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
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
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.