When it comes to funding a health insurance plan, an employer generally has a choice of three options: a self-insured plan, a level-funded plan, or a fully-insured plan.
Let’s look at each funding option and what it means to employers and their employees.
Self-Funded Health Insurance Plan
Also known as an ASO (Administrative Services Only) or self-insured plan, a self-funded plan is where an employer pays out of pocket for health care claims as they happen instead of paying an insurance carrier a fixed premium amount. With self-funded plans, most employers set up a fund to pay claims. They typically partner with a third party administrator, or TPA, to provide administrative services and to process claims.
In 2020, KFF reported that 67% of American workers were on a self-insured plan. That’s up from 61% the previous year. It also reports that 84% of workers at large companies participate in a self-funded plan versus 23% of employees working for smaller organizations.
What are the benefits of a self-funded health insurance plan?
There are several reasons why an employer would self-fund its health plan.
- Employers pay claims as they occur, rather than paying out large premium payments.
- The employer has control over its own health plan reserves, maximizing interest income that would not otherwise be generated.
- The employer can customize its own health insurance plan to fit the needs of its employees.
- Claims can be monitored more closely allowing for adjustments to be made the following year. This allows for maximum cost savings.
- The employer can enjoy savings on state health insurance premium taxes, which can be 2-3% of premium costs.
- Generally, self-insured plans are subject to less regulation than level-funded or fully-insured plans.
What are the risks of a self-funded health insurance plan?
While self-funded health insurance plans have become increasingly more popular among employers of all sizes, it doesn’t mean there aren’t risks. Here are some risks to consider.
- With self-funded health insurance plans, employers are exposed to a risk of high loss due to catastrophic claims. This is often mitigated by the use of stop loss-insurance.
- Expenses are unpredictable. Because employers can’t predict what types of claims will come in, it’s difficult to estimate what they’ll have to pay.
- Depending on the employee population, there could be an increased risk of high-cost health claims. Older employees, employees with risky lifestyles, and those with chronic conditions can all drive higher costs.
- Self-funding can be complicated. If employers don’t understand what they’re doing, what their TPA is doing, and what their stop-loss carrier is doing, they run the risk of non-compliance with regulatory rules set forth by ERISA, the governing body for these plans. Ultimately, it’s the employer’s responsibility to ensure that its compliant.
In summary, self-funded health insurance plans are a good alternative for employees who are looking to have more control over their health care spending, plan design, and provider networks.
Level-Funded Health Insurance Plan
Somewhere between a self-insured and a fully-insured plan is a level-funded health insurance plan.
Level-funding means that an employer pays a set monthly amount to cover estimated costs into its own fund to pay claims. The amount is equal to how much the employer expects to pay in claims, fees for the TPA to manage claims processing and administration, as well as stop-loss coverage premiums. If total claims, costs, and expenses are less than what the employer contributed, it could get a refund.
According to the KFF survey, 13% of small companies offered a level-funded plan, up from 7% the year before.
What are the benefits of a level-funded health insurance plan?
Considered a hybrid of both self-insured and fully-insured plans, level-funded plans are a great option for employers who:
- Want to explore self-funding, but aren’t quite ready to go “all in.”
- Like the flexibility that self-insured plans offer, but worry about the financial risk.
- Need more predictable monthly costs and lower financial thresholds.
What are the risks of a level-funded health insurance plan?
Much like self-funded plans, there are some risks to employers who choose level-funding.
- While financial risk is lower than with self-funding, there is still a risk. Employers still have to pay claims, no matter how much the cost.
- There are administrative fees involved in level-funding. So, it’s possible that cost savings incurred by an employer from paying its own claims are negated by these fees.
- Level-funding can be difficult for many employers to understand. Employers need to ensure they have the right team in place that knows what to expect.
In summary, a level-funded health insurance plan is a great option for a smaller employer who is looking for flexibility in networks and plan design, but wants some predictability in costs. But they must be aware of the risks involved.
Fully-Insured Health Insurance Plan
Lastly, we come to fully-insured plans. Fully-insured plans are what most of us know as traditional group health plans.
With a fully-insured health insurance plan, employers pay an insurance carrier a set premium each year based on the number of enrolled employees and dependents. All claims are paid by the insurance carrier who assumes all of the risk.
What are the benefits of a fully-insured health insurance plan?
For years, employers of all sizes have had fully-insured health plans. And there are a number of reasons why they’re still popular today.
- With fully-insured plans, employers pay a fixed monthly premium, so they know exactly how to budget for their health care expenses each year.
- Employers can shop around and negotiate for lower rates with their health insurance carriers.
- Employers don’t have to worry about claims administration, management, or payment. That’s all handled by the insurance carrier.
- The insurance carrier assumes all risk for costs. That means employers don’t have to worry about how they’ll pay for high-cost claims.
What are the risks of a fully-insured health insurance plan?
While fully-insured plans offer very little risk to employers, there are still some cons.
- Premium costs can be high. While employers can negotiate for lower premiums, they’re often stuck paying whatever the insurance carrier deems appropriate.
- Employer tax burdens are often higher with fully-insured plans. Typically, they’re subject to both state and federal taxes.
- Organizations with a healthy employee population often end up spending more on premiums than what they might pay with a self-funded or level-funded plan.
All in all, employers have a variety of funding options available to them. It’s best to weigh the pros and cons of each one relative to your organization’s situation. Take advantage of your benefits advisor to determine what works best for you.