Stop-Loss Contract Basis: A Self-Funded Employer's Guide to Incurred and Paid Claims

When a mid-market employer with 20 or more employees moves from a fully insured plan to a self-funded or level-funded arrangement, most of the attention goes to the premium equivalent, the stop-loss deductible, and the projected savings. The detail that quietly decides whether those savings survive contact with reality is the stop-loss contract basis, meaning the specific window of time in which a claim must be both incurred and paid for the policy to reimburse it. Get that window wrong at the point of transition and a single large claim that straddles two plan years can land entirely on the employer's own checkbook.

The mechanics are not complicated once you see them laid out, but they are unforgiving. This guide walks through incurred versus paid, the standard contract notations, the run-in and run-out concepts that seal the gaps, terminal liability, and how the whole thing threads through specific and aggregate coverage. A concrete December-to-February example ties it together.

Incurred Versus Paid: The Two Dates That Govern Everything

Every medical claim carries two dates that matter for stop-loss. The incurred date is the date the service happened, the day of the surgery, the hospital admission, the imaging study. The paid date is the day the claim was adjudicated and the payment actually left the plan's account. These two dates are almost never the same, and the gap between them is where contract basis lives.

A hospital stay in late December generates charges on incurred dates in December. But the hospital may not submit the bill for weeks, the third-party administrator needs time to adjudicate, and the payment may not clear until February or March. That lag, often 30 to 90 days for routine claims and considerably longer for complex hospital billing, is normal. The question the contract basis answers is simple: for the policy year you are buying, which combination of incurred and paid dates will the stop-loss carrier actually reimburse?

Understanding this distinction is the foundation of the entire stop-loss insurance framework for self-funded employers. Miss it and the rest of the contract terms read like a foreign language.

Reading the Notation: 12/12, 12/15, 12/18, and Paid Contracts

Stop-loss contracts use a shorthand of two numbers separated by a slash. The first number is the number of months during which a claim may be incurred. The second is the number of months during which that claim may be paid. Both windows start on the policy effective date.

The 12/12 Contract

A 12/12 contract covers claims incurred within the 12-month policy year and paid within that same 12 months. It is the narrowest and cheapest basis. The trap is obvious once stated: a claim incurred in month 12 has almost no runway to be paid before the year closes, so a December claim paid in February falls outside the window entirely. A 12/12 works cleanly only when there is prior-year coverage handling the run-in and a later contract handling the run-out.

The 12/15, 12/18, and 12/24 Contracts

Adding months to the paid side buys runway. A 12/15 contract covers claims incurred in the 12-month year and paid within 15 months, giving a three-month run-out cushion. A 12/18 gives six months, and a 12/24 gives a full year of paid runway. These extended paid windows are how employers protect against the December-incurred, February-paid problem without buying separate run-out coverage. The longer the paid tail, the higher the premium, but the cleaner the protection.

The Paid Contract

A paid contract, sometimes written as a paid basis or 24/12 in some structures, reimburses any eligible claim paid during the policy year regardless of when it was incurred. This is the most protective basis and typically the most expensive in a mature program. Its great advantage shows up at transition: a paid contract in year one will pick up claims incurred before the plan went live but paid after, which is exactly the run-in exposure that sinks unprepared first-year employers.

Contract Basis	Incur Window	Pay Window	Run-out Cushion	Relative Cost
12/12	12 months	12 months	None	Lowest
12/15	12 months	15 months	3 months	Moderate
12/18	12 months	18 months	6 months	Higher
12/24	12 months	24 months	12 months	High
Paid	Any prior	12 months	Covers run-in	Highest

None of these choices is right or wrong in the abstract. The correct basis depends entirely on whether you are in year one, whether you are changing carriers, and what your prior contract left behind. That context is what turns a notation into a real exposure calculation.

Run-In and Run-Out: Sealing the Gaps at the Edges

Two terms handle the claims that straddle the boundaries of a policy year: run-in for claims incurred before the policy began, and run-out for claims still being paid after it ended. Both exist because incurred and paid dates rarely align neatly with policy effective dates.

Run-In Coverage

Run-in coverage protects claims that were incurred before the current policy started but are paid during it. This is the classic year-one problem. Imagine an employer leaving a fully insured plan on December 31 and starting self-funding on January 1. Services rendered in December belong to the old fully insured carrier's world, but any of those December claims that adjudicate and pay in January and February now hit the new self-funded plan's checkbook. If the new stop-loss contract is a strict 12/12 with no run-in provision, those inherited claims are the employer's problem alone.

Run-in coverage is bought in month increments, commonly 3, 6, or 12 months of look-back, and it is one of the most important line items for any first-year self-funded employer or any group switching stop-loss carriers. Assessing whether your group is ready for this exposure is exactly the kind of question a claims utilization and self-funded readiness review is meant to surface.

Run-Out Coverage

Run-out coverage is the mirror image. It protects claims incurred during the policy year but paid after the policy has terminated. If an employer ends a self-funded arrangement or switches carriers on December 31, the December-incurred claims that pay in the following February still need a home. Run-out coverage, or a sufficiently long paid tail like the 12/18 or 12/24 basis, keeps those trailing claims eligible.

The Transition Danger Zone: Year One and Every Carrier Change

The single most important thing a mid-market employer can understand about contract basis is that the risk concentrates at transitions. In a steady-state program that has run for years on a consistent basis, the run-out of one year overlaps cleanly with the run-in of the next, and claims rarely fall through. The danger appears whenever the chain breaks: the first year of self-funding, and any change of stop-loss carrier.

At the move from fully insured to self-funded, there is no prior self-funded year to have generated a run-out. The fully insured carrier's incurred-but-not-reported claims are contractually theirs, but the payment timing can create ambiguity, and any claim the new plan ends up paying needs run-in protection. This is precisely why the fully insured to self-funded switch deserves careful basis planning rather than a copy of last year's terms.

At a carrier change, the same gap can open in the middle of a self-funded program. If the departing carrier wrote a 12/12 and the incoming carrier also writes a 12/12 with no run-in, claims incurred near the end of the old contract but paid after the new one starts can be orphaned. The old policy's pay window has closed and the new policy's incur window has not opened for them. This is the "lasered gap" that catches employers who shop stop-loss purely on rate.

The Department of Labor's Employee Benefits Security Administration maintains guidance on self-funded group health plans and the ERISA obligations that attach to them, which is a useful primary reference when structuring these transitions. You can review that material through the DOL health plans resources at dol.gov/agencies/ebsa.

Terminal Liability, and How Specific and Aggregate Interact With Basis

Terminal Liability Options

Terminal liability coverage, sometimes called a terminal liability option or TLO, is an endorsement that extends the paid window after a contract terminates, so that claims incurred during the final policy year continue to be eligible for a defined run-out period, often an additional three months, even though the contract has ended. It is the cleanest way to protect the tail when a program is winding down or moving carriers. Terminal liability is usually purchased at the start of the contract, not the end, because a carrier will rarely sell it once trouble is already visible.

Specific Stop-Loss and Contract Basis

Specific stop-loss caps the plan's exposure on any single covered individual. If the specific deductible is $75,000, the carrier reimburses claims on one person above that threshold. But here is the critical link: only claims that satisfy the contract basis count toward the specific deductible in the first place. A $200,000 claim incurred in December and paid in February under a strict 12/12 contract does not partially count, it does not count at all. The employer pays the full $200,000 with no specific reimbursement, because the claim never entered the covered window.

Aggregate Stop-Loss and Contract Basis

Aggregate stop-loss protects against the total of all claims running higher than expected, reimbursing once the sum of eligible claims crosses the aggregate attachment point, commonly set around 125 percent of expected claims. The same rule applies: only basis-eligible claims accumulate toward the aggregate. A large straddling claim excluded by basis does not raise your running total, which sounds harmless until you realize the employer still paid that claim in cash while getting no aggregate credit for it. Modeling how these thresholds behave under different funding assumptions is where a level-funded cost calculator earns its keep.

A Concrete Example: The December Claim Paid in February

Consider a group whose plan year runs January 1 to December 31. An employee is hospitalized on December 18 for a serious cardiac event. The incurred dates fall in December. The hospital finalizes billing in late January, the third-party administrator adjudicates, and the $220,000 in claims pays on February 12 of the following year. The specific deductible is $75,000, so in principle $145,000 should be reimbursable. Whether it actually is depends entirely on the contract basis.

Contract Basis	Is the Dec-incurred, Feb-paid claim covered?	Specific reimbursement	Employer's net exposure
12/12 (no run-out)	No, paid after the 12-month pay window	$0	$220,000
12/15	Yes, Feb is within 15 months	$145,000	$75,000
12/18	Yes, comfortably within window	$145,000	$75,000
Paid basis	Yes, paid during the covered year	$145,000	$75,000

The difference between the 12/12 row and the 12/15 row is $145,000 of reimbursement on a single claim, driven purely by three months of paid-window runway. That is the entire lesson of contract basis in one line. The premium difference between a 12/12 and a 12/15 is a fraction of what a single orphaned claim can cost, which is why chasing the lowest stop-loss rate without reading the basis is one of the more expensive mistakes a first-year self-funded employer can make.

Now shift the same claim to year one. Suppose the December event happened while the employer was still fully insured, and the plan went self-funded on January 1. The claim pays February 12 under the new plan. Without run-in coverage, the new 12/12 stop-loss does not cover it because it was incurred before the policy started, and the old fully insured carrier's runout handling determines whether it lands anywhere but the employer's bank account. This is the transition trap in its purest form, and it is why year one demands either a paid basis, generous run-in, or both. Testing these scenarios against your own expected claims is straightforward with the health funding projector before you sign anything.

Related Reading

• Stop-Loss Insurance for Self-Funded Employers: the full framework for specific and aggregate coverage, deductibles, and how stop-loss fits a self-funded plan.
• Making the Fully Insured to Self-Funded Switch: the transition checklist where contract basis and run-in planning matter most.
• Claims Utilization and Self-Funded Readiness: how to read your own claims data to judge whether the timing and volume of claims support a self-funded move.

Frequently Asked Questions

What does 12/15 mean on a stop-loss contract?

The first number is the incur window and the second is the pay window, both measured in months from the policy effective date. A 12/15 contract covers claims incurred during the 12-month policy year and paid within 15 months of the effective date, giving a three-month run-out cushion for claims that adjudicate slowly at year end.

Why is year one of self-funding the riskiest for contract basis?

In year one there is no prior self-funded policy to have generated run-out coverage, so claims incurred before the plan went live but paid afterward can fall into a gap. Without run-in coverage or a paid basis, those inherited claims are paid entirely by the employer, which is why first-year basis planning matters more than the headline rate.

What is the difference between run-in and run-out coverage?

Run-in coverage protects claims incurred before the current policy started but paid during it, which is the year-one and carrier-change exposure. Run-out coverage protects claims incurred during the policy year but paid after it terminated. Together they seal the two edges of a policy period so straddling claims stay eligible.

Does a claim excluded by contract basis still count toward my specific or aggregate stop-loss?

No. A claim that fails the contract basis is treated as if it never entered the covered window, so it does not count toward the specific deductible and does not accumulate toward the aggregate attachment point. The employer pays it in full cash with no reimbursement and no credit, which is what makes a mismatched basis so costly.

Is a paid contract always the safest choice?

A paid basis is the most protective because it covers any eligible claim paid during the year regardless of incur date, which makes it ideal at year one and at carrier changes. It is also typically the most expensive, so the right answer depends on your transition situation and claims timing rather than a blanket rule. Many established programs run comfortably on a 12/15 or 12/18 once the initial run-in exposure has passed.