Employee Benefits Blog

A growing number of employers are currently experiencing a rise in catastrophic health claims, largely due to medical and pharmaceutical advances (e.g., specialty drugs and cell and gene therapies).

In the past, employers have expanded cost-sharing methods to reign in rising health expenses, such as offering high deductible health plans, but today’s employers are hesitant to shift costs onto employees amid the tight labor market.

As a result, many employers with self-funded health plans are actively looking for impactful mitigation strategies. One of the most common strategies is purchasing aggregate stop-loss insurance to help cover catastrophic health claims.

As companies continue to rebound from the pandemic, ongoing challenges — including staffing shortages, unpredictable demand, and rising supply costs — have businesses on the hunt for any advantage. Evaluating funding strategies for medical benefits programs may be a good place to start.

With employers offering richer benefits to employees as a recruitment and retention incentive, organizations are taking a hard look at the options available. Captive insurance can be an ideal solution for medical benefits, offering mid-sized companies across most industries the opportunity to control medical and pharmaceutical costs and design a more customized health plan.

Compared to companies offering traditional, fully insured plans, companies retain more control and transparency through participation in a medical captive. Employers may also save as much as 30% to 50% in total prescription costs through an actively managed pharmacy program. Overall healthcare expenses may also trend lower over time, creating a cost advantage over competitors and a benefit to the bottom line. However, participating in a benefits captive involves more work and oversight in exchange for plan flexibility and the chance to create healthcare savings.

As if there weren’t enough questions surrounding the type of health insurance plans you offer your employees, there’s also the question of how to best fund the program. Fully funded, self-funded, and level funded health plans can be found throughout every industry, but small businesses tend to face more funding challenges with health insurance than their larger counterparts.

While they aren’t required by law to offer healthcare to their employees, many small businesses (as defined by the ACA) nevertheless feel inclined to do so. Some choose to do it simply because they want to take care of their employees, while others do it to strengthen their recruitment and retention strategies. Of course, many employers do it for all three reasons.

Regardless of their intentions, small employers who offer healthcare to their workforce know the cold, hard facts: health insurance is still ranked among the most important factors for potential employees in a compensation package. Job-seekers see how volatile the individual marketplace is and understand that the most reliable and cost-efficient way to obtain healthcare is still through an employer.

Because fully funded health insurance plans tend to be expensive for small businesses, many are turning to level funded health plans, which blend the economic advantages of self-funding with the financial predictability of fully funded plans. That said, level funded plans aren’t without their detractors.

What is a Level Funded Health Plan?

A level funded health plan (also known as a partially self-funded plan) is a type of health insurance plan that combines the cost savings and customization of self-funding with the financial safety and predictability of fully funded plans. Employers still contract with insurance companies, but agree to take on more of the financial risk. 

Everyone is looking for ways to save money on their healthcare costs — especially employers, who are shouldering a large portion of the burden when it comes to insurance premiums. If you’re looking into self-funded insurance options, you’re certainly not alone. Self-funding is surging in popularity among companies of all sizes, including those with as few as 50 employees.

Employers are drawn to self-funding because of the promise it holds to curtail costs, the freedom it provides to customize plans, and the desire to be unburdened by strict regulation. Regardless of whether or not you choose to move to a self-funded insurance option, it’s worth exploring this funding alternative so you can make the right decision for your business.

What is Self-Funded Insurance?

Self-funded health insurance is a form of employer-sponsored healthcare that doesn’t use traditional insurance carriers as a conduit for medical care. Instead, premiums are paid to the employer, which the company uses to pay for medical claims. Self-funding has traditionally been found in larger businesses, typically 1,000 employees or more, because they’re more likely to have larger reserves and cash flow to absorb a bad claim year than a small business.

The financial upside of self-funding is that employers get to keep any premiums which aren’t spent on claims. In a fully-funded environment, those savings are retained by the insurance company as profit.

The downside is that you’re opening yourself up to greater degrees of expense variability. In a low claims year, you’ll save money — but in a high claims year, you'll have to be prepared to absorb any overruns in healthcare expenses. Regardless, in our opinion, employee benefit expenditures should always be looked at over a multi-year time horizon. 

In survey after survey, employee benefit costs remain the top concern for HR professionals. Providing a competitive benefits package that is within an organization's budget sometimes seems like an impossible task. Affordable Care Act (ACA) requirements have added further strain, forcing employers to get creative, most especially when it comes to funding options.

For example, a self-funded benefits strategy used to be reserved for only the largest corporations, yet the Kaiser Family Foundation has tracked dramatic growth in this funding mechanism in companies with 200 or more employees over the past 15 years (from 67% in 2000 to 83% in 2015).

What other funding options for employee benefits are working for U.S. companies? Here are two of the most common strategies being used today, along with a plan design which is exploding in popularity.

1. Fully-Insured Health Plans

These are often thought of as "traditional plans" which used to be very prevalent with employers of all shapes and sizes. They include Preferred Provider Option Plans (PPO), Point of Service Plans (POS), and Health Maintenance Organizations (HMO). Simply put, fully-insured health plans work as follows; employers pay an agreed upon annual premium to a carrier, coupled with employee premium contributions per paycheck. In return, the insurance carrier pays all covered benefits.

One of the most significant advantages to fully-insured plans, in additional to ease of administration, is risk reduction: the risk of claims out-sizing premium collection is removed entirely from the employer. No matter how many eligible claims are made, regardless of scope and size, premiums remain the same for the one-year negotiated period.

The downside to fully-insured plans is that companies may pay more in premiums than they really have to. This often occurs with employers who have young, healthy workforces, but it also happens quite often with companies who know how to effectively manage claims and those who foster positive wellness and preventative care programs.  Furthermore, fully-insured plans only reduce in-year risk. Carriers who get burned on claims will inevitably exact their proverbial pound of flesh the next year in the form of exponential increases in premium.  Lastly, access to carrier claims data is a real challenge for smaller companies on fully-insured plans. This lack of transparency impacts an employer's ability to more successfully manage workforce health and wellness.