Level-funded vs. Self-funded vs. Fully Insured Health Plans: Key Differences and How to Choose

August 09, 2024

 

Choosing the right health plan for a small business can be challenging. While fully insured health plans have traditionally been the preferred choice for small businesses, larger companies often favor self-funded plans due to their flexibility and potential cost savings. However, understanding the differences between fully-insured, level-funded, and self-funded plans is critical for small business owners who want to balance cost, coverage, and employee satisfaction.

 

Self-funding is not inherently riskier than fully insured plans, but it comes with challenges, including unpredictable claims costs. Fortunately, there are safeguards, such as stop-loss insurance, that help mitigate the financial risk. Level-funded health insurance plans offer a middle ground, combining the predictability of fully insured plans with some of the cost-saving benefits of self-funding. Small businesses can tap into the advantages of self-funding or level-funding while minimizing risk by understanding these options and choosing the plan that best aligns with their goals.

 

What is a Level-funded Plan?

A level-funded health plan is a hybrid insurance model that combines the stability of fully insured plans with the cost-saving opportunities of self-funded plans. This plan especially appeals to small and medium-sized businesses that want more control over healthcare costs without the unpredictability of self-insurance.

 

Under a level-funded plan, the employer pays a fixed monthly premium. This premium covers administrative costs, stop-loss insurance (which protects against unexpectedly high claims), and an estimated amount for claims. The key advantage of this setup is the potential for a refund if the claims for the year are lower than expected. This can result in significant savings for companies with healthy employees, as they only pay for the actual costs incurred.

 

What are the Key Components of Level-funded Plans?

Level-funded group health plans provide small businesses with the stability of predictable costs while offering the flexibility and potential savings of self-funded plans. These plans are built on three key components:

 

1. Claims Fund

Employers pay a fixed monthly amount to cover estimated healthcare claims for employees. This fund ensures sufficient resources to handle expected medical expenses for the group. If claims come in lower than expected, the employer may receive a refund of the unused portion, offering an opportunity for cost savings.

 

2. Stop-Loss Insurance

Stop-loss insurance protects the employer by limiting their liability for unexpected high claims. If total claims exceed the fixed monthly amount, stop-loss coverage covers the extra costs, helping maintain the business's financial stability.

 

3. Administration

A third-party administrator (TPA) handles the day-to-day management of the health plan. This includes processing claims, providing customer service, and managing other administrative tasks. With these responsibilities offloaded to a TPA, employers can focus on running their business without being burdened by the complexities of managing a health plan.

 

What Does it Cover?

Understanding what these plans cover is crucial for making informed decisions about employee health benefits.

 

Key Coverage Areas:

 

1. Preventive Care:

Routine Check-ups: Annual physical exams to monitor and maintain health.

Vaccinations:Immunizations to prevent common illnesses.

Screenings:Tests such as mammograms and colonoscopies to detect potential health issues early.

 

2. Medical Services:

Primary Care Visits: Consultations with general practitioners for various health concerns.

Specialist Consultations:Access to medical specialists for specific health conditions.

Hospital Stays:Coverage for inpatient services, including surgeries and treatments.

 

3. Prescription Drugs:

Medications: Coverage for generic and brand-name prescriptions per the plan's formulary.

 

4. Emergency Services:

Emergency Room Visits:Coverage for unexpected medical emergencies requiring immediate attention.

Ambulance Services:Transportation to medical facilities in critical situations.

 

5. Mental Health Services:

Counseling:Access to mental health professionals for therapy sessions.

Psychiatric Services:Coverage for psychiatric evaluations and treatments.

 

6. Additional Benefits:

Telemedicine:Access to virtual consultations with healthcare carriers.

Wellness Programs: Initiatives promoting healthy lifestyles, such as smoking cessation and weight management programs.

How Does Level-funded Work?

How does a level-funded plan work? Level-funding works by having an underwriter review employees' health history and past claims to estimate expected healthcare costs for the year. This evaluation calculates the plan's total monthly cost, including administrative fees, stop-loss insurance, and an estimate for claims..

 

The monthly premium is fixed, providing predictability for employers when managing their budgets. This premium covers all expected costs and includes a safeguard to account for any unexpected increases in claims. If actual claims are lower than the amount paid into the plan, the employer may receive a refund at the end of the year. This structure combines the financial predictability of traditional insurance with potential cost savings, offering small businesses an opportunity to manage healthcare expenses more effectively.

What Happens When You Renew Your Plan?

When it’s time to renew your level-funded health plan, the process typically involves a review of your business’s claims history and employee health data from the previous year. Based on this information, the underwriter will assess whether the monthly fee needs to be adjusted for the upcoming year. If claims were lower than expected, your premiums may remain the same or decrease, potentially providing savings. If claims were higher than anticipated, the fee may increase to cover the anticipated costs. The renewal process ensures your business gets the most appropriate coverage while maintaining cost predictability.

 

What are the Pros and Cons of a Level-funded Plan?

Here, we will explore the pros and cons of level-funded plans to help you determine if they fit your business.

 

Pros:

Save Costs with Self-funding:

Level-funded plans allow small businesses to save compared to traditional fully-funded plans. Instead of paying fixed premiums to an insurer, businesses pay a monthly fee covering administrative costs and estimated claims. If claims are lower than expected, companies could receive a refund at the end of the year.

Keep Your Savings, Not Insurance Profits

Level-funded plans help you bypass the insurer’s profit margins. Your business pays solely for the healthcare services and may receive refunds if claims fall below the expected amount.

 

Protection with Stop-Loss Insurance

While offering the benefits of self-funding, level-funded plans include stop-loss insurance for added protection. If claims exceed the projected amount, this safety net limits your financial exposure, ensuring unexpected costs don’t disrupt your budget.

 

Predictable Monthly Payments

Level-funded plans offer fixed monthly payments, ensuring businesses can plan and budget for healthcare costs without worrying about unexpected premium changes. Companies can easily plan and budget for healthcare costs with a fixed monthly fee.

 

No Surprises or Extra Charges

Fixed monthly payments in level-funded plans eliminate the risk of unexpected charges. This financial predictability helps businesses avoid sudden costs and allows them to focus on growth without worrying about healthcare price hikes.

 

Potential Refund for Unused Funds

If claims are lower than expected, level-funded plans offer a refund for unused funds. This potential refund helps businesses manage healthcare costs while providing employees comprehensive benefits.

Cons:

While level-funded health plans offer advantages, there are a few factors to consider:

Potential for Higher Renewal Rates:If claims exceed stop-loss coverage in high-cost years, renewal rates may increase.

More Resources for Administration: Managing a level-funded plan may require more time and resources for administration and compliance.

Regulatory Compliance: Businesses must comply with ERISA (Employee Retirement Income Security Act) regulations, which can be complex and require additional oversight.

Lack of Integrated Wellness Programs: Some level-funded plans may not include wellness programs that traditional fully-insured carriers offer as part of their package.

What is a Self-funded Plan?

In a self-funded health plan , the employer is responsible for covering employees' medical claims. This suggests that the employer pays for each claim as it arises rather than paying a fixed premium to an insurance carrier. Monthly premiums are determined based on various factors, estimating total plan costs, including administration, claims, and stop-loss coverage. Employers typically purchase stop-loss insurance to protect against large, unexpected claims, which safeguards them if actual claims exceed anticipated expenses. For small businesses, self-funded plans can be challenging due to the difficulty in accurately predicting claims costs with fewer employees and limited financial flexibility to cover large claims without significant risk.

What Are the Key Components of a Self-funded Plan?

When deciding to self-fund your health plan, there are two major components to consider: current plan design and claims costs. A thorough analysis helps determine the correct premium for the plan. Additionally, you will need to assess both predictable and fluctuating costs.

 

Fixed Costs:These include administrative fees, stop-loss coverage, and any other set fees charged per employee.

Variable Costs: These are healthcare claims, which can vary depending on your employees' medical requirements.

What Does a Self-funded Plan Cover?

A self-funded plan provides flexibility, allowing businesses to customize benefits while complying with federal regulations like ERISA. This ensures employees receive essential benefits, such as continued coverage after leaving the company.

To manage the plan, many businesses hire a third-party administrator (TPA) to handle tasks like premium collection, plan design, claims payments, and stop-loss management. Self-funded plans often include wellness programs to help employees manage chronic conditions and adopt healthier lifestyles, ultimately reducing the number of claims and controlling costs.

 

How Does a Self-funded Plan Work?

In a self-funded plan, the employer directly covers medical claims rather than paying fixed premiums to an insurance carrier. This gives businesses more control over healthcare costs, as they only pay for actual claims. To protect against large or unexpected claims, employers usually purchase stop-loss insurance, which provides coverage if claims surpass a certain limit. This structure allows businesses to save on premiums while offering more flexibility in managing healthcare expenses.

 

What Happens When You Renew Your Self-funded Plan?

A self-funded plan does not follow the typical “renewal” process seen with traditional insurance plans. The plan undergoes a comprehensive review to assess whether it has met its expectations. Several factors can influence premiums during this review:

 

Claims History: Premiums will be adjusted based on the actual claims experience from the past year. If claims increase, premiums will rise, while a decrease in claims may result in lower premiums, though a reserve fund should still be maintained for unexpected expenses.

Provider Network: The network of healthcare carriers may be reviewed, and if changes are necessary, premiums could be impacted.

Stop-Loss Coverage: Stop-loss insurance is typically purchased to limit exposure to large or catastrophic claims. During the review, the claims history will be evaluated to determine if adjustments to the stop-loss coverage are needed.

What are the Pros and Cons of a Self-funded Plan?

A self-funded plan allows businesses to manage healthcare costs directly by paying for claims as they occur. While this approach offers potential savings and flexibility, it carries certain risks and administrative demands. Here are the pros and cons:

 

Pros:

Cost Control: Directly managing claims allows businesses to achieve cost savings by paying only for the claims that occur.

Customizable: Employers can adjust the plan to suit their specific needs better, ensuring it aligns with their workforce requirements.

Potential Savings: If claims are lower than expected, businesses can retain unused funds, which can be reinvested into the plan or used elsewhere.

Flexibility: Employers have more control over wellness programs and health management strategies, enabling them to design initiatives that best support employee health.

Cons:

Financial Risk: If claims exceed expectations, businesses may incur higher costs, impacting their budget.

Resource Intensive: Managing a self-funded plan requires significant administrative resources and oversight, which can be burdensome for smaller businesses.

Regulatory Compliance: Self-funded plans must comply with regulations such as ERISA, which adds complexity and requires additional oversight to ensure compliance.

Stop-Loss Costs:While stop-loss insurance helps mitigate financial risk, it comes at an added cost, which businesses must factor into their overall budget.

 

What is a Fully Insured Plan?

A fully insured health plan is a common arrangement where employers pay a fixed monthly premium to an insurance carrier. This premium covers employee medical claims, administrative expenses, stop-loss coverage, and other associated fees. The insurer pools premiums from multiple employers to cover the collective claims of the group. This setup shifts the risk of unexpected or high medical costs to the insurance company, providing financial predictability for employers. However, this risk mitigation often results in higher overall costs, making fully insured plans more expensive than self-funded or level-funded plans.

 

What Are the Key Components of a Fully Insured Plan?

The key components of a fully insured plan include:

Premiums: Employers pay a fixed monthly premium to the insurance carrier. Factors such as anticipated claims costs, administrative fees, stop-loss coverage, and applicable taxes determine the premium.

Risk Pooling: Premiums are typically pooled across all insured individuals in the plan. In small groups, premiums are "community-rated," meaning that all companies with fewer than 50 employees pay the same premium in the same area. For larger groups, premiums are adjusted based on age, claims history, and size.

Claims Coverage: The insurance carrier manages claims on behalf of the employer and covers the healthcare costs of employees, subject to the terms of the plan.

What Does a Fully Insured Plan Cover?

Fully insured plans for small businesses typically cover a broad range of essential healthcare services, ensuring employees have access to necessary care. These services often include doctor visits, hospital stays, prescription medications, preventive care (like vaccinations and screenings), and emergency services. While the core benefits are similar across plans, the specifics, such as deductibles, copays, and coinsurance, may vary based on the plan's design. For small businesses, this means they can offer comprehensive healthcare coverage without the complexity of managing the details themselves.

 

How Does a Fully Insured Plan Work?

A small business pays a fixed monthly premium to an insurance carrier in a fully insured plan. The insurer uses this premium to cover the healthcare claims of the business's employees. The employer is not directly involved in managing claims or dealing with the day-to-day administration of the plan. This setup protects the business from unexpected medical costs, as the insurer assumes the financial risk. Small companies often prefer this model because it provides predictable, manageable costs and reduces administrative burdens, allowing them to focus on their core operations.

 

What Happens When You Renew Your Plan?

When you renew a fully insured plan, the insurance carrier evaluates the plan’s performance, including claims history, utilization rates, and the overall health of the insured group. If the insurance carrier determines that claims exceed the premiums collected, they may increase the premium. This increase is typically non-negotiable, and employers often don’t receive detailed explanations for the change.

 

Small Group

Increases are based on the "pooled risk" of all groups with fewer than 50 employees in the same area. Even if your group is healthy, you may see a premium increase based on the health of other groups.

Mid-Size Group:

Premium increases are based on pooled risk but account for the group’s individual claims experience. Healthier groups may experience smaller increases.

Large Group:

Premiums are adjusted based on the claims history of your specific group. Groups with high claims may see larger increases, while healthier groups may see more stable or reduced premiums.

 

What are the Pros and Cons of a Fully-insured Plan

A fully insured health plan is common for businesses seeking a straightforward, predictable healthcare solution. This approach involves employers paying a fixed monthly premium to an insurance carrier, which covers employee medical claims, administrative expenses, and other associated costs. While this model offers several advantages, it also has certain drawbacks.

Pros:

Predictability: Employers benefit from fixed monthly premiums, simplifying financial planning and budgeting.

Risk Transfer: The insurance carrier assumes the financial risk of healthcare costs, protecting businesses from unexpected medical expenses.

Simplified Administration: The insurer manages claims processing and other administrative tasks, reducing the workload for employers.

Comprehensive Coverage: Fully insured plans typically offer a wide range of medical services, enhancing employee benefits packages.

Cons:

Limited Flexibility: Employers have less control over plan design and claim management, as the insurance carrier determines these.

Potential for Premium Increases: If claims exceed expectations, premiums may rise, and employers might not receive a detailed breakdown of the increase.

Less Customization: The insurance carrier may limit plan features, such as the choice of healthcare carriers or covered services.

How Level-funded Health Plans Can Benefit Your Business?

A level-funded health plan offers small businesses a balanced approach to healthcare coverage by combining the predictability of a fully insured plan with the cost-saving benefits of a self-funded plan. Here's how it works:

Predictability: Employers pay a fixed monthly premium to the insurance carrier, covering administrative costs, claims management, and associated fees. This fixed premium helps you easily budget and plan for healthcare expenses.

Cost Control: If your claims are lower than expected, you may receive a reimbursement from the carrier. If claims exceed your monthly payments, stop-loss insurance covers the additional costs.

Pay-for-Use: With a level-funded plan, you only pay for the healthcare benefits your employees use, not an arbitrary annual premium. This pay-as-you-go structure ensures you are not overpaying, as premiums are based on actual usage.

Tax Savings: Level-funded plans offer tax advantages. Because they are considered self-funded, they are subject to fewer taxes than traditional fully-insured plans, helping your business save money.

Increased Transparency: Unlike fully insured plans, where the carrier controls and rarely shares claims data, level-funded plans provide more visibility into healthcare costs. Understanding the details behind the claims enables you to take proactive steps to reduce unnecessary expenses and manage your healthcare budget more effectively.

How Level-funded Health Plans Can Benefit Your Employees?

A level-funded health plan benefits your small business and provides significant employee advantages. By offering this type of plan, you can enhance their healthcare experience and improve retention, making your benefits a powerful tool for attracting and keeping top talent. Here's how:

Enhanced Plan Options: These plans provide greater flexibility, allowing employers to adjust coverage to align with employees' health needs and budget constraints. This adaptability is particularly beneficial as employees experience different life stages and require varying levels of coverage.

Access to Preferred Carriers:Employees often have the freedom to choose their healthcare carriers, enabling them to select doctors and specialists they trust and feel comfortable with, ensuring they receive optimal care.

Improved Coverage Options: Employees may benefit from a wider range of services by paying only for the healthcare benefits. They can opt for plans with deductibles and out-of-pocket maximums that suit their needs, providing them more value from their benefits.

Cost Savings for Employees: Since level-funded plans are based on actual claims usage, employees may not face significant premium increases year after year, as seen with traditional fully-funded plans where premiums can rise unpredictably. This helps reduce financial strain and increases employee satisfaction.

Enhanced Employee Engagement: Offering flexible, customizable benefits that align with employees' health needs enhances engagement and well-being. Employees with access to meaningful benefits that match their health needs are more inclined to appreciate and use them. This empowerment enables informed healthcare decisions, improving overall engagement and well-being.

Conclusion: Choosing the Right Health Plan for Your Business

The Level Funded Advantage plan, exclusively available through The CBC Health Insurance Marketplace for Costco Members, offers small businesses a powerful and flexible solution for managing health insurance costs . This plan combines the predictability of fixed monthly payments with the potential for refunds on unspent claim dollars, allowing employers to manage their budgets better while ensuring employees receive high-quality care. The inclusion of stop-loss insurance provides an added layer of protection, safeguarding businesses from large or unexpected claims. With this plan, businesses can confidently plan for their healthcare expenses year-round with no surprise charges or cash calls.

For small businesses seeking a cost-effective way to offer comprehensive healthcare to their employees, the Level Funded Advantage plan provides the perfect balance of savings, stability, and security. Exclusively available through The CBC Health Insurance Marketplace for Costco Members, this plan offers a unique opportunity for businesses to control costs without sacrificing coverage as we work diligently to find the best and most competitive offerings for your business. Get in touch with us and start saving while providing your employees with quality coverage.

 

 

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Brought to you by the insurance professionals at Custom Benefit Consultants, Inc.