Level Funded vs Fully Insured Health Plans

As an employer, you have a lot of decisions to make when it comes to selecting the right health coverage for your employees. Often, the choice can be difficult, especially as insurance premiums rise from year to year. You’re likely familiar with the concept of a traditional, fully insured health plan, but you may be wondering if there are any less expensive alternatives that make sense for your organization. If so, you’re not alone.

According to a 2020 Employer Health Benefits Survey from the Kaiser Family Foundation, out of a total of 1,765 employers surveyed, 16 percent of small firms with 3 to 199 employees use an alternative to fully insured health plans, specifically, what’s known as a level funded health plan. That number was slightly higher (17 percent) at firms with 50 to 199 employees. The popularity of the level funded health plan has increased over recent years, due in large part to the concept’s flexibility and affordability.

What Exactly is Level Funded Insurance?

A health insurance plan is “level funded” when the employer makes a pre-determined payment each month, and that payment is placed in an account reserved for the payment of costs associated with the plan. Costs deducted from the account can include claims, administrative expenses, and premiums for stop loss insurance coverage. The monthly cost of a level funded plan varies with the number of covered employees and the strength of the selected coverage.

If the amount of employee claims submitted at the end of the policy contract are lower than expected, the employer can receive either a refund or a credit on the next annual policy contract. However, if claims submitted at the end of the policy contract are higher than expected, the level-funded insurance carrier the employer has been paying will, in theory, cover the remaining claim amount, which may affect the rates for the following plan year.

Fully Insured vs Level Funded Plans: What is The Difference?

In general, think of a level funded health plan as a stepping stone between self insured and fully insured health plans. It’s very common for small businesses to be torn between the security of a fully insured health plan and the possible benefits and lower premiums associated with self insured health plans.

A fully insured health plan takes the risk of high claims away from the employer completely, in exchange for a high monthly cost. The variable month to month claim risk is put on the insurance carrier, instead. Rates can rise with little to no explanation from year to year, regardless of the amount of claims the firm’s employees have actually made.   

With a self insured plan, what may seem like a cheaper choice at first can turn into a nightmare. For example, if a business decides to become self insured, they might face $3,000 in claims in February and $18,000 in claims in March. Stop loss insurance puts a cap on total annual losses for employers with self insured health plans, but it doesn’t mitigate damages from month to month. The unpredictability can be hard to swallow at best, and devastating at worst for small firms. Level Funding is the best of both plans. Level Funding combines the lower risk of fully insured plans with the customizability and potential savings of self Insured plans.

Is a Level Funded Health Plan the Right Choice for My Organization?

If your organization is drawn toward the benefit of predictability inherent in a fully insured plan’s monthly billing model, but is also interested in moving toward the monetary benefit of self funding, a level funded health plan may be the right choice for you. Of course, choosing a health insurance plan for your company is not just a decision for the Human Resources Department, it’s also a big financial consideration.

If your Finance Department likes the possibility of earning a credit at the end of a plan year, but is still reasonably risk-averse, your organization may be among the 16 to 17 percent of smaller organizations and start-ups that have determined level funded insurance plans make the most sense for them.

From the Human Resources perspective, you know your employees best, and you may be able to use their demographics and prior claim information (in the aggregate) to determine if your organization is taking less of a risk with a level funded plan. In general, healthier, younger workforces are less risky in terms of self or level funded insuring. Your employees, on the other hand, might like the perks associated with some of the level funding carriers, such as larger mental health networks or potential savings on copays and maximum out of pockets compared to fully insured plans.

When it comes to choosing a health insurance plan for your organization, there is a lot to consider. If you’re feeling a bit stuck between going with a traditional, fully insured health plan and seeing exactly what a level funded plan has to offer, it’s time to reach out to employee benefits and insurance experts. Advanced Estate & Insurance Services, Inc. (AEIS) brings more than 35 years of experience in the industry to your advantage. AEIS will walk with you through your health insurance questions and beyond for an easier, more complete benefits plan. Health insurance is complex. AEIS makes it simple for you.

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