Level Funded Health Insurance: Pros and Cons

When it comes to providing health insurance for employees, businesses often find themselves navigating a complex and constantly changing landscape. Among the various options available, one of the emerging solutions is level funded health insurance. It is gaining popularity as a viable alternative for small to medium-sized businesses looking to manage their healthcare costs effectively while still offering comprehensive benefits to their employees. However, like any insurance plan, it comes with its own set of advantages and disadvantages. This article aims to explore the pros and cons of level funded health insurance and offer practical advice for decision-makers.

Understanding Level Funded Health Insurance

Level funded health insurance is a hybrid insurance plan that combines features of both fully insured and self-insured health plans. It is designed to provide more cost flexibility and transparency for employers while offering financial protection and predictability. Under this arrangement, employers pay a fixed monthly premium, which covers administrative costs, stop-loss insurance, and expected claims costs. This makes budgeting easier as the cost remains consistent throughout the contract period.

Pros of Level Funded Health Insurance

Cost Savings

One of the biggest advantages of level funded health insurance is the potential for cost savings. By participating in a level funded plan, employers can save money if the actual claims are lower than expected. Any surplus funds in the claims account are usually returned to the employer at the end of the year, unlike traditional plans where the insurer keeps any unspent premiums. This can lead to significant savings, especially for companies with a healthy workforce.

Predictable Monthly Costs

With level funded plans, businesses pay a fixed monthly premium. This predictability is crucial for budgeting, making it easier for businesses to manage their cash flow without the concern of unexpected increases in healthcare costs. For smaller businesses particularly, the assurance of consistent expenses is a significant advantage.

Customized Plan Options

Another advantage is the flexibility in designing a plan that matches the specific needs of a workforce. Employers can tailor benefits, coverage limits, and additional services based on employee demographics and health conditions, resulting in a more relevant and useful benefits package. This customization can lead to higher employee satisfaction and retention.

Improved Transparency

Level funded health insurance provides detailed reporting on where the money is going. Employers gain insight into their healthcare expenditure, which can aid in decision-making and identifying cost-saving opportunities. This level of transparency is often lacking in traditional fully insured plans.

Claims Data Access

Businesses benefit from access to claims data, allowing them to understand their health care utilization patterns better. This information can be used to promote healthier lifestyles, address common health issues, and ultimately reduce healthcare costs over the long term. With this data, employers can also negotiate better terms in the future.

Cons of Level Funded Health Insurance

Risk of Higher Costs

While there are potential savings, there is also a risk that claims could exceed expectations, which might result in higher costs overall. Although stop-loss insurance is part of the plan, any costs beyond the stop-loss limit will not be covered, posing a financial risk for businesses.

Complex Administration

The administrative aspect of level funded health insurance can be complex. Managing claims data, adherence to regulations, setting up the stop-loss coverage, and annual reconciliation of actual claims vs. expected claims can require more administrative effort and expertise than fully insured plans.

Limited Availability

Level funded plans are not available in all markets and may not be offered by all insurance providers. This limited availability can restrict the options for employers, especially in regions where fewer providers are offering these plans. Consequently, businesses might not find a plan that completely suits their needs.

Employee Education Required

Since level funded health insurance is not as well known as traditional plans, there may be a learning curve for employees. Employers may need to invest time and resources in educating their workforce about how the plan works, its benefits, and any changes to their healthcare options.

Real-Life Example: Success with Level Funded Health Insurance

XYZ Corporation, a mid-sized company with 150 employees, previously offered a fully insured health plan. However, due to annual premium increases, they decided to explore level funded health insurance. With the help of a knowledgeable insurance broker, they designed a customized plan that met the needs of their relatively young and healthy workforce.

After the first year, they found that actual claims were significantly lower than expected. As a result, XYZ Corporation received a substantial refund on their premiums. Additionally, access to claims data helped them implement wellness programs that further improved employee health and reduced claims costs. The transparency and predictable costs associated with the level funded plan have made it a preferred choice for the company.

Practical Advice for Employers Considering Level Funded Health Insurance

• Work with an experienced broker who can guide you through the complexities of setting up a level funded health plan.
• Carefully analyze your employee demographics and health condition trends to design the most suitable coverage options.
• Invest in employee education to ensure they understand the benefits and functionalities of the new plan.
• Regularly review claims data to identify areas for improvement and cost-saving opportunities.
• Consider regional limitations and provider options carefully before choosing a level funded plan.

FAQs on Level Funded Health Insurance

What differentiates level funded health insurance from other plans?

Level funded health insurance is a hybrid plan that combines elements of fully insured and self-insured plans. It offers predictability of costs similar to fully insured plans but with the flexibility and potential cost savings of self-insured plans. Employers pay a fixed monthly premium and may receive a refund if claims are lower than anticipated.

Is level funded health insurance suitable for small businesses?

Yes, level funded health insurance can be an excellent option for small to medium-sized businesses, especially those with a healthy workforce. It offers the advantage of predictable costs, potential refunds, and tailored benefits. However, it's important for small businesses to carefully assess their risk tolerance and administrative capacity before choosing this option.

How does stop-loss insurance work within a level funded health plan?

Stop-loss insurance protects employers against unexpectedly high claims costs. It kicks in if claims exceed a certain level, known as the stop-loss limit. This coverage ensures that businesses are not liable for costs beyond the pre-set limit, providing a financial safety net.

What kind of data do employers have access to with a level funded plan?

Employers receive detailed reports on claims data, including information about the types of healthcare services utilized and the associated costs. This data helps employers understand healthcare utilization patterns and make informed decisions about benefits management and wellness initiatives.

Can a business switch back to a traditional health insurance plan if level funded insurance doesn't work out?

Yes, businesses can switch back to a traditional fully insured plan if level funded insurance doesn't meet their expectations. However, the transition should be strategically planned, ideally at the end of the contract period, to ensure seamless continuity in employee health coverage.