More employers are opting to self-insure their employee benefits in order to gain more flexibility and control in plan design and financing. A well-designed self-insured plan enables companies to reap the benefits of their cost containment efforts and wellness activities, rather than having to pay a monthly premium to a commercial insurer based on an arbitrary set of rating restrictions.[i]
Level-funding, a self-insurance hybrid, further enables companies to benefit from the regular and predictable cost of a fully insured plan, while only paying for the healthcare costs actually incurred by employees. This approach can potentially provide a 30 to 40 percent annual refund on health benefit costs.[ii]
With level-funding, employers pay a set amount each month to a healthcare services company to cover administrative costs, fees and embedded stop-loss insurance.[iii] Stop-loss provides for risk retention limitations and serves as a financial buffer for the employer if, for example, an employee is found to have cancer or needs an organ transplant.
Companies put aside enough cash to cover anticipated claim expenses, and the monthly premium remains level for the entire year. If claims are less than the funded amount at the end of the year, a rebate or credit is issued. If claims go over the funded amount, companies are protected by stop-loss.[iv] For companies that already self-insure and then switch to level-funding, they can expect to benefit from a more budget-friendly method of monthly claims payment.[v] The only caveat to be aware of is that each state mandates a set minimum employee count in order to get stop-loss coverage, so this option will not be open to extremely small employers.
Why Level-Funding Is Advantageous
Level-funding delivers all of the same advantages of self-insurance, including greater flexibility than commercial insurance, as well as a number of cost-saving benefits, such as:
Helping employers tailor plans to the specific health needs of a workforce population, especially if guided by the right healthcare services company
Generating as much as three percent immediate savings because state taxes are eliminated on most self-insured plans
Eliminating carrier profit margins and risk charges
Furthermore, level-funded plans are exempt from many of the federal healthcare law’s health insurance taxes, which will be onerous for the fully-insured market, exceeding $100 billion over the next several years.[vi] Companies that opt to level-fund their health benefits are precluded from offering the government-mandated "essential health benefits," which allows them to tailor benefits to the needs of a company and the demographics of its workers.
Additionally, level-funded plans are not subject to state-mandated benefits, the jurisdiction of the states and, for the most part, litigation in state courts or the appeal and complaint procedures of the insurance departments of each of the states.
With level-funded plans, employers only pay for claims and the cost of administering them, and they can conveniently be combined with Flexible Savings Accounts (FSA), Health Savings Accounts (HSA) and Health Reimbursement Accounts (HRA),[vii] which means that, in addition to lowering healthcare costs, level-funding helps companies remain competitive and gain an edge in attracting and retaining talent.