Emerging EB Business Insights
The Advantages of Level-Funded Health Plans for Employers With Better-Than-Average Risk
MAY 2, 2023
For small businesses, the Affordable Care Act (ACA) mandates how fully insured plan premiums are determined. Under the ACA, small group health plans (50 or fewer employees, though some states – CA, CO, NY and VT – have expanded the small group market to 100) must include essential health benefits and offer a minimum level of coverage. Insurance companies use factors like geographic area, age, benefit coverage elected and tobacco use to set the rates for all small businesses. Employers with favorable experience may find savings by moving away from the insured small business market and switching to a level-funded plan.
Level Funding Provides a Way Out of the Community-Rated Pool
Level funding is a hybrid health plan solution for employers that want to move away from community-rated plans, but are not ready or not eligible to completely self-insure. Under a level-funded health plan, employers pay a fixed monthly premium to the insurance company for claims administration and payment. But unlike the community-rated market, the premium is calculated based on your organization’s health plan experience.
The premium includes estimated claims costs and administration fees as well as stop-loss coverage, where the employer's out-of-pocket expenses are capped at a predetermined amount to protect against unexpected high-cost claims. Level-funded plans also feature reduced premium taxes and fewer mandated coverages. Employers with an average or above-average health status are considered “preferred risk” and can save 5% to 10% by switching to a level-funded plan.
Level-funded plans also create an opportunity for a return on premium if claims costs are lower than estimated during the plan year. Employers with good claims experience can see an additional 5% to 10% in dividends. Read our recent article on optimizing your level-funded plan to maximize your return.
What Are You Actually Paying For?
Fully insured (community-rated) plans: Fixed premiums to cover claims costs, premium taxes and administration fees. Premiums are based on the employee demographics (age and gender) of all the employers with fewer than 50 employees in the region.
Level-funded plans: Fixed premiums for claims administration and stop-loss coverage to protect against high-cost claims. The premium is based on your claims experience, plus there’s an opportunity to receive a partial refund on your premium if claims costs are lower than the premium paid.
For employers concerned about the risks of level funding, stable monthly payments and embedded stop-loss coverage help financially insulate the plan if you go through a bad claims year. Level-funded plans that go from a good claims experience to less favorable can return to the fully insured market for the next plan year.
How USI Can Help
Many employers and brokers do not understand the components of a level-funded plan, assuming it’s “not a good fit” or that level funding is “too risky” for certain organizations. Leveraging the experience of thousands of small businesses, USI has the expertise to help clients understand the components of level funding and make recommendations based on employee demographics and health status.
If you’re a preferred-risk employer with a better-than-average health status, level funding gives you a pathway out of the community-rated pool. Contact your USI representative to learn more about this and other strategies to optimize your benefits.
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