With a traditional insurance plan an employer pays an insurance company a monthly premium and in turn that insurance company pays all medical claims employees incur. An employer can also opt to self-insure their medical plan which means the employer pays only for the cost of any employee medical claims through a third party administrator who takes care of the administrative tasks involved like claims processing, ID card production, and answering customer service questions.
A third option, level-funding, combines the best features of fully-insured and self-funded plans to provide yet another option that may be a better fit for certain employers.
Level-funding factors to consider
Given the predictable nature of level-funding, it can be an attractive alternative from fully-insured and self-funded funding mechanisms–especially considering the volatile economic environment we’re living in. Below are some basic definitions across several level-funding factors important for insurance plan decision-making:
Set Monthly Payments and Refunds
A level-funded product allows small- to mid-size employers to fund their claims each month at a set dollar amount. By definition, level-funding provides employers with predictable (i.e., level) monthly payments, regardless of claim activity. This predictability allows for better budgeting and forecasting, as well as increased peace of mind. With additional stop-loss insurance coverage, an employer is protected against large numbers of covered claims, individual catastrophic claims, or both.
Defined Monthly Payments and Stability
Monthly payments for a level-funded plan are calculated based on expected claims over a one-year period. Regardless of actual claims, employers will pay 12 equal payments plus administrative fees and stop-loss insurance coverage. Employers pay all covered claims (up to the stop-loss attachment points) but don’t need to pay more than their set payment in any given month. In addition to stop-loss, level-funding helps eliminate claim-cost volatility. And, it’s likely a lower-cost alternative to fully insured health benefit plans, with similar benefit offerings.
Tax Exemptions Make Level-Funding Attractive
Unlike fully insured plans, level-funded plans are exempt from ACA health insurance tax (HIT) on premiums, which are usually 2-3% of the plan premium cost. Since 2014, the Patient Protection and Affordable Care Act (PPACA) imposed this health insurance tax on fully-insured plans. The HIT tax increases employment costs for small businesses but not for large groups. So small employers who provide fully insured coverage could save extra money on hiring costs by switching to a level-funded plan.
Refund Opportunities for Healthier Employees
Since monthly payments are set by a percentage of actual expected claims there’s an opportunity for an annual refund if the group’s claims are lower than expected at the end of a plan year. This is where employers can initiate wellness programs to keep their employees healthy and reap the benefits of their good health at the end of a plan year.
Level-Funding and Run-Out Periods
A “run-out” period is the time immediately following the end of the health benefit plan year when carriers/third-party administrators continue to process eligible claims as they are received, for claims that were incurred during that health benefit plan year period. These claims, received in the contractual run-out period, are paid from the prior year’s claim fund. No additional funding should be necessary to pay for these claims.
Reporting and Compliance Impacts
With level-funding, employers have access to HIPAA-compliant claim utilization reporting, allowing you to analyze several factors, including: Health conditions, hospital charges, prescription drug utilization, and high-cost chronic diseases within a group. This information can help determine what types of wellness and health education is needed to improve employee’s health outcomes and improve a plan’s efficiency and effectiveness. It’s also helpful information, so employers can modify future plans to better meet the needs of employees and their annual budget.
Time to Consider Something Different?
In response to today’s economic reality, employers are exploring every opportunity to minimize costs and forecast their expenses more accurately. Considering a different funding option for your employees’ health plan puts you in control of your plan. You can reduce cash flow risk, keep your employee’s healthier with informed wellness data, and put the difference in your pocket at the end of the year.
If you’re ready to consider alternative funding for your health plan, contact your benefits advisor or call PHP at 1-800-982-6257. Email: sales@phpni.com.
