cover all additional costs beyond that limit for the rest of the policy year. This feature is designed to protect both the insurer and the insured; it provides a safety net for the insurer against excessive claims while ensuring that the insured is not exposed to unlimited financial liability in the event of high medical expenses.

For instance, if a stop-loss limit is set at $10,000, after the insured has incurred that amount in out-of-pocket expenses, the insurer takes over and pays for further medical costs, thus helping to mitigate financial risk for both parties involved in the insurance contract. This calculated risk management strategy is essential in health insurance markets, particularly since unexpected and high medical costs can arise.

In contrast, eliminating all out-of-pocket costs or ensuring coverage is maintained indefinitely does not accurately reflect the function of a stop-loss limit. Similarly, the concept of limiting the number of services the insured can utilize does not align with the protective purpose of a stop-loss, which is focused more on capping costs rather than