Level Funding: A Self-Funded Plan Option

Some employers desire the freedom of a self-funded insurance plan but need a little more certainty for their budgeting concerns. If this sounds like you, level funding might be a solid option. With the help of our friends at HR360, we’ll help you weigh the advantages and disadvantages of the level funding model to decide what’s best for your company.

What is a self-funded health plan?

Businesses are constantly looking to control costs while still providing a strong benefits package to employees. Not too long ago, we wrote about fully insured plans vs. self-insured (self-funded) health plans with a detailed comparison between the two. In a self-funded health plan, you (the employer) assume the risk and responsibility of medical claims, rather than contracting with an insurance carrier to pay claims. You then set premium rates based largely on claims history. A plan of this type will often benefit from lower administration costs and greater flexibility both in plan design and cash flow within the business.

With a self-funded health plan, you may choose to contract with a third-party administrator (TPA), but it is still a self-funded plan because your company is responsible for funding any claims. Stop-loss insurance can be obtained to pay for excessively high claims, but you are responsible for most of the costs, and the stop-loss insurance is simply a protection against extremely high, unpredictable claims.

However, self-funded plans are not right for everyone. One downside is the obligation to pay out claims as they come in, leaving the organization exposed to fluctuating expenses. However, there is another option – level funding – that can add predictability back into the equation if your company decides to implement a self-funded plan.

What is level funding?

Level funding is an option that can accompany a self-funded plan, aiding your organization’s budgeting efforts. With level funding, you (the employer) pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance.

The carrier facilitating the level funding will pay your employees’ claims throughout the year. At the end of the year, if your payments exceeded claims, you would receive a refund from the excess you paid in monthly claim allotments. If the claims exceeded what you paid into the program, your stop-loss insurance will cover the overage amount in most cases.

Advantages of level funding

There are several advantages to level funding:

  1. Like other self-funded plans, you do not have to pay premiums based on carrier rates, which could be higher than your employee group’s risk. Instead, you only pay the actual claims and an additional administrative fee.
  2. Another benefit of level funding is that if all 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 expensive premiums for a fully insured plan and essentially using or losing that money.
  3. If you are already self-funded, then you will enjoy a more budget-friendly method of monthly claims payment, with stop-loss insurance to protect you from unexpected high costs.
  4. The monetary advantages of level funding are that you are better able to manage your budget and prepare for claims costs. You will benefit from a smoother cash flow, not worrying that a high claim near the beginning of the year will impact your business.
  5. 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).
  6. There are fewer governmental regulations than fully insured plans are subject to. We recommend checking with your legal counsel about regulatory benefits specific to your state and business.

Disadvantages of level funding

There are also disadvantages to level funding:

  1. When you choose to self-fund you are likely looking to cut costs and with level funding, part of your monthly payment is to cover administrative fees. Depending on the plan and your other options, these fees have the potential to cut into the savings you hope to gain from running a self-funded plan. So, what do you do? Weigh the cost effectiveness of administering your self-funded plan in-house, hiring a TPA or choosing a level-funded option with the attached administrative fees.
  2. Remember, you still must pay the claims. With level funding you are paying for the convenience of having equal payments throughout the year and the security of stop-loss coverage.
  3. Consider 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.

Operating a self-funded health plan requires consideration of your company’s cash flow, risk tolerance, employee numbers and preferred budgeting methods. If you have any questions about this topic, please contact the Employee Benefits Management Group (EBMG) at Rose & Kiernan, Inc. here or by calling (800) 242-4433.

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