Fully Insured vs. Self-Insured vs. Level Funding Plans for those of you who haven’t heard, level funding is the next big thing in small business insurance options. But how do you know if it’s right for your company? And if you decide it’s a good solution, what is your next step?
First, let’s start with a basic review of how most companies purchase insurance. Traditionally there are two ways of doing things:
A fully insured plan means that you are passing all of the risk onto your insurance carrier who charges you a flat monthly fee based on how they gauge the risk of insuring your employees.
If covered employees experience health issues and use the plan more, you will probably face a hefty increase in the monthly premium your business pays when your plan renews. Conversely, if your employees rarely use the insurance, you’re stuck playing a flat monthly rate no matter what. This model decreases the risk of month-to-month fluctuations but doesn’t provide any meaningful incentive for having healthy employees.
A self-insured plan is one in which the business pays the actual claims and essentially assumes the role of the insurance carrier in terms of managing risk. Many large companies offer at least one plan that is fully self-insured because they have a large pool of covered employees and also have the cash reserves to protect against a spike in claims volume or amount.
Historically, self-insurance has been perceived as far too risky in the small business market for a number of reasons. Small businesses typically have less cash on hand and can’t weather a dramatic increase in costs as easily. Also, claims data is very hard to come by in small business so it’s difficult to judge if self-insuring is worth the risk because you don’t even know the risk! Most small businesses also lack the manpower in-house to actually review and process claims so they still pay an insurance company to act as a Third Party Administrator (TPA). Though the business is paying the claim, the insurance company will actually process it accordance with the plan documents and ensure that all protocol is followed.
Today, level funding is emerging as a third option somewhere in between fully insured and self-insured. Proponents of level funding argue that it offers the benefits of both insurance models with none of the risks. So how does it work?
The “level” of level funding refers to the fact that you self-insure, but pay a level or steady fee each month as determined by your TPA. Level-funded plans also come fully integrated with individual and aggregate stop-loss insurance. Individual stop-loss insurance will kick in if a covered employee or dependent exceeds a certain dollar amount in claims. An aggregate stop-loss will be activated above a certain dollar amount for all claims. After you pay your level monthly fee for a year, your TPA will compare what you’ve paid for the actual claims and refund you any difference if you’ve paid more than you’ve spent. In summary, you get the regular and predictable cost of a fully insured plan, but because you’re actually self-insured, you only end up paying for the healthcare costs actually incurred by your employees.
Benefits of Level Funding Insurance Plans for Small Business Level-funding is becoming popular because plans following this model are not subject to several key regulations of the Affordable Care Act. For example, they don’t have to offer a package of mandated benefits. Because plans are self-insured, they can be written to the specifications of the business owner. Also because level funded plans are technically self-insured, business owners also avoid paying the Health Insurance Tax (HIT) levied as part of the Affordable Care Act. Furthermore, self-insuring your plan gives you more control and discretion as a business owner to approve claims outside of the contract. If you have a tenured employee whose medical treatment would be denied under a fully insured plan, a level funded approach would let you choose if you wanted to cover it anyway as a gesture of goodwill.
