Level-Funded Health Plans: What To Know Before Offering This Benefit

With health insurance costs continuing to increase every year, if you’re like many companies, you’re probably looking for ways to control your spending while still offering great benefits to your team. While you may not be aware of them, level-funded health plans are picking up steam among small- to mid-size employers as a way to contain costs. What is level-funding and what do you need to know about this option to decide if it’s right for your company? Let’s find out.

In this article, we’ll explain what level-funded health plans are, how they work, the pros and cons of level-funding, and who this approach is best for. After reading this, you’ll be in a better position to know if a level-funded health plan makes sense for your organization and your employees.

What is a level-funded health plan?

A level-funded plan is a type of plan in which the employer contributes a set regular monthly payment directly to the insurer or third-party administrator (TPA) that covers costs for:

• administrative services
• claims payments
• stop-loss insurance to protect you in case of catastrophic claims

While these costs are fixed, at the end of the year, you can get a potential refund of your surplus payments if your group’s actual claims are lower than anticipated. Conversely, if actual claims costs are higher, you’ll see a year-end adjustment on the premium on your stop-loss insurance.

How do level-funded plans work?

As we just mentioned, with level-funded health plans, you’ll pay a set, or “level,” monthly amount to the insurance carrier or TPA. This amount goes into a reserve account for the administrative fee, maximum claim liability, and your premiums for stop-loss insurance to protect you from the effect of large claims. This approach gives you cash-flow certainty, similar to fully-funded plans. In addition, unlike fully-insured plans, which hold onto all premiums that remain at the end of the year, level-funded plans give employers an opportunity to keep a percentage of the leftover reserves or use it as a credit for the following year. And there are ways employers can maximize the amount of that refund such as promoting wellness programs and other incentives to help keep workers healthy.

Are level-funded and self-funded plans the same thing?

While the terms are sometimes used interchangeably, level-funding and self-funding are not the same. It’s easiest to think of level-funding as a bridge from fully insured to self-insured insurance that gives employers some of the same predictability they’re used to with fully-insured healthcare without the same amount of risk as self-funded plans.

This risk arises from the fact that, with self-funding, the company provides all the funds to pay for its medical claims, although most plans have stop-loss insurance to cover greater-than-expected claim activity. This requires you to have good cash flow and reserves in the event of a bad claim year.

In a good year? Like level-funded health plans, employers with self-funded plans realize savings when claims are lower. And, since they are paying the claims, they have greater visibility into what’s driving expenses and can work to reduce their costs and their employees’ through things like wellness programs, incentivizing the right care in the right setting at the right time, and building a network of high-value providers. In this way, self-funded insurance holds the greatest potential for savings.

Why should I offer a level-funded plan?

Level-funding has several advantages when compared to fully-insured and self-funded health plans. Key benefits of this approach include:

• Lower Cost: Generally speaking, if you have a healthy population and your cost of claims stays low, level-funding will be less expensive than the premiums you pay for fully-insured plans, which have to account for many high-risk individuals in their risk pool.
• Fixed Expenses: With level-funded health plans, you pay a set amount every month, no matter the actual dollar amount of claims. And you have stop-loss coverage for claims that are higher than agreed-upon amounts. This approach can help you better budget and manage cash flow.
• Potential Savings: If you have fewer claims than expected, at the end of the year, you may get a refund of the excess claims allowance or use it as a credit to lower your monthly rate for the following year. In addition, detailed reports can help you better understand utilization and encourage member behavior that can reduce expenses.
• Less Regulatory Oversight: Level-funded plans are not subject to all of the Affordable Care Act (ACA) requirements and may also be exempt from some state insurance requirements.

Are there downsides to this plan type?

Like any type of insurance coverage, there are potential disadvantages to level-funding as well. Most notably is that, if you have more claims than estimated, there can be significant increases in the premium for the following year. In that case, if you were to see your group’s rate rising, it may make more financial sense to consider switching to a fully-insured plan that uses a broader sampling for the risk pool to determine premiums.

Who are level-funded health plans best for?

Level-funding can be a good choice for small or mid-sized employers who have a healthy population and want to offer health insurance to their employees at a more affordable cost. If, on the other hand, you have older employees or workers with major illnesses, there may be too much risk to this approach. In addition, level-funded plans aren’t available in every state due to stop-loss coverage regulations.

Getting Started with Level-funding Your Health Benefits

If level-funded health plans sound like they may be a good fit for your company, you’ll want to talk to your insurance carrier or TPA to understand the benefits and limitations of this approach in your particular case to be sure. They may also point you to other options that can be tailored to your needs and budget. 

To learn how Complete Payroll Solutions can help you in this process, visit our dedicated employee benefits page to find out more about how we assist companies in selecting the best plan at an affordable cost to keep current staff happy – and attract new talent.