Today, level funding is emerging as a third option somewhere in between fully insured and self-insured.  Proponents of level funding argue that it offers the benefits of both insurance models with none of the risks.  So how does it work?  The “level” of level funding refers to the fact that you self-insure, but pay a level or steady fee each month as determined by your TPA.  Level-funded plans also come fully integrated with individual and aggregate stop-loss insurance.  Individual stop-loss insurance will kick in if a covered employee or dependent exceeds a certain dollar amount in claims.  An aggregate stop-loss will be activated above a certain dollar amount for all claims.  After you pay your level monthly fee for a year, your TPA will compare what you’ve paid for the actual claims and refund you any difference if you’ve paid more than you’ve spent.  In summary, you get the regular and predictable cost of a fully insured plan, but because you’re actually self-insured, you only end up paying for the healthcare costs actually incurred by your employees.

Benefits of Level-Funding for Small Business

Level-funding is becoming popular because plans following this model are not subject to several key regulations of the Affordable Care Act.  For example, they don’t have to offer a package of mandated benefits.  Because plans are self-insured, they can be written to the specifications of the business owner.  Also because level funded plans are technically self-insured, business owners also avoid paying the Health Insurance Tax (HIT) levied as part of the Affordable Care Act.

Is this for me:  This is a great option for employers with 5 or more employees who are wanting to save money on their current offering or employers who in the past found fully insured plans to be just outside of their budget.  Since these carriers are able to underwrite coverage we generally see this option working best for a historically healthy workforce.

A fully insured plan means that you are passing all of the risk onto your insurance carrier who charges you a flat monthly fee based on how they gauge the risk of insuring your employees. If covered employees experience health issues and use the plan more, you will probably face a hefty increase in the monthly premium your business pays when your plan renews.  Conversely, if your employees rarely use the insurance, you’re stuck playing a flat monthly rate no matter what.  This model decreases the risk of month-to-month fluctuations but doesn’t provide any meaningful incentive for having healthy employees.

Is this for me:  Today fully insured plans are what we call community rated.  Community rating is a concept which requires health insurance providers to offer health insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status.  This can be a good option when you have employees who require regular medical visits and or medication to treat a pre-existing illness.  This is also a good option for employees who are particular about the health network that they use.

A self-insured plan is one in which the business pays the actual claims and essentially assumes the role of the insurance carrier in terms of managing risk. Many large companies like Purina or Anheuser Busch offer at least one plan that is fully self-insured because they have a large pool of covered employees and also have the cash reserves to protect against a spike in claims volume or amount. Historically, self-insurance has been perceived as far too risky in the small business market for a number of reasons.  Small businesses typically have less cash on hand and can’t weather a dramatic increase in costs as easily.  Also, claims data is very hard to come by in small business so it’s difficult to judge if self-insuring is worth the risk because you don’t even know the risk!  Most small businesses also lack the manpower in-house to actually review and process claims so they still pay an insurance company to act as a Third Party Administrator (TPA).  Though the business is paying the claim, the insurance company will actually process it accordance with the plan documents and ensure that all protocol is followed.

Is this for me:  We typically recommend a plan like this for employers with at least 250 employees.  At this size you can really take advantage of the large pool of employees and effectively hedge against the risk.