Benefits Toolkit: Level Funded Health Plans-Are These Right for Your Company?

Rising healthcare costs remain a significant concern for employers, especially those with a workforce that doesn't heavily utilize healthcare services or generate high-cost claims. While larger companies have increasingly turned to self-insured health plans to cut costs, smaller to mid-sized employers often hesitate due to the financial unpredictability associated with self-insurance. Self-insured plans require employers to pay claims directly as they arise, which can fluctuate widely from month to month, making budgeting difficult without a stable cash flow or substantial reserves.

Level-funded health plans are a newer funding option for smaller to mid-sized employers. With these plans, employers pay a fixed monthly fee to an insurance carrier or Third-party Administrator (TPA) to cover estimated healthcare claims, stop-loss insurance, and administrative costs for the year. If actual claims are lower than estimated, the employer may receive a refund from the carrier or TPA. Employers considering level funding should carefully weigh its advantages and disadvantages to determine its suitability for their needs.

This article aims to help employers make informed decisions by providing a comprehensive guide to level-funded health plans. It outlines what these plans involve, how they differ from other health plans, and their increasing popularity in the healthcare benefits sector.

Understanding Level-Funded Health Plans

Level-funded health plans offer a practical choice for small and mid-sized employers looking to manage healthcare costs while ensuring comprehensive coverage for employees. These plans, provided by insurance carriers and TPAs, merge the cost-saving benefits of self-insurance with the financial predictability of fully insured plans. They appeal to employers who want to manage monthly healthcare costs without fully adopting self-insurance.

Key Features and Benefits

• Stable Monthly Costs: Employers pay a fixed monthly fee covering estimated annual benefit costs, stop-loss insurance, and administrative fees, facilitating budget management.
• Cost Savings: Exemption from ACA-modified community rating can lead to lower premiums for healthier employee populations.
• Utilization Insights: Access to detailed utilization data helps in targeted cost management and employee health education.
• Potential for Refunds: Surplus refunds from carriers or TPAs are possible if actual claims fall below estimates.

Considerations for Employers

• Health Profile Impact: Employers with older or high-health-risk employees may not realize significant cost savings compared to fully insured plans.
• Access Limitations: Some carriers or TPAs may have size restrictions for offering level-funded plans, limiting availability.
• Compliance Responsibilities: Transitioning to level-funded plans requires employers to manage additional compliance tasks, such as ACA fees and plan redesigns for nondiscrimination requirements.

The Rise of Level-Funded Health Plans

According to the Kaiser Family Foundation's Employer Health Benefits 2023 Annual Survey, premiums for employer-sponsored health insurance have surged significantly over the past five years, placing greater financial strain on businesses. For instance, in 2023, average annual premiums were $8,435 for single coverage and $23,968 for family coverage, with employers typically covering a substantial portion.

In response to these cost pressures, level funding has emerged as a favored choice among small and mid-sized employers. This approach allows businesses to save on premiums while sidestepping the financial risks of fully self-insured plans. The Kaiser survey reveals a notable uptick in adoption, with 34% of small employers (those with fewer than 200 workers) reporting using level-funded health plans in 2023—a marked increase from previous years.

• Cost Savings Opportunity: Level funding offers a potential avenue for reducing premium expenses compared to traditional fully insured plans.
• Risk Mitigation: Employers can benefit from the financial predictability of level funding without the volatility of self-insurance.
• Increasing Adoption: More insurance carriers and TPAs are expanding their offerings of level-funded plans to cater to the growing demand from small to mid-sized businesses.

Comparing Health Plan Funding Options

Employers face crucial decisions when selecting how to fund their health plans: fully insured, self-insured, or level-funded. Each option carries distinct considerations, influenced by company size, budgeting needs, plan flexibility, and workforce health status.

Understanding Your Health Plan Funding Options

Employers have three primary options for funding their health plans: fully insured, self-insured, and level-funded. Each option presents unique advantages and considerations based on factors such as company size, financial stability, and desired plan flexibility.

Key Considerations for Employers

1. Fully Insured Plans

• Financial Risk: The risk primarily shifts to the insurance carrier, with the employer paying fixed premiums.
• Compliance: These plans are subject to state taxes, insurance laws, and ACA requirements, such as Essential Health Benefits (EHB).
• Advantages: They offer predictable costs and minimal financial risk for unexpectedly high claims.

2. Self-Insured Plans

• Financial Risk: The employer bears the financial risk directly, paying medical claims out of pocket.
• Flexibility: These plans provide design flexibility exempt from state mandates and ACA Essential Health Benefits (EHB) requirements.
• Considerations: They require robust cash flow and may necessitate stop-loss insurance to mitigate financial exposure.

3. Level Funded Plans

• Hybrid Approach: These plans combine the cost savings typical of self-insurance with the financial predictability similar to fully insured plans.
• Structure: The structure involves monthly fixed payments that cover anticipated claims, stop-loss insurance, and administrative fees.
• Benefits: They offer the potential for refunds if claims are lower than expected, all while avoiding ACA-modified community rating and EHB mandates.

Decoding Level Funding: A Guide for Small and Mid Sized Employers

Level funding provides small and midsized employers with a strategic approach to potentially lower monthly healthcare expenses, all while maintaining customized, comprehensive coverage tailored to their workforce. This funding method merges the financial predictability of fully insured plans with the cost-saving benefits and flexibility similar to self-insurance.

Key Components of Level Funding

1. Fixed Monthly Fee Structure: Employers pay a consistent monthly fee to an insurance carrier or TPA, covering:

• Estimated maximum claim liability for the year based on workforce health status.
• Administration fees for managing the health plan, including claims processing and customer service.
• Premium for stop-loss insurance to safeguard against large claims and high utilization costs.

2. Financial Predictability: Unlike fully insured plans, the monthly fee remains unchanged throughout a 12-month period, irrespective of claims activity. Employees typically contribute to this cost through pre-tax payroll deductions.

3. Potential for Surplus Refunds: If actual claims are lower than anticipated by the end of the plan year, employers may receive a refund from the carrier or TPA. Conversely, stop-loss insurance protects against unexpectedly high claims.

Optimizing Health Benefits with Level Funding

Level funding offers employers a strategic approach to control healthcare expenses while meeting their employees' coverage needs. This funding method blends the financial predictability of fully insured plans with the flexibility and potential savings of self-insurance. Here’s how level funding can benefit your organization:

• Cost Considerations: Employers pay a fixed monthly fee based on their employees' health status, which can lead to lower costs compared to fully insured plans. This approach avoids ACA community rating requirements and state insurance mandates, potentially reducing monthly expenses. However, it may not yield savings for employers with older employees or those with significant healthcare needs.
• Refunds and Financial Adjustments: One of the key advantages of level funding is the possibility of receiving a refund if actual claims are lower than anticipated by the end of the year. This hinges on the terms set by the carrier or Third-party Administrator (TPA) managing the plan. Employers should carefully review these terms to understand how surplus funds are handled.
• Flexibility and Compliance: Level-funded plans offer employers greater flexibility in designing healthcare benefits, such as offering high deductible options or tailored network choices. They are exempt from certain state insurance regulations and federal Essential Health Benefits (EHB) requirements for small-group plans. However, employers must navigate additional compliance responsibilities, such as reporting and fee obligations.
• Transparency and Utilization Insights: Employers benefit from transparency through regular utilization reports, enabling them to monitor healthcare usage patterns. This real-time data helps identify areas where costs can be managed more effectively, such as encouraging preventive care or reducing unnecessary emergency room visits.
• Stop-loss Protection: Stop-loss insurance, which safeguards employers against unexpectedly large claims, is included in the monthly fee. Specific stop-loss covers individual catastrophic claims, while aggregate stop-loss protects against excessive claims across the entire group for the plan year.

Compliance Requirements in Level-Funded Health Plans

Transitioning from a fully insured health plan to a level-funded one offers potential cost savings and flexibility but also introduces additional compliance obligations. Here’s what employers need to know:

• Nondiscrimination Rules: Level-funded plans must adhere to nondiscrimination rules under Code Section 105(h), ensuring fair treatment in plan eligibility and benefits among employees, particularly avoiding favoritism towards highly compensated individuals.
• ACA Health Coverage Reporting: Employers with level-funded plans must file annual returns with the IRS (Forms 1094-B and 1095-B), reporting health coverage details to comply with ACA requirements, which includes providing statements to covered individuals.
• ACA PCORI Fees: Employers are responsible for paying the Patient-Centered Outcomes Research Institute (PCORI) fee, calculated based on the average number of covered lives, using IRS Form 720 annually by July 31.
• Use of Plan Assets (ERISA): Surplus refunds received from carriers or TPAs must comply with ERISA rules, ensuring that plan assets are used exclusively for the benefit of participants and beneficiaries, not for the employer's own purposes.
• HIPAA Privacy and Security: Employers must comply with HIPAA rules concerning protected health information (PHI), including privacy notices, training, security safeguards, and policies. Unlike fully insured plans, employers are more responsible for HIPAA compliance with level-funded plans.

Advantages of Level Funding

Level-funded health plans offer several compelling advantages for employers looking to manage healthcare costs effectively:

• Lower Monthly Costs: Employers transitioning from fully insured plans to level funding can often reduce monthly healthcare expenses. This is especially beneficial for companies with healthy employee populations, as costs are based on the company's own claims experience rather than broader community rates. Additionally, level-funded plans typically exclude state premium taxes and fees associated with fully insured plans.
• Predictable Expenses/Low Risk: Similar to fully insured plans, level-funded plans provide predictable monthly expenses throughout the year. Unlike self-insured plans, where fluctuating claims can lead to unpredictable costs, level funding includes built-in stop-loss insurance. This protection ensures that the employer's financial exposure remains limited even if claims exceed expectations.
• Surplus Refunds: A significant advantage of level-funded plans is the potential for surplus refunds if health claims are lower than expected. This contrasts with fully insured plans, where premiums paid to the carrier are non-refundable regardless of utilization levels.
• Comprehensive Coverage/National Networks: Many large carriers and Third-party Administrators (TPAs) offer level funding options with access to comprehensive medical and prescription drug benefits. Employers can choose from various plan designs, including HSA-compatible plans and traditional PPOs, often with expansive national provider networks.
• Plan Design Flexibility: Level-funded plans offer employers greater benefit design flexibility than fully insured plans. Without the constraints imposed by state regulations and ACA requirements, employers can customize plans to better meet their workforce's specific needs.
• Actionable Utilization Information: Employers receive utilization reports with level-funded plans detailing how employees use health care benefits. This data empowers employers to identify cost-saving opportunities and educate employees on optimizing their healthcare utilization, potentially maximizing refunds and controlling future plan costs.

Is Level Funding the Right Choice for Your Workplace?

Level funding allows employers to exert greater control over plan design and access valuable utilization data, all while ensuring stable monthly premiums. Employers who understand employee demographics and prioritize healthcare education can potentially achieve cost savings through a level-funded plan.

• Company Size Compatibility: Determine if your organization falls within the employee range and is typically eligible for level-funded plans offered by carriers and TPAs.
• Employee Health Profile: Assess whether your workforce generally has low health risks and minimal chronic conditions, which can influence the financial viability of level funding.
• Risk Tolerance and Financial Stability: Evaluate your company's comfort level with financial risk and its ability to maintain steady cash flow. These factors can impact the suitability of level funding versus other options like self-insurance.
• Utilization Data and Health Education: Consider whether your organization can utilize utilization data provided by level-funded plans to optimize healthcare costs and whether you have the resources to educate employees on optimal healthcare utilization.
• Contractual Review and Understanding: Ensure thorough review of the level funding contract terms, including provisions related to surplus claims and other unfamiliar terms, with the assistance of advisors if necessary.
• Coverage Objectives: Define your coverage goals regarding eligibility criteria, benefit scope, exclusions, and cost-sharing arrangements while complying with federal nondiscrimination requirements applicable to level-funded plans.

Empower Your Benefits Strategy with Custom Benefit Consultants

Level funding presents a compelling option for small and midsized employers seeking to optimize their health care benefits. It combines the stability of fully insured plans with the cost-saving potential and flexibility of self-insured arrangements. However, it's crucial for employers to assess their specific needs and capabilities before committing to level funding. Factors such as company size, employee health profile, risk tolerance, cash flow, and readiness to manage claims data should all be carefully considered.

At Custom Benefit Consultants, Inc., we specialize in guiding employers through the complexities of level funding. Our team offers expertise in plan design optimization and financial efficiency strategies tailored to your organization's needs. Contact CBC today to schedule a consultation and discover how level funding can benefit your company's healthcare strategy. Let's work together to ensure you make an informed and advantageous decision for your employee benefits.