Level-Funded Pros and Cons
Level-funded plans have been rising in popularity in the past few years. According to The Kaiser Family Foundation’s 2021 Employer Health Benefits Survey, the percentage of small firms that report having a level-funded plan has been steadily increasing since 2019.
Level-funded plans are attractive to many employer groups because they strike a balance between the risky but rewarding self-insured plan and the steady but pricey fully-insured health plan. In a level-funded health plan, a group pays a monthly premium that is held in an account to cover claims costs, administrative services, and stop loss coverage throughout the year. If health costs were lower than expected, the group receives a refund for the amount that was paid in excess. This refund is split with the insurance carrier.
Pros and Cons of Level-Funding
- Predictable monthly premium. One of the main appeals of a fully-insured plan is the consistency of the monthly premium and the knowledge that the cost is steady throughout the year, making budgeting easier and keeping risk low. The level-funded plan maintains this consistency by distilling the plan costs into a set monthly premium, providing the lower cost benefit of a self-funded plan while keeping the stability of a fully-insured plan.
- Higher claims costs are absorbed by the plan’s stop loss insurance. This occurs with a self-funded plan, too, but it’s still important to note. In both types of plans, there’s no risk of exorbitantly high claims costs above the attachment point for the stop loss insurance.
- Access to group’s claims history. One of the main drawbacks of a fully-insured plan is the obscured claims history, making it impossible to know how employees are utilizing the plan, where the costs are highest, and how the plan can be changed to accommodate member utilization or how members can be encouraged to adjust their own utilization to reduce costs. With claims history access, a group can encourage better plan utilization and plan for the future.
- Rates are only based on the group’s members. Many fully-insured premiums are set based on the risk pool of the general population, or on a larger sampling than just the enrolled members. A level-funded plan often assesses the group’s rate by analyzing only the risk pool of enrollees, which can result in a lower rate than would occur in a fully-insured plan.
- Exemption from many insurance regulations. Level-funded plans still fall under the umbrella of self-funded plans legally, and so are exempt from the state regulations and accompanying taxes that govern fully-insured plans. For many employer groups, this alone can make level-funding an attractive option.
- More expensive than self-funding. Though the plan still provides a refund at the end of the year if claims are lower than expected, the premium includes administrative and other fees on top of the claims costs that make the plan more costly overall than a self-funded plan.
- Limited choice in plan designs. A self-funded plan allows a group to exercise full control over their health plan, from selecting the TPA and stop loss carrier to how the plan deductibles, copays, and other structures are designed. A self-funded plan provides autonomy and freedom that can’t be achieved with a level-funded plan.
- The refund isn’t as simple as it seems, sometimes being contingent upon renewal with the same carrier, or only being issued as a credit for next year’s renewal. It is also split with the insurance company, so the cost savings are less significant than they would be with a self-funded plan.
- Rate increases are still common if claims costs are significantly higher than expected. In this case, the level-funded plan doesn’t differ much from a fully-insured plan.
It’s important to note that most of the level-funded plan pros – protection against high cost claims by stop loss insurance, access to claims history, limited risk pool – can be achieved with a self-funded plan, while some of the cons of a fully-insured plan – limited plan design options, more expensive premiums, significant rate increases – can still occur with the level-funded plan. Still, a level-funded plan often feels like a good bridge between fully-insured and self-funded plans for many employer groups. Small groups in particular are frequently drawn to level-funding as they seek more control over their health plan.
The bottom line? The best choice for an employer group is rarely simple, and each option will come with trade-offs of risk and reward. Check out our Risk Decision Support tool for a robust analysis of how an employer group will fare with each plan structure.