Do you know your health plan options? In addition to fully insured health plans, businesses can consider level-funding or self-funding for their health coverage needs. Before you settle on an option, take a moment to understand the differences between these three approaches.
Level-Funding vs. Self-Funding vs. Fully Insured at a Glance
In a fully insured health plan, the health insurance carrier is the payor, responsible for paying claims, minus cost-sharing, in exchange for a premium. In a self-funded health plan, the employer is responsible for paying claims, and instead of paying a premium, the employer sets aside funds to cover predicted costs. Level-funded plans can be thought of as a type of self-funding that provides a compromise between a self-funded plan and a traditional fully insured plan.
| Fully Insured | Self-Funded | Level-Funded | |
|---|---|---|---|
| Who pays typical claims? | The carrier | The employer | The level-funded plan |
| Who pays catastrophic claims? | The carrier | The employer or (usually) a stop-loss carrier | The level-funded plan |
| Who handles claims administration? | The carrier | The employer, typically using a third-party administrator | The level-funded plan |
| Are the employer’s monthly costs predictable? | Yes | Somewhat. Claims costs vary, but stop-loss coverage can limit it to a predetermined threshold. | Yes |
| Does the employer get surplus funds back if claims are lower than expected? | No | Yes | Yes |
| Does the employer have access to claims data insights? | Not typically | Deep insight | Limited Access |
| How much control does the employer have over plan design, including networks, benefits and prescription coverage? | Little to no control | Maximum control | Limited control |
How It Works: Fully Insured
A fully insured health plan is a traditional health insurance plan purchased from a health insurance carrier. The employer pays a premium to the carrier, and employees may also pay a share of premiums, usually via payroll deductions. In return, the health insurance carrier pays covered claims, minus any cost-sharing, such as deductibles and coinsurance.
- The Pros: A fully insured plan can be a simple way to provide health coverage while managing risks. If claims are higher than expected, the employer does not have to worry about additional costs that year. The insurer covers these costs and also takes responsibility for claims handling, plan design, provider networks and pharmacy benefits.
- The Cons: The insurer can raise prices significantly at renewal, so the employer may end up paying for high claims eventually. The insurer also gets to decide what to cover, and high cost-sharing requirements may discourage plan members from using their coverage. If claims are lower than expected, the insurer enjoys the profits.
How It Works: Self-Funding
In a self-funded plan, the employer pays claims instead of offloading this responsibility to an insurance carrier. Instead of paying monthly premiums, the employer analyzes its expected costs and sets aside funds to cover these costs. Employees may pay a premium to the employer, just as they would pay a premium for fully insured coverage, typically via payroll deductions. Self-funded insurers may purchase stop-loss insurance to cover catastrophic claims, and they may hire third-party administrators for claims handling.
- The Pros: Self-funding gives employers control over their benefits and vendors, as well as the potential to recoup costs if claims are lower than expected. Because the employer has control over plan design, it is in a good position to control claims costs and recover surplus funds while also providing coverage that meets the needs of its workforce. Self-funding also protects employers from the whims of the market since they don’t have to worry about rate hikes based on general claims or economic trends, as long as they can keep their own claims costs down.
- The Cons: Employers take on increased risk and responsibility with self-funding. Although they can mitigate this by using third-party administrators to handle claims and stop-loss insurance to cover catastrophic claims, they still need to take a hands-on approach to insurance, and their costs can vary from month to month depending on claims volume and severity.
How it Works: Level-Funding
Level-funding is often viewed as a compromise between self-funding and fully insured coverage, like self-funding with training wheels. Health insurance carriers (the same ones that sell fully insured plans) may offer level-funded program options, and other organizations may also offer level-funding. Employers pay a fixed monthly cost to cover claims and administration. If claims are lower than expected, they may be able to recoup some of the costs. Once again, employees may pay a premium using payroll deductions.
- The Pros: Level-funding gives the potential for cost reimbursement while providing predictable monthly costs, making this an attractive option for businesses that are interested in self-funding but have low risk tolerance or limited cash flow.
- The Cons: Employers using level-funding may not have full control over their coverage, meaning they may not have the flexibility necessary to control claims costs and qualify for a refund.
Which Is the Best Option for Small to Mid-Sized Employers?
Small to mid-sized employers have more options than they realize.
- Fully Funded. Many small and mid-sized employers use traditional fully funded plans, sometimes due to misconceptions and the faulty assumption that they do not qualify for other options.
- Level-Funding. Level-funding is often presented as a suitable option for small and mid-sized employers. Smaller employers may shy away from self-funded plans because they are worried about taking on risk or dealing with unpredictable costs, but they still want the advantages of self-funding, including the potential to be rewarded for keeping claims costs down. Level-funding offers a hybrid approach that may appeal to employers, either as a permanent solution or as a stepping stone to self-funding.
- Self-Funding. Business leaders are often surprised to learn that the threshold for self-funding is not as high as they thought. Employers with a few as 20 employees are often good candidates for self-funding as long as they have sufficient stop-loss coverage, third-party administration and pharmacy benefits management in place. A properly set-up self-funded program can contain risk to a predetermined level while giving employers the freedom, flexibility and insights necessary to create a cost-effective program that delivers quality health benefits.
Why Are There So Many Options?
No one is accusing health coverage of being simple. The plethora of health plan options makes employee benefits even more complicated.
The reason there are so many options is simple – fully insured plans aren’t meeting the needs of many employers, forcing them to explore alternatives. Every year, terrible renewals push employers to the breaking point, while employees struggle with high out-of-pocket costs and restrictive benefits. Because every employer is slightly different, they need different solutions.
Here at Health2Business, we offer a unique solution that leverages direct contracts with community providers. It’s a type of self-funding, but instead of using a traditional provider network, employers work directly with local providers, resulting in cost-savings without sacrificing quality of care. Contact us to learn more.
