Level Funding: A Closer Look
February 3, 2020
If you desire the advantages of a self-funded health insurance plan but need a little more certainty for your budgeting concerns, level funding might be an option for you. In this article, we’ll weigh the advantages and disadvantages of level funded versus self-funded plans to help you decide what’s best for your company.
What Is a Self-funded Plan?
In a self-funded health plan, the employer assumes the risk and responsibility of medical claims instead of contracting with an insurance carrier to assume the risk and pay claims. The employer sets premium rates based on claims history and typically benefits from lower administration costs and greater flexibility in plan design, with the potential of improvements in cash flow within the business.
An employer with a self-funded plan typically contracts with a third-party administrator (TPA) or carrier partner to pay claims and administer the plan, but it is still a self-funded plan because the company is responsible for funding the claims payments. Stop loss insurance can be obtained to pay for excessively high claims both for individuals and for the entire risk pool, but the employer is responsible for all costs up to the stop-loss insurance levels, which helps to smooth out unpredictable claim patterns.
Self-funded plans are not right for every company. One of the downsides to a self-funded plan is that the employer must pay out claims as they come in, leaving exposure to fluctuating expenses. Setting your stop loss levels to considerably reduce fluctuation is one solution. Level funding is an additional option that can add predictability and steady cash flow back into the equation if your company decides to implement a self-funded plan.
What Is Level Funding?
Level funded health plans are a funding option for self-funded plans that aids employers in their health coverage budgeting and funding efforts. With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administration, stop loss coverage, administrative fees and the maximum claims based on underwriting projections. It is worth noting that not all level funded plans fund to the maximum claims level. It is important for employers to understand the contract and the funding method to avoid surprises at the end of the policy year or termination of the contract.
The carrier facilitating the level funding will pay claims throughout the year. In a fully funded plan if your payments exceeded claims, you will receive a refund from the excess at the end of the year. If the claims exceeded what you paid into the program, in most cases your stop loss insurance will cover the overage amount.
Advantages of Level Funded Plans
Level funding offers several advantages. Like other self-funded plans, your claims experience will determine your rates and you will have access to your claims data. Another benefit of level funding occurs if the money you set aside each month to cover claims is not used, you will receive a refund at the end of the year from the surplus instead of paying premiums for a fully insured plan with no opportunity for a refund.
Additionally, many level funding plans provide detailed reporting on utilization trends, giving you important information on where employees may be causing overspending (such as unnecessary use of emergency room visits instead of urgent care). This allows you to better manage education and wellness programs to improve your future claims costs.
Disadvantages of Level Funding
Although there are upsides to level funding, there are also some disadvantages. One major disadvantage to consider is the terms of the contract; make sure you understand how the contract will impact a business of your size. Companies with smaller numbers of employees may benefit differently than those with larger numbers. Also, many level funding plans restrict their offerings to companies with a certain minimum or maximum number of employees, which may affect your ability to contract with your desired carrier and impact future funding options with that vendor.
It is critical that you read the contract before you sign it, so that you understand the funding methodology and the options for cancellation—including funding requirements upon cancellation. In most instances, it is wise to review the contract before you make your final carrier selection or communicate the change to your employees.
Making Your Decision
Level funding may be right for small and midsize businesses that want to take control of their plans and access claims data while paying a consistent premium each month. Employers who understand their employee demographics and emphasize education may save with a level funding benefits strategy.
Ultimately, if you want to operate a self-funded health plan, level funding is an option that can be considered given your company’s cash flow, risk tolerance, employee numbers and preferred budgeting methods. You’ll benefit from an experienced expert to guide you through this type of plan.
If you would like to meet with an employee benefits expert to better understand if level funding is a good option for your company, contact your local Hylant office. If you are interested in learning about approaches to controlling specialty drug spend, read our white paper.
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.