As health care costs continue to rise, many employers are looking for ways to make health plan expenses more predictable and easier to manage. For some organizations, that means adopting a more hands-on cost approach like level-funded health insurance. Let’s talk about what makes level-funded health insurance unique, including how it works, who it may benefit most and common considerations.
What is a level-funded health plan?
A level-funded plan is a type of health insurance plan offered by employers that combines the predictability of fully insured plans with the cost-savings potential of self-insured plans. A level-funded plan can make it easier to control costs with confidence and create opportunities for additional savings.
Level-funded plans are a growing choice among small and mid-size organizations. Many employers are re-thinking how they fund health benefits as costs continue to rise. They’re looking for ways to better manage, forecast and understand their health plan expenses.
The difference between level-funded and fully insured or self-funded health insurance
| Fully insured | Self-insured | Level-funded | |
|---|---|---|---|
| Cost | Fixed premium | Varies per claims | Fixed payment |
| Assumed risk | Insurer | Employer | Stop-loss insurer |
| Assumed administrative responsibilities | Insurer | Employer | Third-party administrator or insurer |
| Surplus recipients | Insurer | Employer | Employer (If claims are lower than set annual amount) |
| Stop-loss insurance | No | Yes | Yes (Built in) |
How a level-funded health plan is structured
Like a fully insured health plan, a level-funded plan has a set monthly cost – no surprises. This amount is determined by three major elements: your pre-determined claims costs, overall administrative fees and stop-loss insurance. Each of these plays an integral role:
- Claims fund: This is what your organization sets aside to pay employee medical claims. This fixed number can change during renewal, depending on if costs were exceeded or stayed below what was set the previous year.
- Stop-loss insurance: A critical piece of level-funded insurance, this protects an organization against unexpectedly high claims. It begins to cover costs for employers if employees exceed the yearly claims fund amount.
- Administrative costs: The set amount it takes to pay for plan administration, often including network access, customer service, care management programs, and data and analytics collection.
Potential benefits of level-funded health insurance
Level funding combines predictable budgeting with opportunities for savings and greater insight into health care spending. Sometimes it’s a permanent choice, and sometimes a business may choose to temporarily use a level-funded approach to funnel their way into a self-insured structure.
More predictable monthly costs
With a level-funded plan, business owners pay a set cost each month. This fixed amount offers more stability, because without any surprise fees or price fluctuations, setting and sticking to a budget is easier. This contrasts with a self-funded plan, where monthly costs can vary.
Built-in protection from higher-than-expected claims
For organizations with self-funded health plans, employers must pay out of pocket for higher-than-expected claims. This can make it difficult to manage risk and budget for smaller businesses. If you’re looking to limit financial exposure, a level-funded plan includes stop-loss insurance.
This protects your business from high or catastrophic individual medical claims. If you exceed a certain pre-agreed upon dollar amount, your stop-loss carrier will pay the overflow. This allows you to decrease financial risks while still maintaining some elements of a self-funded plan.
However, even with stop-loss, your renewal may still reflect your group’s overall claims experience.
Opportunity for a surplus refund
Both fully insured and level-funded plans are shielded from catastrophic claims risks. But what if you spend less than expected for claims during the calendar year? With a fully insured plan, an organization’s insurer gets to reap the benefits of lower-than-expected claims, and employers don’t get to keep that money.
With a level-funded plan, depending on plan terms, employers may get to keep the difference when yearly claims costs are lower than projected.
Greater visibility into plan performance
Typically, more traditional plans offer very little visibility into how coverage is performing. This is because an employer works alongside an insurer. That insurer does the administrative work and will only allow an employer to see the details they choose to share.
Level-funded plans allow for more detailed analytics and reporting, since there’s no middleman. Having this data lends better insight into health care trends and care utilization, so employers can understand what’s driving costs. This information can lead to better benefit strategy decisions, cost savings and more strategic guidance from your broker.
Potential regulatory and tax advantages
In some areas, state-level mandates that regulate fully insured plan options may not apply to level-funded health plans. This means that depending on where you live, you may be able to avoid some premium-based tax regulations and assessments. This can create an opportunity for savings depending on your plan structure. To really understand specific savings opportunities and regulatory expectations, it’s important to consult with your legal team and tax and benefits advisors.
Is level-funded health insurance right for your business?
At their core, level-funded plans are structured to help employers control medical benefit costs and mitigate risks. It can be an excellent, affordable alternative for businesses looking to better manage costs. While anyone can choose this type of plan, it’s often most effective for smaller employers with a relatively stable workforce.
How to get the most from a level-funded plan
If you think your organization might be a good fit for a level-funded health plan, there are many ways you can make utilization and cost control measures more effective. Taking action will help you get the most out of your level-funded health plan.
Focus on your workforce’s overall health
A stable, healthy population will maximize your level-funded plan benefits. This is why it’s important to use health surveys, your benefit data and reportings, and current health trends to identify key health risks employees face. Pinpointing the gaps in your workforce’s health and well-being can help you address conditions proactively, so you can better serve employees and protect your bottom line.
Invest in targeted well-being programs
Maintaining a healthy workforce is crucial to sustaining a level-funded plan annually. Between personalized services, Employee Assistance Programs (EAPs), digital health tools and services, health and well-being programs, there are many options for employers and employees to benefit from.
Work with an experienced partner
When you choose to offer a level-funded health plan, leadership will have new tasks to manage. An experienced benefits administrator will simplify plan management through clear guidance, streamlined quoting, organized onboarding processes and ongoing assistance.
A good partner will help you:
- Set privacy boundaries within the company when handling employee health information
- Follow specific regulations and have access to legal resources
- Follow federal COBRA requirements
- Report Minimum Essential Coverage information to the IRS and policyholders
- Decide how much to charge employees for their coverage
- Calculate and pay the PCORI (Patient-Centered Outcomes Research Institute) fee
Find out if a level-funded plan is right for your organization
If you’re a small-to-midsize organization with a primarily healthy workforce and looking for more predictable costs, it might be time to talk with a broker or consultant about making the switch to level funding.