Would Your Company Benefit From a Level-Funded Health Plan?

JUNE 4, 2024

As healthcare premiums continue to increase, many insurance brokers will recommend simply raising copays and deductibles as the only solution. But there’s a downside to this strategy: employees dissatisfied with higher out-of-pocket healthcare costs will seek employment elsewhere. Smaller businesses already struggling to find workers and remain competitive will need to find a more sustainable way to control health plan costs.

Employers engage USI Insurance Services to help them understand different plan funding options, including level funding. Level-funded plans allow employers to pay a fixed monthly premium to cover claims, administration and insurance, with the opportunity to see a return on premium if the plan runs better than expected. Employers often see savings up front by switching from a fully insured health plan to a level-funded one. Here’s how it works:

Level Funding Provides a Way Out of the Community-Rated Pool

For small businesses in the U.S., the Affordable Care Act (ACA) mandates how fully insured plan premiums are determined. Under the ACA, small group health plans of 50 or fewer employees (100 or fewer in California, Colorado, New York and Vermont) must include essential health benefits and offer a minimum level of coverage. Often referred to as “community-rated health plans,” insurance companies use factors like geographic area, age, benefit coverage elected and tobacco use to set the rates for all small businesses.

Under a level-funded plan, the premium is calculated based on your company’s health plan experience. For employers that are not ready or not eligible to completely self-insure, level funding provides an opportunity to move away from community-rated plans.

The premium for a level-funded health plan includes estimated claims costs and administration fees as well as stop-loss coverage, where the employer's out-of-pocket expenses are capped at a predetermined amount to protect against unexpected high-cost claims. Level-funded plans also feature reduced premium taxes and fewer mandated coverages. Employers with an average or above-average health status are considered “preferred risk” and can save 5% to 10% by switching to a level-funded plan.

Level-funded plans also create an opportunity for a return on premium if claims costs are lower than estimated during the plan year. Employers with good claims experience often see an additional 5% to 10% in dividends. Read our article on optimizing your level-funded plan to maximize your return.

What Are You Actually Paying For?

Fully insured (community-rated) plans: Fixed premiums to cover claims costs, premium taxes and administration fees. Premiums are based on the employee demographics (e.g., age and gender) of all employers that have fewer than 50 employees in the region.

Level-funded plans: Fixed premiums for claims administration and stop-loss coverage to protect against high-cost claims. The premium is based on your claims experience, plus there’s an opportunity to receive a partial refund on your premium if claims costs are lower than the premium paid.

For employers concerned about the risks of level funding, stable monthly payments and embedded stop-loss coverage help financially insulate the plan if you go through a bad claims year. Level-funded plans that go from a good claims experience to less favorable can return to the fully insured market for the next plan year. Even if you have already explored level funding, but determined your health plan is not a good fit, you may still be able to reduce health plan costs by adjusting your plan design.