Is a Level-Funded Healthcare Plan Right for Your Company?

Insight By
Michael LoVasco
Topic
Employee Benefits

For most employers, the concerns about health care costs have only intensified due to the events of the past year. This is causing some business leaders to explore various funding options to maximize their healthcare dollars.

Fully insured health plans have been a long-time favorite for the peace-of-mind they offer. But there’s a growing frustration with the high price tag for that peace-of-mind. The notion of moving to a self-insured plan, however, is just too daunting for some — especially given the lack of predictability, potential risks, and impact on cash flow.  

If you desire the advantages of a self-insured health plan, but need a little more financial certainty for your budgeting concerns, level-funded health plans might be the steppingstone you’ve been looking for. Level-funded plans use a hybrid approach that allows small employers to take advantage of the financial benefits and plan design flexibility that a self-insured plan offers while also retaining the lower risk and stable cost features found in fully insured plans.  

Level-Funded Health Plans Can Be a Viable “Bridge” in the Journey from Fully Insured to Self-Insured
Fully Insured Level-Funded Self-Insured
  • Traditional approach where the employer pays preset monthly premiums directly to a health insurance carrier.
  • These premiums remain fixed through the year regardless of actual claims experience.
  • Premiums are determined annually during the renewal with insurance provider.
  • Hybrid approach that allows the employer to pay the same fixed, or “level,” monthly payments throughout the year —which are typically lower than those of fully insured plans.
  • Payment includes stop-loss protection against high-cost claims.
  • If claims are lower than expected, the employer gets a refund.
  • The employer assumes the financial risk of paying for employees’ claims as they occur.
  • The employer must estimate and budget for annual costs and may purchase stop-loss coverage to help cover higher than expected claims.
  • Costs vary from month to month based on actual claims experience.
How Do Level-Funded Plans Work?

With a level-funded plan, an employer pays a preset monthly amount to the health insurance carrier to cover the monthly costs for:

  • Estimated Employee Claims
  • Plan Administration
  • Stop-Loss Coverage

If, at the end of the plan year, total claims costs are greater than the claims, the carrier and/or stop-loss coverage will cover those extra costs—meaning the employer is 100% protected.  

On the other hand, if total claims costs are lower than the expected, the employer can typically experience one of two things based on the agreed upon contract:

  1. receive all or a significant portion of the unused account balance as a “refund” at the end of the year; or  
  2. rollover unused claims-funds into the following year’s plan, thus further reducing future medical claims costs.  

Note: Plan administration and stop-loss premiums are not refundable.

What Are the Advantages of Level-Funded Plans?
  • Improved Cash Flow: Unlike self-insured health plans, level-funded payments are spread evenly across a 12-month period. These predictable payments make cash management easier. The included stop-loss coverage protects against unexpected cost spikes due to higher or catastrophic claims.
  • Company-Based Risk Assessment: Traditional fully-insured plans use a broad community group to assess risk when setting premium rates, while level-funded plans evaluate only a company’s own claims experience. Since a company’s risk is commonly lower than the general population, the results are often lower-cost plans.
  • Opportunity to Earn an Annual Refund: A primary selling-point for small to mid-sized businesses, these plans allow employers to recoup savings —through a refund—when they have a heathier-than expected year. This is an advantage not found under fully insured plans.
  • Transparency: Level-funded customers receive annual reports about plan utilization that identify areas of concern, misuse or abuse. This added insight gives businesses the opportunity to target plan design changes and educate and engage employees to take care of their health to help further reduce utilization costs.
  • Fewer Regulations: May not be subject to certain ACA regulations and state mandates.
  • Flexibility: Meet Federal regulatory requirements and easily replace traditional plans.
Weighing the Pros and Cons

There are numerous factors to consider when selecting a health plan.  It comes down to weighing the pros and cons for your company, such as:

Pros Cons
Fully Insured
  • Stable monthly fees.
  • Low risk for employer – pays same amount each month regardless of actual claims costs.
  • High monthly cost; employer may overpay if employee claims are under premium total.
  • No opportunity to recoup savings when claims are less than expected.
  • Low flexibility for customizing plans.
  • Minimal transparency on your group’s spend.
Level-Funded
  • Stable monthly fees.
  • Lower cost than fully insured option.
  • Good balance between design flexibility and risk.
  • Stop-loss coverage is activated if claims usage exceeds claim funds.
  • Potential for cost savings (via refunds) if claims are less than account balance at year end.
  • Considered a “partial self-insured plan,” it is not subject to most state insurance mandates or premium taxes.
  • Monthly cost may be higher than self-insured plans.
  • A shift from pre-packaged options to a custom design, which may require more broker support.
Self-Insured
  • Save on premium costs; pay only for actual claims made.
  • Most flexibility for customizing plan to meet business and employee needs.
  • Not subject to most state insurance mandates or premium taxes.
  • Lower predictability and increased cash flow stability risk.
  • Exposure to risk — employer is responsible for covering claims even if higher than expected
Which Approach Is Right for Your Company and Employees?

Level-funded plans may position you to have more control over one of the largest expenses in running your business. A health plan built to meet the unique needs of your business positions you to reap the benefits of cost containment, wellness activities, and improve your ability to attract and retain talent.

If you are interested to learn more about the various funding arrangements and discuss which may be best suited for your company, contact LoVasco.  

Insight By
Michael LoVasco
Executive Vice President
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Topic
Employee Benefits
Published on

June 21, 2021

updated on

June 16, 2021

Disclosure

This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.

Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. LoVasco Consulting Group is independently owned and operated.

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