Selecting a health insurance plan isn’t easy. Whether you’re an individual searching for healthcare coverage through the Health Insurance Marketplace or you’re a business owner looking for group health insurance coverage to offer to your organization, it’s not easy to find a plan that checks all the boxes. While finding a plan that offers the coverage you and potentially your employees need is probably the top priority, finding one with this level of coverage at an affordable cost is probably priority number two. Of course, that’s easier said than done. With a seemingly limitless number of providers and options available to you and your business, it can be difficult to sort through the noise and find the option that works for everyone within your organization.
At Payday HCM, we understand the difficulty and importance of finding a good group health insurance plan. We’ve received plenty of questions from clients regarding ways they can find a health insurance plan that works for them and the kinds of decisions they should make when it comes to provider or cost. Speaking of decisions, one decision you’ll need to make along the health insurance journey is whether to go with a fully-insured, self-funded, or level-funded plan. Now, we’re all probably relatively familiar with fully-insured and self-funded plans, but what about level-funded ones? What are the advantages and disadvantages of a level-funded plan?
Well, in this article, we’ll be going over the pros and cons of a level-funded health insurance plan. We’ll start by covering what level-funded health insurance is, how it works, and how it differs from fully-insured and self-funded plans. From there, we’ll dive into the benefits and potential drawbacks of choosing a level-funded plan. By the end of this article, you’ll have the knowledge you need to approach choosing a health insurance plan with confidence.
In this article, you will learn:
- What is Level-Funded Health Insurance?
- Pros of Level-Funded Health Insurance Plans
- Cons of Level-Funded Health Insurance Plans
What Is Level-Funded Health Insurance?
Before we dive into the benefits and drawbacks of a level-funded health insurance plan, we first need to understand what a level-funded health plan is and how it works.
How Does a Level-Funded Health Plan Work?
Level-funded health insurance is a type of employer-sponsored health insurance that combines features of both fully-insured and self-funded plans. Like the name implies, the key element of a level-funded plan is its level funding—employers pay a fixed monthly premium each month to their plan administrator.
This monthly payment covers the key costs associated with a health insurance plan, including claims, administrative costs, and stop-loss insurance. These monthly payments cover employee health insurance claims up to a specific threshold, which, while specific numbers vary by plan and carrier, can range anywhere from $10,000 to $100,000.
Level-Funded vs. Fully-Insured and Self-Funded
Fully-insured and self-funded health insurance plans can be thought of as the two opposite ends of the health insurance plan spectrum. Whereas fully-insured plans allow employers to pay a fixed monthly rate with the insurance carrier bearing all of the financial risk, a self-funded plan has the employer paying for each claim (an amount which may fluctuate) and assuming all financial risk.
Level-funded plans, then, sit in the middle: employers take on some risk but maintain predictable monthly payments. If claims are lower than expected, employers may receive refunds or credits, something not available under fully-insured models. This hybrid approach makes level-funded plans attractive for businesses seeking both control and cost predictability.
Pros of Level-Funded Health Insurance Plans
Now that we have a better understanding of what a level-funded health insurance plan is and how it works, we can look at the potential benefits of offering one to your employees.
Predictable Costs and Savings Potential
One of the biggest advantages of level-funded insurance is that it offers predictable monthly expenses, meaning businesses can budget for the exact amount they’ll need to pay in any given month. This differs from something like a self-insured or self-funded plan, where monthly costs may fluctuate based on claims.
On top of that, since employers take on some of the financial risk, if employees use less health care than anticipated, unused claims funding may be returned to the employer or applied as a credit toward the next year. This differs from a fully-insured health plan, where a business assumes no financial risk, but no possibility of a refund or credit.
Stop-Loss Insurance and Plan Flexibility
On top of the financial benefits provided by the fixed monthly premiums and potential for a claims surplus refund, level-funded plans also provide a level of protection and security with stop-loss insurance. While stop-loss insurance is also typically found with fully-insured health plans, this would be an additional cost with a self-funded plan.
Additionally, level-funded plans typically offer more flexibility than fully-insured plans, allowing employers to design a benefits package that’s tailored to their employees’ unique needs instead of being restricted to standardized packages. Certain carriers may also offer more detailed insights into costs and claim usage with level-funded plans as opposed to self or fully-insured plans.
Cons of Level-Funded Health Insurance Plans
Level-funded is sounding pretty good, right? While level-funded health insurance plans do have their benefits, there are still some potential downsides to keep in mind.
Financial Risks and High Claims
As mentioned earlier, level-funded plans come with a number of different benefits when it comes to cost. One thing to note, however, is the level of financial risk that is associated with level-funded plans. Given that businesses can receive refunds on surplus claim amounts, this means employers take on more financial risk with the health plan.
With a fully-insured health plan, employers assume no financial risk, meaning no potential for surplus claim refunds, but also no need to worry about paying for higher claims. While stop-loss insurance can help to cover high claim amounts, there is a possibility that claim amounts could surpass the amount covered by stop-loss insurance, leaving the employer to make up the rest.
Administrative Necessities and Compliance Needs
Offering health insurance is a great benefit and can help businesses meet their employees’ needs as well as recruit new top talent. Of course, there’s also a level of requirement and compliance with health insurance plans. When choosing a level-funded plan, it’s important to note the administrative needs that may come with it.
Most health insurance plans will be subject to the same kinds of laws and regulations that may affect compliance. Even still, it’s important for businesses, especially those with more limited resources, to consider the administrative efforts needed to maintain compliance with things like the Affordable Care Act or the Employee Retirement Income Security Act.
Understanding the Ins and Outs of Level-Funded Health Plans
As we said earlier, creating a benefits package is a process that is built on decisions. Even when looking at just health insurance specifically, there are several decisions involved in the process—decisions that can have a huge impact on both the cost and amount of time spent administering the plan. This isn’t even taking into account finding a plan that actually suits the needs of your business and your employees. Deciding on whether to go with a level-funded plan is one of those decisions. Luckily, with the information provided in this article, you’ll have the information you need to approach that decision with confidence.
Deciding on a level-funded health insurance plan is only one decision you’ll make along the benefits journey. There is a whole other series of decisions you’ll need to make when it comes to selecting a health insurance plan and creating a benefits package as a whole. One crucial decision that can save you both time and money is selecting the right benefits agency. Check out our article for the five features to look for in a benefits agency and ensure your benefits journey goes as smoothly as possible.
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