Understanding Level-Funded Health Plans: Benefits, Suitability, and Hidden Costs

What is a Level-Funded Health Plan?

A level-funded health plan is a hybrid between traditional fully insured plans and self-funded plans. In this arrangement, employers pay a fixed monthly fee that covers claims, administrative costs, and stop-loss insurance. This model is designed to provide predictability in budgeting while allowing some of the benefits associated with self-funding.

How Level-Funded Health Plans Work

1. Monthly Payments: Employers pay a set monthly amount, typically based on their estimated claims for the year. This amount includes:

   • Expected claims costs
   • Administrative fees
   • Stop-loss insurance premiums

2. Claims Payment: The insurance company pays out claims as they arise. If claims are lower than expected, employers may receive a refund at the end of the policy year.

3. Stop-Loss Coverage: This insurance protects employers from catastrophic claims. There are two types:

   • Specific Stop-Loss: Covers claims over a certain amount for an individual (e.g., $50,000).
   • Aggregate Stop-Loss: Covers claims that exceed a set threshold for the entire group (e.g., $1 million).

Who Should Consider Level-Funded Health Plans?

Level-funded health plans can be advantageous for certain employers. Here’s a breakdown of who they are best suited for:

• Employers with Low to Moderate Claims: Companies with 51 to 250 employees often find these plans beneficial. They typically have enough claims data to predict future costs accurately.
• Stable Workforce: Employers with low turnover rates are ideal candidates because they have a better understanding of their employee health trends.
• Desire for Predictability: Organizations that prefer a fixed monthly budget for health benefits without the unpredictability of fully self-funded plans.

The Financial Breakdown

• Cost Control: Companies can save an average of 10% to 20% annually compared to fully insured plans, depending on their claims experience.
• Refund Potential: If claims are lower than expected, employers could receive up to 50% of their monthly payments back at the end of the plan year.
• Administrative Fees: These fees can range from $10 to $25 per employee per month, which can add up quickly for larger groups.

Hidden Costs to Watch Out For

While level-funded plans offer several advantages, there are hidden costs that brokers may not emphasize:

• Administrative Complexity: Managing a level-funded plan requires more administrative work compared to fully insured plans. Employers may need to invest in additional resources or software.
• Stop-Loss Insurance Costs: The cost of stop-loss insurance can vary significantly. Specifically, the specific stop-loss premium might range from 15% to 30% of the total monthly payment, depending on the health risks of the population.
• Higher Initial Costs: Many employers face higher initial costs compared to fully insured plans as they fund the plan upfront until claims are settled.
• Risk of Overestimating Claims: If an employer overestimates claims and ends up with higher-than-anticipated claims, they may face significant costs without the benefit of a refund.

Considerations Before Switching

Before deciding to switch to a level-funded health plan, consider the following:

• Claims History: Analyze past claims data to evaluate if a level-funded approach is financially beneficial.
• Employee Demographics: Understand the health status and age of your employees, as this impacts the overall claims.
• Market Trends: Research current market conditions and benchmark against similar organizations.

Bottom Line

Level-funded health plans can provide an effective balance between predictability and flexibility for employers, particularly those with a stable workforce and low to moderate claims. However, it’s crucial to look beyond the surface. Understand the total costs involved, including administrative fees and stop-loss premiums, and evaluate your organization's specific needs. Make informed decisions to ensure that your choice aligns with your financial goals and workforce health.