What Are Level Funded Health Plans?

A level funded health plan is a unique type of partially self funded insurance plan in which an employer pays a fixed cost every month. Level funded insurance plans offer employers additional flexibility and cost control when offering health benefits to employees.

Given rising premiums for traditional group health insurance plans, many employers are exploring level funded models as viable alternatives. Small and mid-sized businesses in particular may be feeling the squeeze and looking for cost-effective solutions to at once provide sufficient health benefits and reduce costs. But organizations of all stripes may find a level funded health plan, which may be cheaper than a fully funded health insurance plan, is the most financially feasible option for their organization.

What Is Level Funded Health Insurance, and How Does It Work?

Level funded health insurance plans combine features of self-insurance and fully insured arrangements. Employers pay into a claims account, stop-loss insurance, and administration of the health plan by the third-party vendor. By paying a lower monthly cost and assuming some risk along with your insurer, you may find that a level funded plan constitutes a cost-effective alternative health insurance plan for your team.

As part of a level funded plan, employers directly fund employee health claims, up to a specific threshold per person, on an annual basis. This threshold is typically anywhere from $10,000 to $100,000.

For any claims exceeding this threshold, stop-loss insurance kicks in to cover the excess cost of claims until the end of the plan year. Think of stop-loss insurance as your company's safety net. Like any other insurance plan, stop-loss insurance has a price tag: a monthly premium.

Additionally, companies will pay a fixed monthly administration fee per employee that covers third-party administration of the health plan (think participant onboarding, billing and claims processing, and customer service).

So, who is a level funded health plan for? The following business types might benefit from the cheaper health plan that a level funded schema offers:

• Small businesses
• Mid-sized businesses
• Startups
• Businesses looking for high-quality benefits at a cheaper overall cost
• Businesses aiming to pay for health plan costs every month at a predictable price
• Businesses who want more transparency into how their monthly payments are distributed

Note that there are key differences between level funding and self funding or fully insured plans. Perhaps you're unfamiliar with other models of employee health benefits to begin with. In that case, let's break down how level funding differs from other forms of employee health plans.

Level Funded vs Fully Insured Plans

What does fully insured mean when it comes to health plans? Fully insured health plans, also called fully funded health plans, are group health insurance plans in which employers purchase coverage directly from an insurer, and premiums are paid directly to that insurer. These are likely the types of health plans with which you and your employees are the most familiar.

Traditional plans involve:

• Paying a fixed premium to an insurance carrier
• The insurance carrier pooling risk across their clients and managing each client's plan
• Predictable costs, but less flexibility in plan design
• Carriers retaining surplus premiums if claims run low

So, what's the difference between level funded and fully insured health plans? Unlike fully insured plans, in a level funded health plan, the employer assumes some risk along with the insurer, at a cheaper overall cost to the employer. Additionally, surplus unused claim dollars are retained year-to-year.

Level Funded vs Self Funded Plans

A level funded health plan is sometimes described as a type of self funded health plan. As a result, it has some of the features that are distinctive to self funded vs fully insured plans. However, a level funded plan differs from self-insurance in several important ways.

A purely self-insured plan is usually characterized by the following:

• Your business directly pays all employee healthcare costs
• You can customize the plan design and benefits
• Your company retains surplus funds not used on claims
• There is no financial risk pooling, so liability is unlimited without stop-loss insurance
• Stop-loss insurance protects against catastrophic or high-cost claims

So, what's the difference between level funded and purely self funded insurance? Unlike self funded plans, in a level funded health plan, liability risk is defined and limited by stop-loss contracts. This means employers don't have to pay more for health-related claims beyond their threshold even if the claims costs are high. An employer's monthly payment remains fixed.

You may see self funded plans referred to as ASO (Administrative Services Organization) plans. When assessing ASO vs fully insured plans, consider the level of risk and claims responsibility you want your business to assume. With the combination of some employer-assumed risk and the safety net of stop-loss coverage, level funding effectively synthesizes elements of both self funded and fully funded insurance plan types.

Level Funded Health Insurance Pros and Cons

Adopting a level funded group health insurance plan for your team may be a viable alternative to prohibitively high-cost fully insured plans. But there is always some level of risk associated with choosing new insurance coverage.

Advantages of Level Funding

What are the pros of a level funded health plan?

Key advantages of a level funded health plan include:

• Predictable monthly costs
• Lower monthly costs based on your specific employee population
• Customization of plan design beyond carrier constraints (e.g., networks, deductibles, co-pays)
• Retention of unused claim funding allocated for any given year
• Ability to easily add desired special programs or value-added benefits
• Access to detailed claims data to inform health management strategies
• Reduction in premium taxes (in some states)

If you're a smaller employer looking to attract and retain talent through competitive health benefits, a level funded health plan may be key.

Disadvantages of Level Funding

What are the cons of a level funded health plan?

Keep in mind the following features of a level funded health plan that may impact your organization:

• Possibility of claims exceeding stop-loss coverage in higher cost years, which could lead to higher renewal rates
• The need for more resources to manage plan administration and compliance
• Compliance requirements of regulations like ERISA (Employee Retirement Income Security Act of 1974)
• A lack of integrated wellness programs that some insured carriers include

How To Switch to a Level Funded Plan

Ask yourself this question: Are you overpaying for health benefits?

If you're not sure or think that your rates have increased year over year but don't know to what extent, it may be time to do more research into considering a level funded plan:

1. Consult the experts for a preliminary analysis of your health plans 3 to 6 months before renewal.
2. Look for experienced partners who offer level funded health plans. Don't go with the first vendor you research. Compare proposals from multiple stop-loss carriers and Third Party Administrators.
3. Finalize your plan design and funding levels.
4. Confirm new processes and logistics before you go live with the new plan.
5. Educate your employees on upcoming plan changes. Provide them with network links, explain the differences between their old and new coverage, and provide additional resources to answer questions.
6. Leverage wellness incentives within your company to reduce overall health plan costs. For example, you can offer incentives for preventive care and health screenings. The more proactive, the better. Additionally, you may consider promoting telemedicine, fitness, mental health, and other wellness programs at work. A healthier team may mean a lower risk of paying out for health-related claims.

Level funding may ultimately strike an effective balance between cost control and flexibility. For companies seeking alternatives to rising premiums, it's an option warranting exploration.

Stuck on step 1? Paychex clients can reach out to our team of group health benefits advisors to assess if transitioning to a level funded health insurance plan may be suitable for their organization.

Insurance sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA License #0C28207.