Level funding: an onramp to health plan innovation for fully insured employers

As health care costs continue their steady climb upward – with a worsening outlook for 2024 – it’s critical for employers to embrace their power to transform this trend. That starts with saying no to the status quo and making health plan choices that focus on value – where quality and affordability meet.

One opportunity employers have to move the needle in this transformation is to switch from a fully insured plan to a self-funded model. Too often, employer premiums for fully insured plans rise each year with little data to justify the increase or inform decision-making. And even when data is provided, it is often incomplete or incomprehensible.

Self-funding, however, gives companies more insight into expenses to better understand and manage costs and to tailor smarter plans that make sense for their workforce and their wallets. Self-funding also creates savings through reduced premium taxes and the state mandate exemption.

Yet as promising as a self-funded plan might sound, some employers still hesitate to make the leap for fear of change, the assumption of risk or because they believe self-funding is better suited to a larger company. For them, a level-funded plan can strike the perfect balance of control, cost savings and predictability.

A quick level set

The key difference between fully insured plans and self-funded ones is who assumes the risk for health care claims and how they are paid. With a fully insured plan, a company pays the premium and the insurer bears all the risk for the health care claims. When a plan year ends, the insurance company’s profit is determined by how much they have paid in claims. With a self-funded plan, the company pays all the claims throughout the plan year for its covered employees, with protection for large claims. In a better-than-expected claims year, that company pays far less than they would if fully insured. The protection for large or total expected claims expenses, called stop loss insurance, protects the company and creates an absolute maximum the company can pay.

Level funding is a type of midway approach for fully insured companies to transition to a self-insured strategy. It incorporates some of the typical features of a fully insured plan and has become more widely available to smaller employers in recent years. In fact, 38% of covered workers in small firms (fewer than 200 employees) were in a level-funded plan in 2023. It’s a compelling option for companies that want to move from a fully insured plan to the flexibility and lower regulatory obligations of self-funding but aren’t ready to completely self-insure.

Level funding essentially packages together a self-funded plan with extensive stop loss coverage and a cash flow mechanism that significantly reduces employer risk. A level-funded plan generally offers:

• Predictable payments. As painful as fully insured premiums have become, many employers take comfort in the predictability of regular, equal monthly payments (that may end up higher than actual claims costs, not that employers ever have the chance to find out). Level funding offers that consistency without the buyer’s remorse of overpayment. With level funding, employers can expect to pay a set (or “level”) monthly amount to cover the estimated cost for maximum claims, plus any premiums for stop-loss insurance and plan administration costs. Different than the typical pay-claims-as-you-go self-funded model, this cash flow mechanism ensures a predictable monthly cost.
• The possibility of cash back. With a level-funded plan, if total claims costs are lower than the expected maximum, employers will get a refund from their carrier or third-party administrator for any surplus – something that simply won’t happen within a fully insured arrangement.
• The security of stop-loss. Level-funded plans include extra stop-loss features such as lower individual stop-loss levels, monthly caps and advance funding. All of these are designed to reduce risk or protect cash flow.
• Decision-making data. Level funding gives companies more access to robust claims data than fully insured gives. Companies can account for every dollar spent to customize benefits and vendors.
• Lower taxes. Since the state premium tax is only paid on stop-loss coverage, instead of on fully insured premiums, a level-funded plan can reduce tax payments.
• Better flexibility and fit. With the added flexibility of level-funded plans, employers can tailor benefits to meet the specific needs of their workforce, from cost-share levels (such as deductibles and copays) to prescription coverage to wellness programs and more.

Level funding: An onramp to innovation

Innovation in today’s health care environment has become a necessity. Health care prices are too high, employer health plan premiums are out of control, employees are avoiding care for fear of costs and the large traditional carriers are posting record profits.

Employers can be a driver of health care innovation simply through the choices they make, although the weight of that responsibility can seem daunting. Level funding offers employers an exciting opportunity to explore innovation with safeguards in place. All the while, they can practice their power while offering a health plan designed for their employee base and gaining better understanding of their actual health care costs.

Alan Cohen is chief product officer and co-founder of Centivo. Contact him at [email protected].

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