Level-Funded Health Plans: What Employers Should Know
The popularity of level-funded health plans is increasing rapidly. In 2019, only 7% of small businesses -those with between 3 -199 employees – offered these plans. That number jumped to 42% in 2021, according to a Kaiser Family Foundation health benefits survey, conducted each year.
What is driving the popularity of this health plan funding mechanism? Is a level-funded plan the right choice for you, your business, and your employees? Let’s take a closer look at some recent trends in health plans, some of the pros and cons of each type of plan, and considerations for firms considering a level-funded plan.
Health Plan Trends
If you’ve offered your employees health benefits over the past decade or so, you know this already: costs are rising. In fact, according to the Kaiser Foundation survey, over the last 10 years they’ve gone up 39%. The employer has borne the majority of that increase.
In 2012, the total average annual cost per employee was $15,745. The worker contributed about $4300; the employer $11,400.
By 2022, the average cost jumped to $22,463. The worker’s contribution was just over $6000; the employer’s share is over $16,000.
This trajectory is unlikely to change anytime soon. Forecasts predict a 7-8% increase for 2023, and a further increase in 2024.
Given these rising costs, it’s not surprising that employers are looking for more options to look after their employees, while also protecting their bottom line. Currently, there are several funding models available to choose from.
Health Plan Payment Models
In simple terms, there are 2 primary funding mechanisms for health plans.
- One – arguably the most common – is a fully insured plan.
- The other option is self-funding.
- Of this latter kind, there are two types. “You have true self-funding, the pay-as-you-go model,” explains Tommy Poulin, Health and Benefits Advisor with TechServe Alliance, “and level-funding. As the name implies, it is a level pay and a level risk.”
We’ll look at the level funded plans in more detail below. First, here’s a brief overview of fully insured and self-funded plans.
The cost associated with fully insured plans is a fixed monthly premium. Premiums are calculated based on community risk. For small businesses, with less than 50 employees, underwriters use only member age and zip code as cost factors (other demographic factors are considered for larger companies).
The employer can choose from a limited number of plan structures. Employees have access to providers within the carrier’s network.
This option comes with high claims and premiums increase, but the employer is not liable to pay directly for those high claims. Lower claims should result in lower premiums, but the employer receives no immediate direct benefit from these lower claims. “In fact,” Poulin says, “you’re the best customer if you pay premiums and employees don’t utilize the plan. The insurer keeps any unspent dollars as profit.”
With fully-insured plans, carriers play a significant role in maintaining compliance, mitigating risk and lessening the administrative burden on staff.
In the case of self-funded plans, there are no monthly premiums, per se. Instead, costs will rise and fall with the value of employee claims. Stop-loss insurance is one of the typical fixed costs in this case, which covers claims over a predetermined value. Up to that amount, however, the employer is liable for all costs.
The employer in this case has more flexibility in terms of the design of the plan, and the network of providers available.
There are no state mandates with self-funded plans as there are with fully-insured plans. However, compliance – HIPAA and ERISA compliance, and Form 5500 filing, for example – is generally the responsibility of the employer, adding to staff workload and introducing risks associated with noncompliance.
These two options represent opposite ends of a spectrum. This is one of the reasons for the growing popularity of level-funded health plans – an option in the middle of that spectrum.
Level-Funded Health Plans
Level-funded health plans are designed to be the ‘best of both worlds’, offering some of the advantages of both fully-insured and self-funded plans, while minimizing some of the downsides and risks of each type.
As with fully-insured plans, the cost of a level-funded health plan is a predetermined monthly premium. That premium is a function of three elements:
- An estimate of maximum claims liability
- Fixed administration fees
- The cost of stop-loss insurance.
Monthly costs are more predictable than with self-funded plans, making it easier for businesses to forecast expenses and manage their budgets.
“With the pay-as-you-go model,” says Poulin, “you could see $5,000 in claims one month, and $100,000 in claims the next month. With level funding – like fully insured, you pay a fixed monthly premium, whether your employees go to the doctor and file claims or not.”
With a level-funded plan, premiums are based on the claims history of the specific employee pool, as opposed to a broader demographic community, as is the case with fully-insured plans.
“Fully-insured plans are rated on date of birth and zip code,” Poulin explains. “No other parameters are taken into consideration. [This] Could be good, could be bad, but it’s more bad than good. The definition of insurance is spreading known risk. If they don’t know what the risk is, they err on the side of caution by charging more.”
This is one of the reasons why, for employers with generally healthy employees, the premiums associated with a level-funded plan are 10-30% less than fully-insured plans.
The most significant difference in the case of level-funded plans is the potential for a refund. If claims are lower than the estimate allowed for, some or all of the surplus may be returned to the business. This can be reinvested back into the plan, reducing costs for both employer and employee – a win-win when it comes to attracting talent.
Level-funded plans, like other self-funding mechanisms, offer greater flexibility than fully-insured plans. Employers have the opportunity to choose a larger nationwide network, possibly even an open network.
Employers have more control over the design of the plan, including the relative contributions. Level funded plans allow for different worker classifications, which are not always available with fully insured plans. Furthermore, participation percentages aren’t as stringent as they are in the case of fully-insured plans.
This flexibility can mean the opportunity to offer your employees a plan that is the best fit for their needs, as well as for your budget.
A fully-insured plan provides very limited visibility into the claims history of the employer’s specific plan. This means that the employer has less leverage when it comes to negotiating premiums. “Without that information, you’re negotiating in the dark,” says Brian Drummond, CEO of Kasa. Kasa is the broker partner for TechServe Alliance’s health benefits plan. “When you have claims data, though, you’re able to say with some authority, for example, that an increase isn’t justified based on the utilization of the plan.” If an increase is justified, a business owner can use this information to understand why.
A lack of information also means that the employer has a limited ability to influence the factors that increase or reduce costs.
With a level-funded plan, the employer has access to more detailed information about their plan, and how it’s used (in a privacy-compliant manner, of course).
This information can help the employer educate employees about decisions that can make the plan better. Choosing generic over brand name prescriptions, for example, or seeking urgent care rather than visiting the emergency room. Better decisions can help return funds to the plan, which is a win-win for employees and employers alike.
“If your employees pay a portion of their health insurance premiums, the lower your costs are, the lower their costs are,” notes Michele Grassley Clarke, CFO & COO of TechServe Alliance. “You save money, and you’re saving your employees money. It’s like giving them a bonus or a raise. It makes you a more desirable employer, it helps with retention and recruitment, and you might be able to offer a better plan.”
Additionally, this data helps employers make more informed decisions. The employer can calculate the return on investment for a wellness plan, for example, or make more informed choices about the right network.
For firms considering a level-funded plan, one of the first steps is to work with a competent broker partner. The burden of compliance with these plans falls to a greater degree on the employer than with fully-insured plans.
“In fact, this is one thing that I think sometimes scares people a bit when they’re beginning to consider a level funded model,” says Drummond. “If I were thinking about moving to a level-funded plan, I’d want to make sure I had a really competent broker partner who could help me understand and organize compliance matters. It’s really not overwhelming, but there are some differences that require some action on your part.”
The right broker partner will help manage the additional staff workload, and – most importantly – help mitigate against the real risks of noncompliance.
Is a level-funded plan right for you?
While the ‘best of both worlds’ nature of level-funded plans are appealing, they’re not right for every company.
They can be ideal for small to midsize firms. For larger companies, other options may be better. The flexibility of a level-funded plan comes along with additional compliance responsibilities. The benefits of that flexibility – both in terms of managing costs, and keeping employees happy – may be worth it, but they may not.
The additional transparency also has ups and downs. Having access to information is one thing, but the commitment to review your claims data and educate the employees is another. Without that commitment, you may not see the savings you hope for.
As with any contract, it’s important to review a level-funded plan contract carefully. Terms vary from one to another. For example, some plans offer a full refund of any premium surplus, while others only refund a portion.
TechServe Alliance offers a level-funded plan that has been a good fit for many of its members. While a broker partner should discuss a range of alternatives with you – from fully-insured to self-funded – this level-funded plan might be a good option to consider. Contact Tommy Poulin to discuss these options.
Level-funded plans were the focus of a recent webinar hosted by TechServe Alliance. The discussion was moderated by Michele Clarke, along with Tommy Poulin and Brian Drummond. The webinar was recorded, and if you missed the live presentation, you can view the recording here. A link to the slide deck presentation is available here.
To view TechServe’s upcoming webinars, please click here.