Grant Reeves is Vice President of Better Health Plan, a level-funded, cost-effective option for group healthcare. As the world of level-funding and self-funding can get quite complex, Grant breaks down the basics of how this type of funding arrangement works.
Q: In a gist, how does level-funded health insurance work?
A: A level-funded health plan is a type of self-funded plan where the employer contributes a level, fixed amount every month for their group’s health insurance. That monthly payment goes to a third-party administrator (which manages the plan) and covers administrative costs, claim payments and stop loss insurance. Essentially, the third-party administrator takes the role that an insurer would in a fully-funded plan, but since the employer is self-funding the insurance plan, those payments go to an administrative claims fund, not to an insurer. While the administrative aspect of it looks different, from an employee’s point of view, it looks and feels just like a normal health plan.
Q: How are self-funding and level-funding different?
A: Level funding is a type of self insurance. The thing that separates the two is that with level funding, your monthly payments include stop loss insurance (this is what keeps it “level”). A purely self-funded plan may not have stop loss insurance included in it, so it may result in the plan being more expensive if there are high claims. The way we administer Better Health Plan is a self-funded plan with stop loss insurance, which makes it level-funded, because we include stop loss that limits an employer's liability both at an individual and a group level. That same protection may not be there with a purely self-funded, administrative-only plan.
Q: What is the purpose of stop loss insurance in a level-funded plan?
A: Think of stop loss insurance as an added layer of risk protection that can cap risk at an individual or group level (or both, depending on what you purchase for your plan). If an employer doesn’t have stop loss insurance and their group has a catastrophic claim, they could be liable for really high claims because they don't have the extra layer of protection.
Q: How is self-funded different than fully-funded?
A: When an employer has a fully-insured health plan, any savings for the year remain with the insurer. If a group has a really great year, they get no real benefit from this. They could potentially get good rates at the renewal, but with a level-funded plan like Better Health Plan, they’d get that refund at the end of the year if they run well. When self-funding/level-funding, there is also more flexibility to tweak and develop plans to meet the exact wants and needs of the health plan. Self-funding allows employers to have much more control over the plans and the programs they want to offer.
Q: What are the benefits of level funding?
A: The main benefits are predictability, potential for savings, and access to more data.
Predictability: Employers who are budget-conscious know how much they're going to pay every single month (but keep in mind, that can depend on enrollment fluctuations throughout the month). There’s also shared risk with the stop loss carrier. So, level-funded employer groups have claims they pay up to a certain amount, and then the stop loss insurance kicks in after that. The stop loss insurance carrier will cover these extra higher claims once the employer meets a certain threshold.
Potential for savings: If an employer pays the TPA a certain amount every month and doesn't utilize the full amount that they pay into, like their claims fund, for instance, they're eligible for a refund or credit at the end of the year if claims are lower than anticipated. That’s something an employer wouldn’t get with a fully insured arrangement.
Access to more data: Data provides that visibility for employers to make more informed decisions. At Better Health Plan, use that data to work with our customers to develop programs or find partners in the marketplace to supplement with their health plan to lower their claims costs.
Q: If I am currently fully insured, when is it worth it to transition to self-insured?
A: This will depend on several factors in your organization, including age, demographic, and industry. Oftentimes, when a company chooses to make a switch to self-insured, they’re at a point where they’re looking for cost savings as well as more flexibility in how their plan is designed.
Q: Are the compliance requirements for level-funded the same as fully-insured?
A: From a compliance perspective, level-funded plans have more requirements due to the employer sponsoring and self-funding their plans. They also have more responsibilities from a reporting perspective that a fully-funded carrier may do for them in the background. The benefit of working with Better Health Plan is that our benefits consultants help employers with those compliance requirements.
Q: What is a third-party administrator (TPA) and why are they used for self-funded plans?
A: A third-party administrator (TPA) does everything you would expect from a health insurance carrier. A TPA, on behalf of the employer, does claims adjudication and processing. It pays providers, gets networks in place for customers, orders and prints ID cards, provides customer service, negotiates with providers, and more.
Q: What is the best way to switch from fully-funded to self-funded smoothly?
A: There needs to be a lot of care and communication when it comes to onboarding and educating the employees about the switch. Understandably, there will be many questions relating to the continuation of care and what providers the group will be able to use going forward. For a smooth transition, you should partner with a broker who can walk you and your employees through the process and collaborate with all the vendors and partners involved.
