When it comes to providing employee health benefits, businesses face an overwhelming number of options, each with its own pros and cons. In recent years, level-funded health plans have emerged as a popular alternative for companies looking to strike a balance between cost control and flexibility. But are these plans right for your business? This article dives deep into what level-funded health plans are, their benefits and drawbacks, and the types of businesses they best serve.
What Are Level-Funded Health Plans?
A level-funded health plan is a hybrid insurance solution that combines features of fully-insured plans and self-funded plans. With a level-funded plan, employers pay a fixed monthly amount to cover the costs of administrative fees, stop-loss insurance, and anticipated healthcare claims. This fixed payment structure provides predictability, making it easier for businesses to budget.
At the end of the plan year, if claims are lower than expected, the employer may receive a refund or credit for the surplus. On the other hand, if claims exceed the projected amount, stop-loss insurance protects the employer from incurring substantial out-of-pocket expenses.
Key Features of Level-Funded Health Plans
- Fixed Monthly Costs: Payments cover administrative fees, stop-loss insurance, and projected claims, ensuring cost predictability.
- Stop-Loss Insurance: Protects employers from catastrophic claims by capping their financial liability.
- Potential Refunds: If healthcare claims are lower than expected, employers may receive a refund or credit.
- Customizable Plan Design: Employers can tailor plans to meet the specific needs of their workforce.
- Regulatory Compliance: Level-funded plans are regulated as self-funded plans, requiring adherence to federal laws like ERISA and ACA.
Benefits of Level-Funded Health Plans
Level-funded health plans offer several advantages for businesses, particularly those looking for cost savings and flexibility without significant financial risk.
1. Predictable Costs
One of the most appealing aspects of level-funded plans is their fixed monthly payment structure. Unlike traditional self-funded plans, where costs can fluctuate based on claims, level-funded plans provide a steady, predictable expense that makes budgeting easier.
2. Cost Savings Potential
If your employees are generally healthy and claims are low, your business could receive a refund at the end of the plan year. This feature incentivizes employers to promote wellness programs and preventive care among their workforce.
3. Customizable Benefits
Level-funded plans allow businesses to design benefits that align with their employees’ needs. From choosing deductibles to tailoring coverage options, employers have greater flexibility compared to fully-insured plans.
4. Stop-Loss Protection
Unlike self-funded plans, where employers bear the full financial risk of high claims, level-funded plans include stop-loss insurance. This coverage limits the employer’s liability, providing peace of mind.
5. Access to Claims Data
With level-funded plans, employers gain insights into claims data, helping them understand healthcare usage trends and make informed decisions about future benefits.
6. Exemption from State Insurance Mandates
Because level-funded plans are regulated under federal laws like ERISA, they are not subject to state insurance mandates, potentially saving employers money and providing more flexibility.
Drawbacks of Level-Funded Health Plans
While level-funded health plans have many benefits, they’re not without their challenges. Employers should consider the following drawbacks before deciding if this type of plan is right for them.
1. Eligibility Requirements
Level-funded plans are often geared toward businesses with relatively healthy employees. Employers with high-risk workforces may face higher costs or find it difficult to qualify for these plans.
2. Limited Refund Potential
While the possibility of a refund is an attractive feature, not all businesses will benefit. If claims consistently match or exceed projections, there may be no financial advantage compared to a fully-insured plan.
3. Complex Compliance Requirements
As self-funded plans, level-funded options require compliance with federal regulations like ERISA, COBRA, and ACA. While administrative partners often handle these tasks, employers must still oversee and ensure compliance.
4. Risk of High Claims in the Long Run
Although stop-loss insurance protects against catastrophic claims, employers are still responsible for funding day-to-day claims up to a certain limit. Over time, high claims costs could outweigh the benefits of a level-funded plan.
Is a Level-Funded Plan Right for Your Business?
Deciding whether a level-funded plan is the right choice depends on your organization’s size, financial stability, workforce health, and risk tolerance. Here’s a breakdown of factors to consider:
1. Business Size
Level-funded plans are typically designed for small to medium-sized businesses (10–200 employees). Larger companies often prefer traditional self-funded plans for greater cost control, while very small businesses may find fully-insured plans more practical.
2. Workforce Health
If your employees are generally healthy and have lower-than-average healthcare claims, a level-funded plan could offer significant cost savings. Employers with high-risk workforces may find the fixed costs of fully-insured plans more manageable.
3. Financial Stability
While level-funded plans provide stop-loss protection, employers must still have the financial stability to cover claims up to the stop-loss threshold. Businesses with tight budgets or inconsistent cash flow may prefer the predictability of fully-insured plans.
4. Appetite for Risk
Level-funded plans strike a balance between risk and reward. They’re ideal for businesses that want to control costs without taking on the full risk of self-funding.
5. Desire for Customization
If you’re looking to tailor benefits to your employees’ specific needs, level-funded plans offer more flexibility than fully-insured plans.
How to Choose a Level-Funded Plan Provider
If you’ve determined that a level-funded plan is a good fit for your business, the next step is selecting the right provider. Here are some key factors to consider:
1. Reputation and Experience
Work with providers or brokers who have extensive experience in level-funded plans. They should have a proven track record of serving businesses similar to yours.
2. Administrative Support
Look for a provider that offers comprehensive administrative support, including claims processing, compliance management, and stop-loss insurance coordination.
3. Plan Customization Options
Ensure the provider allows you to customize benefits to meet the needs of your employees.
4. Transparent Pricing
The provider should clearly explain all costs, including administrative fees, stop-loss premiums, and projected claims funding.
5. Access to Claims Data
Choose a provider that offers detailed claims reporting, allowing you to track healthcare usage and make informed decisions.
Why Level-Funded Plans Are Gaining Popularity
In recent years, level-funded plans have become increasingly popular among small and medium-sized businesses. Employers are drawn to the predictable costs, potential savings, and flexibility these plans offer. As healthcare costs continue to rise, more businesses are exploring alternatives to traditional fully-insured plans, and level-funded options provide a compelling middle ground.
Final Thoughts
Level-funded health plans can be an excellent choice for businesses seeking to manage healthcare costs while maintaining flexibility and minimizing financial risk. By offering the stability of predictable monthly payments and the potential for cost savings, these plans are particularly well-suited for small and medium-sized employers with relatively healthy workforces.
Before making a decision, assess your business’s needs, budget, and employee demographics. Consulting with a knowledgeable benefits advisor can help you navigate the complexities of level-funded plans and determine if they align with your organization’s goals. With the right approach, level-funded health plans can provide valuable benefits for both employers and employees, ensuring a healthier and more financially sustainable future.
