In this article
- 1 Level-Funded Group Health Insurance
- 1.1 What is Level-Funded Group Health Insurance?
- 1.2 How Does Level Funding Work?
- 1.3 Differences Between Level-Funded and Other Group Health Plans
- 1.4 Pros of Level-Funded Group Health Insurance
- 1.5 Cons of Level-Funded Group Health Insurance
- 1.6 Why Employers Should Consider Level Funding
- 1.7 Questions to Ask Before Choosing Level Funding
- 1.8 Takeaways
Level-Funded Group Health Insurance
How to stay competitive with predictable healthcare cost.
For small and mid-sized businesses, balancing affordable healthcare options with predictable costs can be a challenge. One increasingly popular solution is level-funded group health insurance. This hybrid approach combines the cost-containment benefits of self-funded plans with the predictability of fully insured plans. Here’s a closer look at how level-funded health insurance works, its pros and cons, and why it may be an attractive option for employers.
What is Level-Funded Group Health Insurance?
Level-funded group health insurance is a type of partially self-funded health plan. Employers pay a fixed monthly amount (“level funding”) that includes:
- Administrative Costs: Fees for plan management, claims processing, and network access.
- Stop-Loss Insurance Premiums: Coverage that protects the employer against unexpected high claims, either on an individual basis (specific stop-loss) or aggregate basis (total group claims).
- Claims Funding: A portion set aside to cover anticipated employee healthcare claims.
At its core, level funding provides the flexibility and potential cost savings of self-funded plans while maintaining the stability of a fully insured plan through fixed monthly payments. By design, level-funded plans offer businesses the best of both worlds: cost control and financial predictability.
When you first agree to a plan, the policy will specify the amount of the monthly premium that goes into each category. Typically, 20% is paid towards the administrative cost, with 40% going into both the stop loss protection and the claims funding.
How Does Level Funding Work?
Level-funded plans operate through a straightforward yet effective process:
Employers make a fixed, consistent monthly payment to cover administrative costs, stop-loss premiums, and an estimated claims fund. This amount is determined at the time you set up the policy. This predictable payment structure helps businesses avoid cash flow surprises and budget effectively.
When an employee uses the plan, healthcare claims are paid from the claims fund. A third-party administrator (called a TPA) handles the claims processing and ensures the plan operates smoothly. The TPA also provides essential administrative support, such as compliance management and employee education, to streamline the experience for employers.
If over the course of the year, the total amount of claims exceeds a predetermined threshold, the stop-loss protection kicks in to cover the excess. This ensures that employers are protected from unpredictable, high-cost claims.
At the end of the plan year, the claims fund is reconciled. If claims are lower than the amount that was allocated towards claims funding, then the employer receives this money as a refund or credit. This refund is a significant advantage over fully insurance plans, where surplus funds remain with the insurance company. In the event the claims exceed the amount in claims funding, the stop-loss insurance covers the overage, ensuring that the employer’s cost remain capped.
Differences Between Level-Funded and Other Group Health Plans
To better understand level-funded insurance, it helps to compare it to other common types of group health plans:
Fully Insured Plans
- Structure: Employers pay a fixed premium to the insurance carrier, which assumes all claims risk.
- Predictability: Monthly premiums are fixed, but employers do not receive refunds if claims are lower than expected.
- Flexibility: Limited customization options for plan design.
Self-Funded Plans
- Structure: Employers assume all risk for claims and directly pay for employee healthcare costs.
- Predictability: Costs fluctuate based on claims, making cash flow unpredictable.
- Flexibility: Offers more control and customization but comes with higher financial risk.
Level-Funded Plans
- Structure: Combines elements of both fully insured and self-funded plans, with fixed payments and stop-loss protection.
- Predictability: Fixed monthly payments reduce cash flow uncertainty, while stop-loss insurance provides a safety net.
- Flexibility: Allows for customization while limiting financial risk, making it a balanced option for many businesses.
Pros of Level-Funded Group Health Insurance
Predictable Cost
One of the most significant benefits of level-funded plans is the predictability of costs. Employers know exactly how much they’ll pay each month, allowing for easier budgeting and financial planning.
Potential Refunds
Unlike fully insured plans, where unused funds remain with the insurer, level-funded plans offer the possibility of a refund. If claims are lower than expected, employers can receive a portion of the unused claims fund, effectively lowering the overall cost of coverage.
Cost Savings
By avoiding the overhead and profit margins of traditional insurance carriers, employers can often save money. Additionally, the transparency of claims data allows businesses to identify cost-saving opportunities and implement targeted wellness initiatives.
Transparency
Employers gain detailed insights into claims data, helping them understand where healthcare dollars are being spent. This transparency enables better decision-making and fosters greater control over healthcare expenses.
Customizable Plan Design
Level-funded plans offer more flexibility to tailor benefits to the unique needs of employees. Employers can customize coverage options, wellness programs, and provider networks to align with their workforce’s preferences.
Access to Self-Funding Advantages
Small businesses, which might not have the resources to adopt a fully self-funded plan, can access many of the same benefits through level funding. This makes it an attractive option for businesses looking to transition away from traditional insurance models.
Cons of Level-Funded Group Health Insurance
Year-End Liability
If claims are higher than anticipated, stop-loss insurance covers the excess, but the employer does not receive any refunds. This means that businesses with consistently high claims may not see the same financial benefits.
Eligibility Requirements
Level-funded plans may not be available to very small businesses or groups with high-risk employees. Insurers often assess the health status of the group before offering coverage, which can limit access for some employers.
Employee Health Risk
Groups with higher-than-average claims may experience increased stop-loss premiums in subsequent years. This can reduce the overall cost-saving potential of level-funded plans.
Complexity
Compared to fully insured plans, level-funded plans involve more administrative tasks and require a deeper understanding of how claims funding and stop-loss insurance work.
Employee Communication
Employers need to effectively communicate the benefits and mechanics of level-funded plans to employees. Without proper education, employees may not fully understand the value of the plan or how to navigate their benefits.
Why Employers Should Consider Level Funding
Level-funded group health insurance can be a cost-effective option for businesses seeking a balance between affordability, predictability, and flexibility. It is particularly attractive to employers who:
- Have a healthy employee population with lower-than-average claims.
- Want more control and insights into their healthcare spending.
- Are willing to invest time in understanding and managing a partially self-funded plan.
- Desire the potential for refunds if claims are low, without taking on the full risk of self-funding.
Questions to Ask Before Choosing Level Funding
Before committing to a level-funded plan, employers should ask the following questions:
- Is My Group Eligible?
- What are the underwriting requirements, and does my group meet the health criteria? Understanding eligibility is crucial to determining if level funding is a viable option. Your broker should be able to tell you if you qualify.
- What Happens If Claims Exceed Expectations?
- How does the stop-loss insurance work, and what are the coverage limits? Knowing the details of stop-loss protection ensures that employers understand their financial risk.
- Are There Administrative Support Services?
- Does the TPA provide resources for claims processing, compliance, and employee education? Strong administrative support can make a significant difference in the success of a level-funded plan.
- What Are the Plan Customization Options?
- Can the plan be tailored to meet the specific needs of my workforce? Customization is a key advantage of level funding, so it’s important to explore the available options.
- What Are the Total Costs?
- What is included in the fixed monthly payment, and are there any additional fees? Transparency in cost breakdowns helps employers make informed decisions.
Takeaways
Level-funded group health insurance offers small and mid-sized businesses a unique opportunity to control healthcare costs while maintaining predictable expenses. By combining the advantages of self-funded and fully insured plans, level funding can provide significant savings and flexibility. However, employers should carefully evaluate their group’s health needs, financial goals, and risk tolerance before choosing this type of plan.
With the right preparation, support, and communication, level-funded health insurance can be a valuable tool for managing employee benefits effectively. For businesses seeking a strategic approach to healthcare coverage, level funding may be the solution that bridges the gap between affordability and comprehensive care.
Feel free to reach out if you would like to explore level-funded options for your business.
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