Self-Funding 101: Level Funding

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If you like the idea of self-funding but want a stable payment option level funding just might be your ideal fit.  Level funding can aid employers in their health coverage budgeting efforts. With level funding, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance.

The carrier facilitating the level funding will pay your employees’ claims throughout the year. At the end of the year, if your payments exceeded claims, you will receive a refund from the excess you paid in monthly claim allotments. If the claims exceeded what you paid into the program, in most cases your stop-loss insurance will cover the overage amount.

What are the advantages?  

  • You don’t have to pay premiums that are based on community rates, which might be higher than your employee group’s risk. You only pay the actual claims and an additional administrative fee.
  • If all the money you set aside each month to cover claims is not used, you will receive a refund at the end of the year from the surplus.
  • If you are already self-funded, then you will enjoy a more budget-friendly method of monthly claims payment, with stop-loss insurance to protect you from unexpected high costs.
  • You will benefit from a smoother cash flow and not worrying that a high claim near the beginning of the year will impact your business.
  • Detailed reporting on utilization trends can give you important information on where employees may be overspending.

What are the disadvantages?  

  • When you choose to self-fund you are likely looking to cut costs—and with level funding, part of your monthly payment is to cover administrative fees. Depending on the plan and your other options, these fees have the potential to cut into the savings you hope to gain from running a self-funded plan. You’ll need to weigh the cost effectiveness of administering your self-funded plan in-house, hiring a TPA or choosing a level funded option with the attached administrative fees.
  • You still have to pay the claims. With level funding you’re paying for the convenience of having equal payments throughout the year and the security of stop-loss coverage.
  • Another challenge of level funding to consider is the terms of the contract; make sure you understand how the contract will impact a business of your size.
    • Companies with smaller numbers of employees may benefit differently than those with larger numbers.
    • Many level funding plans restrict their offerings to companies with a certain minimum or maximum number of employees, which may affect your ability to contract with your desired carrier.

Having the Right Broker to Weigh the Decision

Ultimately, if you want to operate a self-funded health plan, level funding is an option that must be considered in light of your company’s cash flow, risk tolerance, employee numbers and preferred budgeting methods.

It is important to have a broker in your corner who can explain the different options to you.  In addition, there is a limited distribution with some level funded products.  Fortunately, AUI is an industry leader and has several unique products to offer clients interested in level funding.  If you would like more information, contact us today!

This blogpost is a supplement to our webinar on Alternative Benefits.  If you would like more information about this presentation please contact us.

2019-03-07T20:31:16-05:00
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