Health insurance costs continue to rise, hitting businesses and non-profits where it hurts the most – the bottom-line.
As a result, employers are forced to pursue creative alternatives to fully-insured healthcare coverage for their employees in order to provide more benefits at an affordable cost.
While employers may not be required to offer healthcare coverage, many feel compelled to offer it anyway in order to take care of their employees and gain a competitive edge in recruiting and retaining top talent.
Questions abound on whether employers should go with standard group health insurance [also known as a fully-funded plan] or a self-funded plan that may also include stop-loss coverage.
What if the best answer lies somewhere in between?
Many employees are finding that the happy-medium is a level-funded medical plan – a hybrid of fully-funded and self-funded medical plans.
Basics of Level-Funded Medical Plans
A level-funded medical plan is a combination of fully-funded and self-funded medical plans.
More businesses are flocking to level-funded medical plans for the cost savings and customization features of a self-funded plan and the financial stability and risk control features of a fully-funded plan.
A level-funded plan gives an employer access to vital information, including claims data, not available with a fully-funded plan. This enables an employer to further customize its plan and reduce its costs. In addition, employers love the freedom they get with level-funded plans.
How It Works
Select Your Plan – An employer selects its specific level-funded plan and chooses from available options to hand-tailor the program that works for the company. It then contracts with an insurance provider to manage enrollment, payment processing and claims.
The underwriter will then establish copays, coinsurance, deductibles, premiums and other requirements based on the plan selected.
Fund Your Claims – The employer will make a monthly premium payment to the insurance company to fund potential claims and cover service fees. The insurance company will calculate the monthly deposit based on the health risk, age, and gender of the employer’s employees.
Limit Your Risk – Part of the monthly payment is a premium for stop-loss insurance, which will kick in if claims exceed the cash reserves paid by the employer. This limits/caps the financial exposure of the employer in its level-funded plan.
Benefits of a Level-Funded Medical Plan
- Cost Savings – An employer may be able to save 10 – 20 percent or more, annually.
- Return-Of-Premium – An employer may receive a refund of premiums, if claims are lower than projected for the year.
- Flexibility – Level-funded medical plans are more flexible than fully-insured plans and are ERISA compliant.
- Control Risk – An employer enjoys predictable monthly claims funding and protections to limit its risk for both individual and group claims.
- Claims Report Information – An employer can gain access to claims reporting information, such as medical claim expenditures, which it can use to further customize its medical plan and control costs. An insurance company does not generally share such information with the employer.
- Less Regulations – A level-funded medical plan may not be subject to certain state regulations, giving employers more flexibility in customizing their medical benefits program.
- Good Fit for Small Businesses – Ideal for employers with 25 to 50 generally healthy employees.
What Type of Employers Usually Benefits From Level-Funded Plans?
A level-funded medical plan works best for a company with a healthy workforce. One reason is that a self-funded medical plan is not subject to the community rating rules of the ACA, which state that an insurance company cannot establish premiums based on the health status, medical claims, or gender of an employer’s employees. In contrast, in a level-funded medical plan, the insurance company can underwrite the employer’s workforce, which may result in a lower cost for employers with healthy or younger employees.
Even employers with workforces that are older may benefit from a level-funded medical plan. Because an employer with a level-funded medical plan has access to information, such as claims data, it may be able to customize its medical plan and better control its costs. This type of information is not generally available in fully-funded medical plans.
A level-funded medical plan may be the best option for employers with as few as 25 employees. Every employer should get proposals for a level-funded medical plan and a fully-funded medical plan in order to determine which plan is right for its workforce.
Level-Funded Plans VS. Fully-Insured Plans
There are benefits to a Fully-Insured Medical Plan:
- Simple Administration – The employer pays a fixed monthly premium to an insurance company, which pays all claims.
- No Risk – The insurance company assumes full claims liability, including large claims.
- Easy Budgeting – The employer knows the total amount of its monthly premium before the start of the plan year.
However, there are several disadvantages to a Fully-Insured Medical Plan that may cause some employers to search for alternatives:
- Higher Cost – An insurance company has to pay taxes and fees, such as premium tax and the ACA insurer fee that get passed through to the employer.
- Employer Limitations – An employer is subject to the offerings of the insurance company and is not able to choose its plan administrator.
- Regulations – A fully-insured medical plan is required to comply with all state and ACA regulations.
- No Claim Refunds – An insurance company will not refund premiums if the employer’s claims experience is favorable for the year.
- Lack of Information Transparency – An insurance company generally does not provide claims information, so the employer does not have the ability to adjust its program based on real-time data.
The bottom line is a fully-insured medical plan is likely to be more expensive on the front-end.
A Level-Funded Medical Plan has many benefits:
- Lower Monthly Premiums – Because an employer can customize a plan to its workforce, the monthly cost may be significantly lower than a fully-insured plan.
- Limited Risk – An employer can limit its risk by adding stop-loss insurance to protect against large individual and group claims.
- Easy Budgeting – An employer pays a fixed monthly premium, so its cost does not fluctuate from month to month.
- Less Regulations – A level-funded medical plan may not be subject to certain ACA regulations and state mandates.
- Administrative Freedom – An employer can pick its plan administrator.
- Possible Refund – An employer may receive a fund of premiums, if its claims experience is better than expected for the year.
- Access to Information – An employer can access important claims information in order to customize its medical program and better control costs.
There may be drawbacks to a level-funded medical plan:
- Self-Paying Claims – The fixed monthly premium includes a claims reserve out of which claims are paid. If the insurance company expects an employer’s claims to be higher than average, the amount needed to pay claims could be significant.
- Administration Fee – The plan administrator will charge an administrative fee.
While fully-insured and level-funded medical plans both offer a fixed design, a level-funded medical plan will offer greater flexibility and allow an employer to customize its plans, which may reduce monthly premiums. In addition, a fully-insured medical plan will charge more taxes and fees, be subject to greater regulation, and will not offer the return-of-premiums if claims are lower than expected for the year.
With a level-funded medical plan, an employer will have access to important claims information, which an insurance company generally does not share. With this information, an employer may be able to customize its plan so that a level-funded medical plan is the better choice for a business of any size.
Level-Funded Plan VS. Self-Funded Plan
A Self-Funded Plan may offer certain advantages:
- More Administrative Freedom – An employer may have greater freedom to choose the plan administrator.
- Possible Improved Cash Flow – An employer may see improved cash flow, but only if it does NOT pre-fund claims.
- Funding Flexibility – Because a self-funded medical plan does not require monthly payments to a claims reserve, an employer may have greater freedom in how it funds its plan.
In many ways, a Self-funded Medical Plan is similar to a Level-Funded Medical Plan:
- Possible Refund – An employer may get a refund at the end of the plan year, if claims are lower than expected, but only if the employer has pre-funded projected claims.
- No ACA Fees & Taxes – Taxes only apply to the stop-loss coverage, whether an employer has a self-funded or level-funded medical plan. Neither plan pays ACA fees.
- Less Regulation – Both plans may be subject to less state and ACA regulation.
- Information Transparency – An employer with a self-funded medical plan has access to the important claims information that it needs in order to customize its plan.
However, an employer that wants to pre-fund potential claims and add stop-loss coverage essentially has a level-funded medical plan.
What is Stop-Loss Insurance?
Stop-loss insurance limits an employer’s exposure by capping its claims risk. While a self-insured medical plan offers the potential of saving money, it also exposes an employer to significant financial risk if claims are higher than expected, unless an employer has a stop-loss policy.
With a stop-loss policy, an employer is able to cap the dollar amount of its liability at a predetermined limit, on both an individual and group basis, and protect itself in the event that one or more employees incur budget-breaking claims, such as hepatitis C, cancer, hemophilia, and rheumatoid arthritis.
Most level-funded medical plans generally include stop-loss insurance, while stop-loss insurance is optional in a self-insured plan.
The following types of stop-loss insurance are available:
- Specific Stop-Loss Insurance – This type of stop-loss insurance limits an employer’s risk for the claims of individual employees.
- Aggregate Stop-Loss Insurance – This type of stop-loss insurance limits an employer’s risk for the claims of its entire group of employees.
- Monthly Aggregate Accommodation – If claims in any given month exceed the monthly attachment point, the stop-loss carrier will prefund the excess amount. The monthly attachment point is determined by dividing the annual aggregate attachment point by 12.
Is a Level-Funded Medical Plan Right For You?
As health-care costs continue to skyrocket, it can be difficult to find a medical plan that delivers maximum care options, customization and less government interference all at a competitive price.
A level-funded medical plan could be the ideal solution for you.
A level-funded medical plan can save an employer 10 – 20 percent or more when compared to a fully-funded medical plan. In addition to the initial cost savings, an employer could get a return-of-premium, if claims are lower than projected for the year.
An employer enjoys far greater flexibility and control with a level-funded medical plan. A level-funded medical plan is subject to less government restrictions and control, while still being considered an ERISA plan.
A level-funded medical plan gives an employer access to important claims information, which enables the employer to better evaluate its needs, customize its plan and lower its costs. In addition, by adding stop-loss insurance, an employer can limit its risk.
The number of employers enjoying the benefits of a level-funded medical plan is growing daily. You should take the next step of talking to RMC to determine whether a level-funded medical plan is right for you.
Let’s Connect For a Free Consultation
RMC can provide more information about level-funded medical plans and design a program specifically to meet your needs.
Speak with one of our insurance professionals for a no-strings-attached review today – call 239.298.8210!
