NAIC meeting warns: Level-funded plans could destabilize health insurance

Level-funded health plans are growing in popularity as small-group employers look to save money on their workers’ health coverage. In addition, level-funded plans are attractive because they are exempt from some Affordable Care Act and state benefit mandates. The result is that the increasing popularity of level-funded plans allows healthier employee groups to be carved out and put into self-funded arrangements.

David C. Smith, president-elect of the National Association of Benefit and Insurance Professionals, gave an overview of self-funded and level-funded plans and their potential to create instability in the health insurance marketplace during the National Association of Insurance Commissioners summer meeting.

Level-funded plans are alternative funding arrangements for health benefits where an employer could purchase a health benefit option for their workers, relying on stop-loss and other risk mitigation instead of group health insurance policy. Smith said an increasing number of carriers have entered this space in the past 10 years.

Level-funded plans attractive to many

Employers find level-funded plans attractive, Smith said, “because the yin and yang of market stability is that people want to buy any product at the lowest price.” ACA rules eliminating group risk as an underwriting and pricing criteria were economically favorable to 70% of small employers, but cost some the “low risk” discount they had previously enjoyed. In addition, enhanced options in various markets to access networks and take advantage of self-funded/ERISA exceptions that otherwise apply to group health insurance markets improved competition and pricing options.

Carriers and service providers also find level-funded plans attractive, he said, because the plans offer greater flexibility in terms of pricing, underwriting and risk selection; avoid compliance with some ACA and state benefit mandates, and offer better risk-sharing arrangements with stop-loss carriers.

Smith said concern about these plans centers on their being marketed as “just like fully insured plans.”

“That is creating some confusion and a lot of buying decisions that are not always well educated,” he said. “We have found that a lot of employers do not know and are not aware they are really in a self-funded arrangement, and don’t understand some of the requirements that go along with that, like managing eligibility and other contract terms. We also find compliance obligations that are being missed or not followed by employers.”

Level-funded plans can have some gaps in coverage, and Smith said they are rarely explained in simple language for the employer’s review and are usually buried within the terms of the stop-loss or administrative agreement.

“As agents and brokers, as we work in the market, we are used to a well-regulated market, with things being done and followed in a very particular way,” he said. “But within the level-funded environment, there’s a significant difference between regulated and licensed carriers and third-party administrators and stop-loss carriers that the way the rules work and the way they’re enforced are becoming an area where more and more claims can get denied or excluded under a level-funded plan.”

Smith said that carriers who offer these plans “are very good at cherry picking, finding the good healthy groups and taking them out of the market.

“And the only people who are being left are the unhealthy small groups who won’t survive the underwriting process.”

Recommendations for regulating plans

Smith gave the commissioners several recommendations for regulating level-funded plans, including:

• Common contract definitions for administrative and stop-loss.
• Clearer disclosure requirements for level-funded groups.
• Application of compensation transparency rules to all level-funded services providers to understand the impact of costs.
• Detailed disclosure mandates for all group health products with requirements to disclose provider; diagnosis; high-cost claimant diagnosis and prognosis; dates of service and payment; billed, allowed and paid amounts for each claim, and what was paid to the provider versus what was reported as paid.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at susan.rupe@innfeedback.com.