Understanding How Level-Funded Health Plans Work

Level-funded health plans can help employers lower their healthcare expenses while providing employees comprehensive health coverage and a robust provider network. These plans combine the cost savings and flexibility of a self-insured health plan with the financial predictability of a fully-insured health plan.

What is Level Funding?

With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative or other fees, the estimated amount of expected claims based on underwriting projections and stop-loss insurance.

How Does Level Funding Work?

Employers with level-funded plans pay a “level” fee to an insurance carrier or third-party administrator (TPA) each month that includes three components:

  1. Maximum Claim Liability: Level-funded health plans limit an employer’s monthly claim liability to a set monthly amount to cover estimated, expected claims, typically based on the health status of the organization’s employee group.
  2. Health Plan Administration Fee: Level-funded health plans have an administration fee, which often includes claims processing, billing, and customer service.
  3. Stop-Loss Insurance Premium: Level-funded health plans include a premium for stop-loss insurance coverage that protects the employer against large claims and high utilization.

The employer’s total monthly payment is determined by the carrier or TPA and remains fixed or level for a 12-month period. The employer pays this fee each month, regardless of claims activity, and usually collects some of this cost from employees through pre-tax payroll deductions. If actual claims exceed projections at the end of the plan year, stop-loss insurance protects the employer from unexpected costs.  If actual claims are less than expected, then the employer may be eligible for a refund from the carrier or TPA.  Whether an employer is entitled to a refund will depend upon the terms of the contract between the employer and the carrier or the TPA.  This is why an employer needs the help of an experienced, insurance professional when negotiating the terms of its contract with the carrier or TPA.

Employer Takeaway

Level-funded health plans can provide employers with the stability and predictability of a fully-insured health plan while offering cost savings, plan design flexibility and useful claims data available under a self-insured plan.

Contact us for more information and to request additional employee benefits resources at 239-298-8210 or [email protected].