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.
Level funded health plans have recently been attracting more attention among smaller employers (defined by the Affordable Care Act [ACA] as having between two and 49 full-time equivalents — FTEs). Level funded health plans typically include four main components:
- Administrative Costs — These costs are fixed and charged per employee. They will remain the same regardless of claims. This is the cost employers pay for network availability, claims adjudication, and prescription network, among other things.
- Individual Stop Loss Coverage — This is the stop loss insurance employers pay so they’re protected in the event that an individual claim is exceedingly high in a given plan year. If this individual claim reaches the stop loss deductible, the reinsurance kicks in and reimburses the employer for claims.
- Aggregate Stop Loss Coverage — This type of stop loss insurance covers the entire workforce. This acts the same way a family deductible would for your employees. If together, your employees incur enough claims that they reach the aggregate stop loss deductible (even if you’ve not reached your individual stop loss deductible), the reinsurance kicks in and reimburses the employer for claims.
- Claims — This is the variable portion of level funded health plans, but also where the most cost savings can enter into the picture. Unfortunately, this is an area (in addition to administrative costs) where level funded health plans provide opportunities for carriers to increase their profit margins at an employers expense (but more on that later). As with a fully insured plan, the insurance carrier estimates what they think an employer’s group policy will charge for the year (including all four components) and then divides that number by the total number of employees. This number is each person’s total premium, before it gets divided between employer and employee. But the difference with level funded health plans is that if the claims are lower than expected, the insurance company will refund part (or sometimes, all) of the unused funds back to the employer.
Benefit to Small Employers
Level funded plans (and generally, most self-funded plans) deliver three primary benefits to small employers: the potential for cost savings, more opportunities for plan customization, and reduced regulations.
- Cost Savings: It’s true that fully insured health plans remove most of the risks from the employer, but as a result, the cost of the plan is much higher. And while the cost of a fully insured plan is predictable for the plan year, rates can and will rise in subsequent years, should your claims surpass those forecasted by the carrier. On the other hand, a self-insured plan leaves the most risk with the employer, but also has the greatest chance for producing savings in the form of claims being lower than premiums. Level funded health plans attempt to combine the best of both worlds, making partial self-funding a more viable option for a larger portion of employers, such as small businesses.
- Plan Design: Level funded and self-funded health plans also provide employers with far more flexibility in plan design and are exempt from some ACA regulations, such as the requirement to offer essential health benefits, or the requirement to follow the three-to-one rating formula, for example. Additionally, self-funded plans give employers access to invaluable data which can inform plan design, such as claims information, unit cost of healthcare statistics, utilization frequency, and prescription data.
- Regulation: Lastly, because of an ACA exemption, level funded and self-funded health plans (even for small groups) enjoy the benefit of not having the same regulatory requirements as traditional, fully insured plans. Oftentimes, this means a lesser administrative burden on small companies who don’t have the same staffing resources as large employers. Therefore, level funding helps reduce overhead expenses.
Potential Drawbacks of Self-Funding and Level Funding
Detractors of level funded plans often point to the fact that self-funded medical plans aren’t beholden to the ACA’s medical loss ratio (MLR) rule, otherwise known as the 80/20 rule. This rule stipulates that carriers must spend at least 80 percent (85 percent in the large group market) of collected premiums on medical care and efforts to improve the quality of care. If they don’t, they must rebate any excess premium charged, essentially capping carrier profits at 20 percent (15 percent in the large group market).
Because self-funded plans are exempt from this governance, carriers can and will take liberties in defining claim expenses. To protect themselves against this practice, employers should work with employee benefits advisors who know to look out for these hidden costs, which oftentimes take the form of spread pricing, shared savings, and other benign-sounding euphemisms which can easily skirt by those who don’t know what to look for.
Is Level Funding Right for You?
Almost all insurance is an ongoing balancing act between costs and risk, but each business (especially a small one) needs to determine how much they can take on without risking the livelihood of the company — and therefore, its employees.
If you’re considering switching to level funding, you must ask yourself the following questions:
- How many employees do we have today, and plan to have in the future?
- How healthy is our pool of participants?
- How much variation in claims cost can we accommodate, year to year?
- How much input to benefit design do we want to have (or need to have)?
- How talented is my benefits broker in making sure the carrier doesn’t redefine claims in such a way that they line their pockets at my expense?
In other words, a small company with financial discipline, who is on the higher end of the two to 49 FTE range, who is made up of healthy individuals, and represented by a talented employee benefits broker, may be a suitable candidate for a level funded health plan.
But if your workforce is on the smaller side, made up of people with a lot of health problems, and you lack financial discipline, it may not be a good solution for you.
Choosing Level Funded Health Plans
If you’re a small business owner who is currently fully funded, but is considering the switch to a level funded health plan, you should talk to your employee benefits broker to figure out what such a plan looks like for your company. They can help you map out what’s realistic for your company and what to expect. They can also more closely examine carrier contracts to ensure that additional costs aren’t slipped into the claims definition and administrative costs.
In addition, be sure to discuss the prospect with your financial officers. Whether that means your board of directors, CFO, comptroller, or accountant, they’re the best people to guide you through this decision. They have the knowledge necessary to figure out what you can commit to financially — and make sure you aren’t putting yourself or your company at risk.
If your small business healthcare plan has become too expensive, but you don’t want to give up such a valuable benefit to your employees, consider level funded health plans before throwing in the towel. They provide the potential for cost savings, while protecting you from the risks associated with self-funding, making them a potentially great healthcare solution for small businesses.
To learn more about self-funding we'd encourage you to read our blog post "What is Self-Funded Insurance And Is It Right For My Small Business?"
Are you considering a level funded health plan for your workforce? Leave us a comment below or contact us. We’re happy to discuss the possibilities with you!