Group Healthcare: Fully Funded Vs. Level Funded

Group Healthcare: Fully Funded Vs. Level Funded

Many employers out there are looking to add a benefits package, including health insurance. Studies show that offering health benefits can not only help businesses recruit new employees, but also retain the valuable team members they already have.

As you weigh all of your options when it comes to group health, there is one question that you might want to consider. How are you going to fund your program? The answer may not be as cut-and-dry as you’d think!

There are several different types of funding options out there for businesses, each with their own unique sets of advantages and challenges for business owners. Let’s dive into two types of group health plans that you may be considering: “fully-funded” and “level-funded.”

What Is a Fully-Funded Health Plan?

With a fully-funded group health plan, the employer pays a premium to an insurance carrier. The insurance company then pays for employees’ medical claims that are covered under an agreed-upon contract, or which go beyond an out-of-pocket maximum.

With this type of plan, the financial risk of providing coverage largely falls to the insurance company, rather than the business owner. The insurance company will pay relevant claims for the length of the contract (generally a year, at least). It doesn’t matter if an employee suffers a catastrophic health event or racks up extraordinary costs; monthly premiums will not change for the length of the contract.

However, the rates offered by your insurance company may go up (and may go up significantly) when it’s time to renew this contract at the end of the year. For smaller employers, whose group of employees face fewer health risks compared to the general population, these increases can feel steep.

What Is a Level-Funded Health Plan?

Level-funded plans — also called “partially self-funded” plans — are emerging as a way for businesses to receive much of the financial security of fully-funded plans, while also getting the cost savings and customization that comes with another option, known as self-funded plans.

Self-Funded Plans

So, before we can dive into what a level-funded plan is, it’s important to understand what self-funded plans are and what they entail. In this type of arrangement, a company (as you might have guessed) self-funds its own health insurance plan. This means that a company or employer provides all the funds to pay for expected claims in a given year.

To accommodate for extraordinary or unexpected costs, most self-funded plans have stop-loss coverage in place. This means that employers pay a premium for protection in case actual claims exceed their predicted yearly expenses.

Historically, self-funded plans were thought of as only being a viable option for large companies. The more employees you have, the more data you’ll have on hand, and the better you’ll be able to make estimates about total claims. At the same time, a larger pool of individuals also helps provide a cushion in the event of a particularly large claim by any one or two individuals.

Level-Funded Plans: Splitting the Difference Between Fully-Funded and Self-Funded

Level-funded plans are, more or less, a way to help “fully-funded” and “self-funded plans” meet in the middle. They’re a way to bring some of the benefits of self-funding to smaller businesses that may not be able to afford to fully self-insure.

Here’s how level-funded plans work. As with fully-funded plans, employers contract with insurance companies, but agree to take on some of the financial risks.

Generally speaking, employers agree to pay fixed administrative costs to an insurance carrier, as well as the cost of stop-loss coverage.

There may be two levels of stop-loss coverage: individual (i.e., employers pay a premium so they’re protected if an individual employee’s claim is exceptionally high in a given year), and aggregate (which covers the entire workforce, so if claims cross a certain threshold, reinsurance kicks in and helps pay back the employer).

As for claims? With a level-funded group health plan, the insurance carrier estimates a total cost for the year, which determines what the employer (and employees) pay in premiums – not unlike in a fully-funded plan. Here’s a major difference: If claims are lower than expected in a year, then the insurance company refunds all or part of the unused difference back to the employer.

Comparing Level-Funded and Fully-Funded: The Pros and Cons

That’s a lot of wonky health insurance speak to take in! If you’re a business owner weighing coverage options, it may be more practical to think of these things in terms of costs and benefits, or pros and cons.

When comparing fully-funded and level-funded group health plans, you may wish to consider:

• Potential Cost SavingsLevel-funded health plans may offer some cost-saving advantages over fully-funded plans, particularly if total claims end up being lower than premiums. They are also “community-rated” differently than fully-funded options, which might translate into greater cost savings per employee.
• Flexibility and CustomizabilityLike self-funded plans, level-funded plans may be exempt from certain regulations and requirements of the Affordable Care Act (ACA). Level-funded plans may allow for more flexibility and freedom when it comes to designing the plan that works best for your organization.
• Stability and RiskWith fully-funded plans, employers have more assurance about what their premiums will look like for a full year, and most of the financial risk for extraordinary claims gets passed onto the insurance carrier. However, as a result of this, fully-funded plans might be more expensive overall — and there is a risk that costs will rise year-to-year, as well.

Making the Right Choice for Your Business

When it comes to choosing between fully-funded and level-funded group health plans, it’s important to weigh your options carefully.

Remember, while level-funded plans are becoming more and more popular for businesses of all sizes and in different industries, you may ultimately find that this may isn’t the right option for you once you factor in your budget, the makeup of your employee pool, and the amount of risk you’re truly able to take on.

As you do more research on fully-funded and level-funded health plans, it may help to ask yourself questions like:

• “How many employees do I have?”
• “How many employees am I planning to have? Is the business growing or contracting?”
• “From year-to-year, how much variability in claims costs and premiums can I handle?”
• “Broadly speaking, how healthy is my group of employees? How old are my employees?”
• “Do I have a go-to health insurance guy to help me make sure I’m making the right choices? Is there someone who will help me work with my insurance carrier and get the best possible deal?”