Life isn't always simple for smaller employers with fully insured health benefits plans. It's easy to get frustrated with high plan costs, especially for an organization with a healthy workforce that's not overusing health care or submitting unreasonably high health claims for the insurer to pay.
Yet, many smaller employers are concerned about taking the step from the financial safety of a fully insured plan to the financial uncertainty of self-funding. After all, a self-funded health plan requires employers to pay claims as they come in, even if that means facing $2,000 in claims one month and $15,000 the next. Stop-loss insurance only caps total annual losses for self-funded employers. It doesn't help when many claims must be paid all at once.
Given the potential costs, risks and negative impact on cash flow, moving from a fully insured health plan to self-funding can seem daunting for many smaller employers. The good news is that there is a hybrid solution called level-funded health plans for employers that want to move away from fully insured health care but are not yet ready to completely self-insure.
"Level-funding provides a viable bridge option" for employers interested in moving toward self-funding but maintains some of the predictability of a fully insured plan, said Joe Meyer, senior vice president of sales and marketing at third-party administrator Maestro Health. Employers that are more risk-averse can "dip their toes into the self-funding world while maintaining some elements of the fully insured world, such as monthly billing."
How Level-Funded Plans Work
With a level-funded plan, an employer pays a health carrier the same monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance that covers health care costs over a set dollar amount, and plan administration costs. If total claims costs are higher or lower than expected, the carrier makes adjustments at the end of the plan year in the form of a refund to the employer for lower claims or a premium increase on the stop-loss insurance renewal for higher claims.
Stop-loss coverage is an essential part of this arrangement because it limits an employer's financial responsibility for claims over a certain amount, either on a per-employee basis or for the entire covered population.
The Kaiser Family Foundation's 2020 Employer Health Benefits Survey, with responses from 1,765 employers, found that 16 percent of small firms with 3 to 199 employees use level-funded health plans. There were slight differences between the smallest firms with 3 to 49 employees (14 percent with level-funded plans) and those with 50 to 199 employees (17 percent).
Reviewing the Basics: Self-Funded vs. Fully Insured
In a self-funded (or self-insured) group health plan, the employer assumes the financial risk of paying for employees' health care claims under the cost-sharing terms of the plan. Employers typically set up a trust fund to earmark corporate and employee contributions to pay incurred claims. A third-party administrator, such as an insurance company, usually manages the plan.
For fully insured plans, the employer and employees pay premiums directly to an insurer, which pays health providers based on the cost-sharing terms of the plan.
"Since a self-insured employer assumes the risk for paying the health care claim costs for its employees, it must have the financial resources to meet this obligation, which can be unpredictable," the Self-Insurance Institute of America, a trade association for service providers, advised.
A Health Care Refund?
What really makes employers take notice when discussing level-funded plans is the potential for a refund on their health care spending if the plan's actual claims are lower than expected. "The promise of a potential refund is the main reason employers like level funding," said Mark Mixer, CEO of Health One Alliance and Alliant Health Plans in Dalton, Ga. "Any incremental savings can up the ante as to what benefits the employer is able to provide to its employees."
To maximize any potential refund, employers need to lay the groundwork in the plan contract. Depending on the contract language, the administrator can retain one-quarter or more of any excess funds. In some cases, the contract may require that unused claims amounts be rolled over for use in future plan years.
"Some carriers who offer level-funded plans will keep a percentage of any reserve leftover," said Donovan Pyle, CEO of Health Compass Consulting in Orlando, Fla. "Stay away from those products." He also suggested that employers make sure the contract does not require the employer to renew its contract with the carrier to receive an available refund.
Consider Workforce Demographics
Employers experiencing a bad year for employee health claims could see the opposite effect on costs if stop-loss insurance premiums increase significantly. This is where the relative age and health of the workforce can make a significant difference.
For example, in a recent SHRM Connect discussion on level-funded plans (accessible only by Society for Human Resource Management members), one employer tried level funding for a year but was forced to return to a fully insured plan when higher-than-expected claims made its stop-loss insurance renewal prohibitively expensive. Another employer delayed pursuing level-funding as a result of a few clusters of high claims. When that claims experience improved over time, the employer shifted to level funding with strong enough results to receive a refund in its first year.
Effective risk management can help increase the chance that an employer will receive a refund from its carrier. The good news is that employers with level-funded plans can take advantage of the more comprehensive claims reporting these plans provide. This "opens up an array of opportunities for benefits consultants and employers to manage risk more effectively," Pyle said. Claims information that is more comprehensive can provide greater opportunities to consider the full costs and benefits of implementing pharmacy benefit management or case management programs for specific claims, for example.
When setting up a level-funded plan, it makes sense for employers to discuss the move with their current carrier. But it is important to keep all options open. "You want to go with the best available carrier for level-funded plans, and that may not be your current carrier," noted Alan Silver, senior director with consultancy Willis Towers Watson in Philadelphia.
While some larger carriers offer prepackaged options that may not be open to negotiation or customization, employers should still look for opportunities to maximize the potential of these plans.
Pyle urged employers to avoid "minimum premium" language in stop-loss insurance contracts. This could require employers to pay the insurer a minimum monthly premium to cover incurred claims even if the employer lays off employees during the year, thereby reducing the number of covered employees and dependents.
Stop-loss contracts should also have a 12/18 clause that pays claims over an 18-month period as long as the claims were incurred during the 12-month contract term.
Above all, Silver urged HR and benefits professionals to involve the company CFO throughout the process of identifying and choosing a carrier for a level-funded plan. "This is a financial transaction that could impact cash flow and other aspects of a company's finances," he said.
Joanne Sammer is a New Jersey-based business and financial writer.
Related SHRM Article
Self-Insurance Is Just the Start, Say Health Plan Innovators, SHRM Online, May 2018
Self-Insured Employers Look Beyond the ACA, SHRM Online, February 2017