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Navigating the health insurance marketplace can be a daunting task for business owners. Not only do you need to understand and determine what type of health insurance plans to offer your employees—you also need to figure out the best funding strategy for your business.
Fully funded, self-funded, and level-funded health plans are options for every business owner, but small and mid-sized businesses tend to face more challenges when it comes to funding their health insurance plans than their larger counterparts.
In this blog post, we’ll discuss the differences between these three approaches to funding health insurance plans for your business.
Fully Funded Plans
A fully funded (traditional) plan involves a fixed monthly premium paid to an insurance carrier. The carrier pays for healthcare claims, while employees and covered dependents pay any deductible amounts, co-payments, or co-insurance for those covered services.
According to PeopleKeep, a fully-funded health plan is the traditional way to structure employer-sponsored health plans. Here’s how it works:
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The company pays a premium to the insurance carrier.
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The premium rates are fixed for a year, based on the number of employees enrolled in the plan each month.
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The monthly premium only changes during the year if the number of enrolled employees in the plan changes.
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The insurance carrier collects the premiums and pays the healthcare claims based on the coverage benefits outlined in the policy purchased.
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The covered persons (i.e. employees and dependents) are responsible for paying any deductible amounts or co-payments required for covered services under the policy.
Self-Funded Plans
A self-funded (self-insured) plan involves fixed monthly costs for items such as administrative fees and stop-loss coverage. A Third Party Administrator (TPA) is engaged to perform the tasks traditionally handled by the insurance company such as claims administration, billing, provider network rental, pharmacy benefit management (PBM), and disease management. Healthcare claims are funded by the employer and costs vary from month-to-month based on the services utilized.
Due to the increased liability associated with self-insurance, employers have a couple of options to reduce their risk and potential costs under this type of plan. Stop-loss or reinsurance policies can be purchased from an insurance carrier to guard against "unpredictable" losses that exceed your deductible limits. There are generally two types of stop-loss policies:
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Individual stop-loss: coverage that is purchased to protect the employer when claims during the policy year on any one covered individual exceed a pre-determined specific liability limit
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Aggregate stop-loss: coverage that is purchased to protect the employer from when eligible claims for the entire group exceed a pre-determined annual aggregate liability limit
There are many advantages that an employer can realize from implementing a self-insured program. In addition to enhanced cash flow, an immediate savings can be realized by avoiding taxes and profit margins built into your premiums under a traditional fully-insured arrangement. Plan flexibility, customization, and utilization reporting are also greatly enhanced.
Level-Funded Plans
Level funding is an option that can accompany a self-funded plan, aiding employers in their health coverage budgeting efforts. With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance.
The carrier facilitating the level funding will pay your employees’ claims throughout the year. At the end of the year, if your payments exceeded claims, you will receive a refund from the excess you paid in monthly claim allotments. If the claims exceeded what you paid into the program, in most cases your stop-loss insurance will cover the overage amount.
Generally, the monetary advantages of level funding are that you are better able to manage your budget and prepare for claims costs. You will benefit from smoother cash flow and not worrying that a high claim near the beginning of the year will impact your business.
Ultimately, if you want to operate a self-funded health plan, level funding is an option that must be considered in light of your company’s cash flow, risk tolerance, employee numbers, and preferred budgeting methods.
Whether to fully-insure, self-insure, or level fund your health benefit program constitutes a long-term major decision. The choice is one that must be analyzed completely and the known calculated risk understood. Our expert employee benefits brokers can help you determine what’s best for your company.
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