How level-funded plans are helping small employers reduce healthcare costs—without disrupting employee networks
When the Affordable Care Act (ACA) was passed 15 years ago, its aim was to increase access to affordable health insurance, lower healthcare costs and improve care quality by expanding coverage. However, medical inflation and health insurance premiums continue to rise year over year, making health benefits one of the most challenging and expensive line items for small businesses to manage.
Most small businesses purchase their health insurance plans through fully insured, community-rated risk pools created by the ACA. Within these pools, small employer groups often face rising healthcare costs, limited visibility into claims and utilization, standardized “off-the-shelf” plan designs and narrower provider networks that limit employee choice of care.
For most small businesses, the fully insured market has traditionally been the most practical option, as partially self-funded plans often carry risk levels that are difficult to absorb at a smaller scale. As premiums increase at double-digit rates, employers are frequently left with few alternatives beyond reducing employer contributions or shifting higher deductibles and out-of-pocket costs to employees.
Enter Level Funding: A Balanced Approach for Small Employers
While the hybrid approach of level funding has existed for decades, there were few options for employers with fewer than 50 employees. However, as demand for alternative solutions to fully insured plans has reached a fever pitch among smaller employers, many insurance companies are now offering level-funded plans in the small group market, in some cases for employer groups with five or more employees.
Unlike partially self-funded plans enjoyed by larger employer groups, where claims are paid as incurred and leave significant cash flow exposure despite stop-loss insurance, level-funded plans still allow small employers to pay a fixed monthly cost based on total enrollments. The insurance company underwriting the plans assumes all risk by purchasing stop-loss protection. Unlike the fully insured market, level-funded plans are medically underwritten, resulting in some groups being declined due to unfavorable underwriting. Once a carrier offers group coverage, it will include estimated claim funding for the year, along with administrative and reinsurance costs, to determine a monthly fixed premium.
How Level Funding Works
Employer groups are billed a fixed monthly amount, and in return, the carrier agrees to pay all claims on their behalf. During the plan year, claims data is available monthly, so the group has full transparency into claims paid to date versus the claims projected by the insurer at the time underwriting was completed. When claims are lower than projected, the group is running a surplus; conversely, when claims are higher than expected, the group is running a deficit. At renewal, the insurer is responsible for any incurred deficit, and the employer group bears no liability.
When a surplus exists at renewal, the group is typically entitled to a share of the savings, often around 50%, though this can vary, delivered as either a premium credit or a direct payment. When a large deficit occurs, it can affect the group’s renewal, as it is no longer in the community-rated fully insured market, where its individual claims experience has no impact on rate actions. One of the protections the ACA inadvertently created with community rating is that there is now very little downside to exploring level-funded options for small employer groups, since they can always re-enter the fully insured market, no questions asked, if they find they are running large deficits that result in large renewal increases.
Reevaluate Your Healthcare Strategy
With level-funded plans expanding rapidly and many realizing significant annual premium savings, there is no better time to consult with an industry leader to explore solutions for your small business. Contact Charles Licameli at Clicameli@hwphillips.com to discuss your needs.
Charles Licameli joined HWP Insurance in 2004 and serves as Vice President of our Employee Benefits Department. His principal area of practice is Employee Benefits Consulting for employers of all sizes, with a particular emphasis in the Non-profit, Association and GOVCON sectors. Additionally, he specializes in specialty Life Insurance and Disability Income planning for business owners, executives and individuals. He serves on the Broker Advisory Councils for United Healthcare and Aetna, and prior to joining HWP, he was employed with Allstate Insurance Company for over 10 years. Mr. Licameli is a 1993 graduate of Towson University.
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