Employers who find self-funded plans too risky and the fully insured approach too limiting may find level funding a better fit.
Small and mid-sized businesses seeking flexible employee benefit plans that provide built-in cost controls often feel their options are limited. Enter level funding.
The fully insured world restricts flexible and creative plan options, and many employers are stuck in a cycle of paying steep increases year over year because they’re being pooled with many other small plans. A traditional self-funding model might also be out of the question without solid claims data to understand risk and your potential monthly claims. However, level funding is an alternative funding strategy that may be right for small and mid-sized businesses that want to take control of their plans and access claims data while paying a consistent premium each month. Level funding is ideal for employers that like the idea of self funding but want to keep the safety and stability of consistent premium payments.
In a level funding, employers work with a third-party administrator (TPA) to determine the expected claims for the year. The TPA adds a “claims corridor” to the expected claims amount, typically between 10-15%. This, along with the stop-loss insurance and administrative fees, becomes the annual premium. This number is divided by 12 to determine the total monthly cost.
Throughout the year, the TPA pays claims as they come in. At the end of the year, if any claims dollars are left over from the expected claims bucket, the employer receives a refund. However, if the claims exceed the allotted amount, the stop-loss insurance kicks in to pay the difference, rather than the employer having to pay more.
Employers using a level-funded plan get access to detailed claims reporting, which highlights where employees are both overspending and underspending on their health insurance. With this information, employers can customize their health plan to better serve participant needs.
As with any self-funded plan, employee education and communication play a large role in cost containment. Employers have access to claims data and can see trends in their employees’ healthcare that could be driving up costs. For example, employers can look at how employees use urgent care centers, emergency rooms and primary care doctors’ offices, and educate them on which care option is right for different situations.
Similarly, employers may need to take a bigger role in educating employees about prescription drug plans—from helping them understand a formulary, to discussing mail-in pharmacy plans and generic versus brand name medications.
Disease management helps employees manage chronic health issues, or prevent those at risk from developing one. Employee education and communication plans can take a variety of forms, including intranet messages, emails, posters and postcards—depending on how their workforce best consumes information.
Employers who understand their employee demographics and emphasize education have saved significantly with a level-funding benefits strategy. We know of an employer with 60 covered participants has saved 35% by moving from a fully insured model to a level-funded plan, and this company is projected to receive a surplus at the end of the first year.
For financially stable and relatively healthy organizations, level funding is a step in the right direction toward traditional self funding. While level funding does require more employee education, the results (access to claims data, plan flexibility and the ability to better contain costs from year to year) are worth the effort.
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