If you desire the freedom of a self-funded health plan but need a little more certainty for your budgeting concerns, level funding might be an option for you. Weigh the advantages and disadvantages and decide what’s best for your company.
What is a Self-Funded Health Plan?
In a self-funded health plan, the employer assumes the risk and responsibility of paying the medical claims of its employees and their dependents. Contrast this with a fully-insured plan where the employer pays a premium to an insurance company, and the insurance company pay claims, even if the claims exceed the premiums paid by the employer. If claims are less than the premiums that an employer might otherwise pay, a self-funded health plan can result in significant savings.
A self-funded plan may contract with a third-party administrator (TPA) to administer the plan and pay claims, but it is still the employer that is responsible for funding the claims payments. An employer can mitigate the risk of extremely high, unpredictable claims by buying stop-loss insurance to pay claims in excess of a predetermined amount.
Self-funded plans are not right for every employer due to the unpredictability of claims. However, level funded health plans are an option that can add predictability back into the equation.
What is a Level Funded Health Plan?
A level funded health plan is an alternative to a self-funded health plan that can help employers in their health coverage budgeting efforts. With a level funded plan, an employer pays a set amount each month to a carrier. This amount typically includes the administration costs and other fees, and the amount of expected claims based on underwriting projections, and stop-loss insurance premiums.
The carrier pays your employees’ claims throughout the year from your monthly deposits. At the end of the year, if your payments exceed claims, you will receive a refund from the carrier. However, if the claims exceed the total of your monthly payments, your stop-loss insurance will cover the excess amount.
Advantages of a Level Funded Health Plan
A level funded health plan offers several advantages. Like a self-funded plan, you don’t have to pay premiums that are based on community rates. Your monthly payments are based on your employees’ expected claims. In addition, if your actual claims are less than the sum of your monthly payments, you will receive a refund at the end of the year, unlike a fully-insured plan, where the insurance company profits from your employees’ good claims experience.
The advantage of a level funded health plan over a self-funded health plan is that you are better able to manage your budget. In a self-funded health plan, medical costs can vary widely from month-to-month. However, in a level funded health plan, the employer’s monthly costs are predetermined and fixed. This enables an employer to smooth out costs and better provide for cash flow .
Additionally, many level funded plans provide detailed reporting on utilization trends, giving you important information on where employees may be causing overspending (such as unnecessary use of emergency room visits instead of urgent care).
Disadvantages of Level Funded
Although there are upsides to level funded health plans, there are also some disadvantages. The primary disadvantage is that you still need to use an insurance company. This means that, while your monthly payments are based on expected claims, it is the insurance company that will be setting the amount of your monthly payments. The insurance company is likely to overestimate your expected claims to ensure that your premiums are sufficient to cover claims. While you will get a refund if your payments exceed actual claims, you will not have the use of that money during the course of the year. Further, if your actual claims are greater than the sum of your total monthly payments, the cost of your stop-loss insurance could increase in subsequent years.
In addition, you will need help administering the plan. Depending on the plan and your TPA, administration fees could eat into your expected savings.
A level funded health plan may not be available to all employers. Many carriers restrict their programs to employers with a minimum number of employees. In addition, different carriers may have contracts with different provisions. For example, some carriers may require an employer to renew its contract for the following year before they refund excess payments. Or, a carrier may apply the excess to the following year’s payments instead of paying a refund. An employer must carefully review the carrier’s contract.
Making Your Decision
Ultimately, a level funded health plan is a great middle option if you aren’t quite ready to go all in on a self-funded health plan. It just depends on your business and looking at your company’s cash flow, risk tolerance, employee numbers, and preferred budgeting methods.
Contact RMC Group for more information about health plan options at 239-298-8210 or rmc@rmcgp.com.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as professional advice. © 2015, 2018 Zywave, Inc. All rights reserved.
