Level Funding

What is a Self-funded Plan?

In a self-funded health plan, the employer assumes the risk

and responsibility of medical claims instead of contracting

with an insurance carrier to pay claims. The employer sets

premium rates based on claims history and typically benefits

from lower administration costs and greater flexibility both in

plan design and cash flow within the business.

A self-funded plan may contract with a third party

administrator (TPA), but it is still a self-funded plan because

the company is responsible for funding the claims payments.

Stop-loss insurance can be obtained to pay for excessively

high claims, but the employer is responsible for the majority

of the costs and the stop-loss insurance is simply a protection

against extremely high, unpredictable claims.

Self-funded plans are not right for every company. One of the

downsides to a self-funded plan is that the employer must

pay out claims as they come in, leaving itself exposed to

fluctuating expenses. Level funding is an option 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 employers in their health coverage budgeting

efforts. With level funding, employers 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 will receive a

refund from the excess you paid in monthly claim allotments.

If the claims exceeded what you paid into the program, in

most cases your stop-loss insurance will cover the overage

amount.

Advantages of Level Funding

Level funding offers several advantages. Like other self funded

plans, you don’t have to pay premiums that are based

on community rates, which might be higher than your

employee group’s risk. Instead, you only pay the actual claims

and an additional administrative fee. 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. 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.

Generally, 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 and

not worrying that a high claim near the beginning of the year

will impact your business.

Additionally, 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).

Another advantage of level funding is having fewer

governmental regulations than fully insured plans are subject

to. Check with your legal counsel about regulatory benefits

specific to your state and business.

Disadvantages of Level Funding

Although there are upsides to level funding, there are also

some disadvantages. One is that 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. You’ll need

to 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.

Additionally, you still have to pay the claims. With level

funding you’re paying for the convenience of having equal

payments throughout the year and the security of stop-loss

coverage.

Another challenge of level funding to consider is 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.

Making Your Decision

Ultimately, if you want to operate a self-funded health plan,

level funding is an option that must be considered in light of

your company’s cash flow, risk tolerance, employee numbers

and preferred budgeting methods.

Contact Benefit Strategies Agency, LLC for more information

about coverage options.

This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2015, 2018 Zywave, Inc. All rights reserved.