Annual rate increases are pushing fully insured health plans out of reach for more and more small businesses in the U.S. But if small businesses with at least 50 qualifying employees do not offer ACA-compliant health benefits, they face a financial penalty. What are employers to do? They might consider level-funded and self-funded health plans. Note that the two options are a bit different.
We do not hear much about level-funded and self-funded health plans despite the fact that the latter are increasingly more popular among employers in nearly every sector. Yet there are small business owners who would make the jump to self-funded plans if they were not so terrified by the thought of taking on such a huge financial responsibility. That’s where level-funded plans come in.
More About Self-Funded Health Plans
Let us discuss the difference between level-funded and self-funded health plans, beginning with the self-funded option. For more information, we turn to a Las Vegas company known as StarMed Benefits (starmedbenefits.com). The company is a third-party administrator of self-funded health plans.
StarMed explains that a self-funded health plan is not an insurance plan. It is a plan that provides a range of health benefits funded entirely by the employer and its employees. The lion’s share of the costs is covered by the employer while employees contribute through payroll deductions. All claims made against the plan are paid directly from the plan’s funds.
More About Level-Funded Health Plans
Level-funded health plans are not exactly traditional health insurance. But they aren’t exactly self-funded plans, either. Instead, they are more like a hybrid solution. With a level-funded plan, the employer still bears the responsibility for paying claims through a combination of its contributions and those of its employees.
The big difference is that level-funded plans are both administered and backed by insurance companies. Rather than maintaining the fund itself, an employer forwards plan funds to a health insurance company. All claims are paid by the insurer. At the end of the year, any leftover funds are refunded or returned by way of lower premiums the following year. If there is a balance due, the company is responsible for paying it.
Purchasing Stop Loss Insurance
Level-funded health plans are sometimes viewed as stepping stones from fully insured plans to self-funded benefits. An employer looking to go the self-funded route might use a level-funded plan for a couple of years until they learn how to accurately estimate plan costs. But with either low cost alternative, purchasing stop loss insurance is a must.
Stop loss insurance protects an employer from financial loss in the event healthcare claims made against its level-funded or self-funded plan exceed available funds in a given year. It is impossible to maintain either type of alternative health plan without this insurance. But there is a catch: any benefits a stop loss policy might pay will not be paid until the end of the plan year. If a self-funded plan gets hit with a large volume of claims it cannot pay in the middle of the year, the money needs to come from somewhere else.
A level-funded plan’s biggest advantage is insurance company backing. Under that same scenario – an employer’s plan being hit with a large volume of claims it cannot cover – the insurance company makes up the difference at the time it occurs. They settle up with the employer at the end of the year.
Both level-funded and self-funded health plans are low-cost alternatives to standard group health insurance. Level-funded plans are slightly different in how they are administered, and they are often utilized as stepping stones to going fully self-funded.