Traditionally, employers have utilized two options for providing health insurance benefits:
1) Fully-funded solutions: employers pay premiums, insurance carriers provide product offerings and assume claims risk (risk of claims exceeding premiums received).
2) Self-funded solutions: employer assumes claims risk, develops their own product offering and uses insurance carriers for administration and catastrophic coverage protection (stop-loss)
As employers grow in size, they are faced with the conundrum of switching from fully insured to self-funded programs, which instantaneously shifts the burden of risk from the insurance carrier to the employer.
There are alternative health insurance options that help employers shift their financial risk in a more graduated approach. Level-funded health programs provide employers the option to pay a consistent monthly premium that includes claims coverage and administrative expenses while allowing employers to take advantage of the benefits of a self-funded plan without the variable costs and associated risks.
Self-funding has financial risk
Knowing when to make the shift from a fully funded health insurance plan to “what’s next” can be a tricky proposition for growing employers.
Employers often switch to a self-funded model to contain costs as headcount and premiums increase. In a self-funded model, employers pay employees’ medical costs directly, giving the employer better control and transparency over their health plan. This allows the employer to get a clear picture of how their health plan dollars are being spent and tailor the plan to members’ needs.
Nonetheless, the self-funded model has its challenges. Although employers receive federal tax exemptions, there are additional expenses to consider, such as the amount of stop-loss coverage -- which covers the cost of claims above a certain dollar amount -- to purchase for the member population. The types and coverage amounts may change depending on the employer’s needs, but they will be reflected in the monthly premium. Claims administration costs also apply. In addition, healthcare costs vary month to month, as claims are funded by the employer and depend on the services used. Most important, if the employer has large claimants it can have a massively negative financial impact on the organizations cost structure as they take on the burden of the claims.
What would have cost the employer a $1 in a fully-insured solution can cost them up to $1.25 in a self-funded program. Given that health insurance is often the second largest check that an employer writes, 25% of additional cost on the one of the most expensive line items in a budget is not an ideal outcome for the finance and HR department.
To put it in real dollars, a typical 100 employee company under a fully insured plan will pay ~$1m in annual premiums. In a self-insured plan that same company could end up paying $250k more in costs than if they would have gone with the no-risk solution.
Level-Funded Health Insurance
There is another option that combines the best characteristics of both fully funded and self-funded health insurance programs: Level-funding.
Level-funded health plans are a form of self-funded insurance program that allows employers to pay a level (or fixed) premium to a third party to cover anticipated expenses for administration and employee claims. At year-end, if an employer pays out more than they have incurred in employee insurance claims, they receive a refund. However, if employee claims exceed the employer’s payout, stop-loss coverage embedded in the plan covers the difference.
Put simply, level-funded health plans provide employers the flexibility to pay only for health costs that their employees actually incur. It also delivers more budgeting visibility because it gives companies the ability to make consistent and predictable “level” payments throughout the year.
Other key features include specific Stop-Loss insurance, which provides financial protection from large medical and prescription claims for an individual and Terminal Liability protection that extends the paid claims period by a set number of months in the year of termination only, covering claims paid after the policy termination date.
Employers considering switching to an alternative funding model for their health insurance program should seek counsel from their health insurance broker.