Why Small Businesses Should Consider Level-funded Health Plans

As a small business owner, attracting and retaining top talent is critical to success. Offering competitive benefits, particularly health insurance, can significantly affect your ability to do so. According to a U.S. Chamber of Commerce survey, 96% of Americans believe that access to health insurance is crucial, and two-thirds wouldn’t even consider a job offer that lacks these benefits. However, exploring the range of health insurance options can be challenging. This is where level-funded health plans come into play, providing a balanced approach that combines the advantages of fully insured and self-insured plans. Small businesses can control costs while providing valuable health benefits by opting for a level-funded health plan, making it a smart choice for employers and employees.

Understanding Level-Funded Health Plans: Are They Right for You?

Level-funded health plans are increasingly popular among small to midsized employers as a flexible and potentially cost-effective option for employee health benefits. This funding method combines elements of self-insured plans—like cost savings, design flexibility, and access to claims data—with the financial stability of fully insured plans. Employers can manage healthcare costs more predictably by paying a fixed monthly fee to an insurance carrier or third-party administrator. However, businesses should carefully assess whether this model fits their workforce needs, particularly if they have older employees or those with chronic health conditions.

How Level-funding Works

Level funding allows small employers to reduce monthly healthcare expenses while offering a plan that meets their workforce's needs. This approach combines the financial predictability of fully insured health plans with the cost-sharing benefits of self-insured options, allowing for greater flexibility in plan design and access to claims data. Employers pay a fixed monthly fee to an insurance carrier or third-party administrator (TPA), which consists of three components: an estimated maximum claim liability based on the group's health status, administrative fees for claims processing and customer support, and a premium for stop-loss insurance to protect against high claims. This monthly fee remains constant for a 12-month period, similar to fully insured plans, and employers typically recoup some costs through pre-tax payroll deductions from employees. Throughout the year, the carrier or TPA pays claims from the funded claims account, and if actual claims are lower than expected, employers may receive a refund at the end of the plan year.

Conversely, stop-loss insurance helps reduce financial risk if claims surpass projections. Level-funded plans also include a runout period for processing claims incurred during the plan year, meaning no additional funding is needed from employers during this time. Because level-funding is a relatively new model, employers should thoroughly review contract terms, especially regarding surplus refunds, and consult with advisors to fully understand their obligations before proceeding.

Essential Features of Level-funded Health Plans

Level-funded health plans offer a balanced approach to employee health insurance, combining the benefits of self-funding with the stability of fully insured plans. Here are the key features:

Lower Health Care Costs

Level-funded health plans can lower monthly expenses for employers since fees are based on the specific employee group rather than the ACA's modified community rating. This is particularly beneficial for employers with healthier workforces. Additionally, these plans are exempt from state insurance mandates and premium taxes, further reducing costs. However, employers with older employees or chronic conditions may not see these savings, as unexpected high claims could increase fees in the following year.

Refunds

Paragraph- A key advantage of level-funding is the potential for refunds if actual claims fall below projections at the end of the year. Employers should review contracts carefully, as carriers and TPAs have various methods for handling surplus funds. It's important to choose providers that offer favorable surplus refund policies, ideally returning most of the surplus while keeping a small portion for future costs. Employers must also comply with ERISA regulations to ensure refunds benefit the plan’s participants.

Design Flexibility and Compliance

Level-funding allows for greater flexibility in health plan design. Carriers and TPAs typically offer various options, including high-deductible health plans, network-only plans, and traditional PPOs. Since these plans are considered self-insured, they are not subject to state insurance mandates or federal essential health benefits requirements. However, this flexibility increases compliance responsibilities, such as additional fees and reporting requirements.

Transparency

Level-funded plans often provide periodic utilization reports, helping employers track employee healthcare usage and identify cost-driving behaviors, such as frequent ER visits. This real-time data allows for proactive management, enhancing the chances of achieving a claims surplus by year-end.

Stop-Loss Insurance

Stop-loss insurance is crucial for level-funded plans, protecting employers from the financial impact of unexpected claims. Premiums for this coverage are included in the monthly fees. Claims are first paid from the employer’s claims account, and if they exceed a certain threshold (the attachment point), stop-loss insurance takes over. This includes:

• Specific Stop-Loss: Protects against individual catastrophic claims by transferring responsibility to the insurer once the claim exceeds a specified amount.

• Aggregate Stop-Loss: Caps financial exposure for the entire plan year, safeguarding against unusually high claims across the entire group.

Advantages of Level-funding

Level-funded health plans offer a strategic way for employers to manage healthcare costs while providing comprehensive benefits. Here are the key advantages:

Lower Monthly Costs

Employers often see reduced monthly expenses by transitioning from fully insured plans to level-funding, particularly if their employees don’t frequently use healthcare services. The fees are based on the specific employee group, leading to lower overall risk and costs. Additionally, these plans are exempt from state premium taxes and fees.

Predictable Expenses/Low Risk

Employers pay a consistent monthly fee throughout the year, similar to fully insured plans, which contrasts with the fluctuating costs of self-insured plans. Built-in stop-loss insurance protects against excessive claims, ensuring predictable budgeting and making level-funding appealing for businesses without substantial cash reserves.

Surplus Refunds

A major benefit of level-funding is the potential for surplus refunds. If health claims are lower than expected, employers may receive a refund for part or all of the surplus, unlike fully insured plans where carriers keep premium payments during low utilization years.

Comprehensive Coverage/National Networks

Level-funded plans are increasingly available from large carriers and TPAs for small and midsized employers, offering a variety of medical and prescription drug benefit designs, including HSA-compatible and traditional PPO options, all supported by national provider networks.

Plan Design Flexibility

Employers have greater flexibility in designing their benefits because level-funded plans are not subject to state insurance mandates or ACA comprehensive coverage requirements. This enables them to create plans that better align with the needs of their workforce.

Actionable Utilization Information

Level-funding often provides detailed utilization reports, helping employers track employee healthcare usage. This data is essential for managing costs and maximizing potential refunds, allowing employers to identify areas for improvement and educate employees on efficient healthcare use.

Determining if Level-funding Is Right for Your Workplace

Level-funding can benefit employers seeking more control over their health plans and access to utilization data while maintaining predictable monthly premiums. Organizations that understand employee demographics and prioritize healthcare education benefit significantly from a level-funded plan. To assess whether this option suits your workplace, consider the following key questions:

Are you a small or midsized employer?

Most carriers and TPAs provide level-funded plans exclusively to small and midsized employers, each with specific employee count criteria. Verify that your organization fits within these parameters before exploring level-funding.

Are your employees healthy and at a low risk of serious health conditions?

A licensed consultant can help you analyze your health profile and explore your options. The CBC Health Insurance Marketplace experts can assist you in assessing your workforce's health needs and provide insights on level-funding. By working with CBC, you can ensure your employee benefits are tailored to fit your organization. Reach out to us today to see how we can support your health insurance and benefits decisions.

What is your risk tolerance and cash flow situation?

Level-funded plans offer consistent monthly payments, making them appealing to employers with unpredictable cash flow or limited reserves. A self-insured plan might be more appropriate if your organization has a stable financial foundation and is comfortable with higher risk.

Is your organization prepared to regularly review utilization reports to maximize cost savings with a level-funded plan?

To maximize cost savings with a level-funded plan, employers should regularly review utilization reports to identify and address any issues with benefit usage. If your organization has the resources to undertake this initiative, it can lead to significant savings.

Have you carefully reviewed the contract?

Before committing to a level-funding agreement, thoroughly examine the contract terms, especially any unfamiliar provisions regarding claims surplus. Collaborate with advisors to understand the terms and compare vendors to find the most advantageous arrangement.

What are your coverage goals?

Establish your objectives regarding eligibility, benefit coverage, exclusions, and cost-sharing. Remember that level-funded plans must adhere to federal nondiscrimination requirements, ensuring your health plan does not favor highly compensated employees.

Evaluating Level-funding for Your Business

Level-funding offers numerous advantages for small employers, providing the stability and predictability of a fully insured health plan alongside the cost savings, design flexibility, and valuable claims data associated with self-insured plans. However, before choosing this option, employers should assess several factors, including size, workforce health, risk tolerance, and cash flow. Additionally, the ability to review claims data and educate employees is crucial.

Since level-funding is a relatively new concept, reviewing contract terms and consulting with an experienced professional is essential. Custom Benefit Consultants, Inc. (CBC) has the expertise to guide your organization through the decision-making process, helping you evaluate plan designs and make informed recommendations for improvement. Contact CBC today to schedule a consultation and discover how we can help you optimize your health plan design.

FAQs

1: What Are the Main Benefits of a Level-funded Health Plan?

Level-funded health plans provide cost predictability through fixed monthly fees, allowing for easier budgeting. Employers may receive refunds if claims are lower than expected. These plans also offer flexibility in design and comprehensive coverage, along with stop-loss insurance to protect against high claims.

2: Are There Any Drawbacks to Choosing a Level-funded Health Plan?

Yes, drawbacks include eligibility requirements, which may exclude some employers. Companies with older employees or chronic health conditions may not benefit from cost savings. Employers also face more compliance responsibilities and may find the plan structures complicated.

3: What Are the Main Benefits of Level-funding for Small and Midsized Employers?

Level-funding offers small and midsized employers predictable monthly costs, the potential for refunds if claims are lower than expected, and greater flexibility in plan design. It also provides regular utilization reports to help employers manage healthcare usage and includes stop-loss insurance to protect against high claims.

4: What Compliance Responsibilities Do Employers Have With Level-funded Plans?

Employers with level-funded plans must comply with nondiscrimination rules, file annual IRS reports under the Affordable Care Act, and pay fees for the Patient-Centered Outcomes Research Institute. They must also ensure that any surplus refunds benefit plan participants and adhere to HIPAA privacy and security regulations.