- Posted by Chris Elvidge
- On September 24, 2015
Being a small to mid-sized employer typically leaves few options when looking at medical plan funding. Historically, self-insured funding (employer assumes risk and responsibility of medical claims) was typically only available to the much larger sized employer segment, which left many clients held hostage to the fully insured funding methodology of the carrier (paid claims and assumed risk) that resulted in expensive, ever-escalating premiums.
The Affordable Care Act has stirred some market innovation in alternative insurance models. Level funding is one such innovation and has become a growing trend among small and mid-sized employers. The rising popularity of these plans is due to the fact that it offers the best of fully and self- insured plans. There’s the same cost predictability of fully insured plans without the large risk exposure of self-insured options. In addition, many national, main stream insurance carriers such as Aetna, Cigna, and UnitedHealthcare all have level funded products as part of their portfolio options.
So how does it work? Level funded health plans are hybrids that combine a guaranteed-issue plan with a form of self-insurance. Businesses simply set aside cash to cover anticipated claim expenses. The monthly premium remains the same (level) during the course of the year and if claims are less than the funded amount, a rebate or credit is issued at the end of the year. If claims go over the funded amount, businesses are protected by a stop-loss policy. Unlike self-funded plans, level-funded payments are spread evenly across a 12-month period. Predictable payments make cash management easier on companies who are not used to the potential large fluctuations than can happen in a truly self-insured plan environment. Level funded plans may just be the answer to the small business owner concern over rising health insurance premiums because it can potentially provide them up to 30 to 40 percent annual refund on their health benefit costs if a surplus exists when their premiums exceed claim payments.
Some key advantages to level funded plans:
- Surplus opportunity—shared savings at renewal if previous plan year ran well
- Enhanced reporting on claims experience, giving you important information on where employees may be causing overspending (such as unnecessary use of emergency room visits instead of urgent care, or where care can be better managed
- Fewer governmental regulations and reduced premium taxes
- Fixed rates by tier for the purposes of aligned employee contribution
- Flexible benefit designs, including consumer-directed health plans
- Exemption from some ACA and state-mandated benefit requirements
- Level premium for cash flow predictability
Many employers are ready to gain more flexibility and control in plan design and financing via this relatively new funding vehicle. A well-designed, self-insured (level funded) plan enables companies to reap the benefits of their positive claims experience and wellness activities, rather than having to pay a monthly premium to a commercial insurer based on an arbitrary set of rating restrictions. The level funded approach to self-funding is right in the middle of the insurance spectrum. It’s a stepping-stone that takes advantage of the best of both fully insured and self-funded options. There are many protections in place that make it feel, look and act just like a fully insured plan, but the platform is self-funded, which brings some great advantages.
Questions? Don’t hesitate to reach out to your dedicated Employee Benefits Consultant or Account Executive.