As an employer, you know that your best asset is your employees, and to protect your employees and their families, chances are you offer them a health plan. There are several ways to fund the health plan, and in this article, we’ll discuss the specifics around using level funding to fund your health plan.
While fully-insured plans allow you to pay fixed monthly payments, unless you’re a large employer, there isn’t much transparency on what those payments go towards (i.e., claims). It doesn’t matter if your organization has fewer medical claims than anticipated because you’re not getting any of the savings back; the carrier keeps it.
With a level-funded health plan, an employer makes a fixed monthly payment to the claims administrator that covers estimated medical claims from the workforce. That payment also goes toward stop-loss insurance, which covers the company in case of extremely high claims or catastrophic losses.
Level-funded plans are attractive to small- to mid-sized employers because if claims come in less than expected, you can recoup some or all of that money. On the other hand, if claims exceed the projected amount, you have a built-in safety net to cap costs.
As a result, level-funded plans can reduce the high cost of fully insured plans and mitigate the cash flow fluctuations of total self-funding (where you’d pay for claims as they occur).
Key Points About Level-Funding Health Insurance
What is level-funded insurance, and why is it popular? Level-funded health insurance often works for small businesses because:
Employers make regular contributions toward estimated claim payments
Employers may be able to get annual refunds if claims are lower than expected
Stop-loss insurance provides a cap on cost if claims are higher than expected
Financial consistency and predictability make management and change easier
These features allow small- to mid-sized businesses to use level-funding insurance to offer better benefits to their employees at reasonable costs with potential savings.
How Level-Funding Health Plans Work
Level-funding health insurance combines payment predictability with independence.
Here’s how it works in detail.
Business Makes Monthly Payments to Claims Administrator: Businesses make regular (“level”) monthly payments to their claims administrator, similar to fully insured plans. The claims administrator transparently breaks down exactly what the money pays for, including stop-loss insurance, administrative costs, and the expected cost of claims.
Employer, Broker, and Claims Administrator Estimate Annual Claims: All parties try to project how much employees’ medical claims will be over the contract term. This estimation considers company size, worker demographics, claims history, risk assessment, and more.
Employer May Qualify for Annual Refunds on Unused Claims: Should employee claims for a year be less than annual estimates, the company may be eligible for a refund on unused funds. This refund typically happens at the end of the year and varies by Claims Administrator.
Stop-Loss Insurance Covers Excessive Claims: If claims for a given year run higher than the original estimates, the insurer covers the difference. At the end of the term, they may also change the employer’s annual premium according to new projections.
What Companies Benefit Most from Level-Funding Health Plans?
Smaller companies typically start with fully insured health benefits for their employees. This is practical because young companies usually can’t afford much risk exposure. If the businesses grow, they may evaluate switching to self-funded insurance to improve cash flow.
Of course, that transition isn’t always possible for small companies. Self-funding requires a high level of financial independence. The sudden switch from fully-insured to self-funding can be disorienting at best and harmful to the business at worst. That said, there are also many benefits to being self-funded, with 90% of enterprise employers being self-funded.
Level-funded health plans have become increasingly popular in recent years, providing small companies with a bridge to future self-funding. An employer gets used to paying its own claims while stop-loss insurance caps total risk exposure and the steadiness of fixed monthly payments creates predictability and removes some uncertainty.
Level-funded plans help small- to mid-sized companies graduate from expensive, fully-insured coverage. They help companies grow as they strive for financial self-sustainability. Payment predictability limits plan maintenance, while claims transparency and data give the employer the information they need to decide if it’s time for true self-funding.
Most importantly, level-funded insurance helps companies care for the people who work hard for them. More options for affordable health insurance makes workers happier.
Potential Benefits of Level-Funded Health Plans
Level-funded health insurance offers several possible benefits to growing companies. They include the following:
Simplicity and Predictability: Regular monthly payments, as with fully insured plans, offer reliability and low maintenance.
Full Cost Transparency: As convenient as fully-insured plans are, insurers are often vague about where premiums go and how they are used to pay claims. Level-funded plans clearly show how monthly payments are used, outlining administrative fees, stop loss premiums, and claim payments plainly.
Expanded Health Care Options: Fully-insured plans may be easier to start out with. But frequently, their options and flexibility can be limited. Level-funded health care helps a business expand its insurance offerings at a reasonable pace.
Giving Employees More Choices: In turn, having more options for health coverage benefits workers. By graduating from the limits of fully insured plans, level-funded plans can help employees get the care they need the most.
Maintaining Steady Business Growth: Progress is crucial for small businesses. Level-funded health care helps businesses chart growth in several ways. It’s low maintenance, controllable, and less expensive than fully-insured plans, while providing the business with the health plan data it needs as it prepares for growth.
Lower Cost and Potential for Refund: Most level-funded plans cost substantially less than fully insured plans. They can help a building company save on expenses as it moves toward the fiscal maturity of self-funding. And at the end of the year, level-funded plans could cost even less than the annual premium paid. These savings can come in the form of end-of-term refunds for unused claims.
Level-Funded Insurance: Summing Up
Level-funded insurance is gaining popularity. But it’s still a relatively new trend. Many employers who grapple with fully-insured plans may not know that level funding is an option. It serves as a logical starting point for future self-funding.
Some companies may resist leaving the safety of fully-insured coverage. They may have no problems with monthly premiums but may not realize how much they overpay. Level-funded insurance is likely less expensive and has more options.
Small businesses, start-ups, and companies in growth mode should consider the possible advantages of level funding. It corresponds to and supports the growth curve that drives business owners and human resources personnel to improve — all at a likely discount.
