Small to mid-size groups are looking for solutions, especially at a time when inflation and supply chain costs continue to rise. With the ever-changing landscape of health insurance and medical expenses, many businesses are exploring level funding and the benefits of this approach to save on costs.
However, some brokers and employers don’t understand the basics of how a level-funded, self-funded health benefit plan works. Let’s break this down into three basic components of level funding: Administration; Stop-Loss Insurance; and Claims/Benefits.
First, some basic background on level funding. Clients who choose level funding have monthly payments of the same amount, which is applied toward the aggregate and specific stop-loss insurance premium, as applicable, administrative costs to the third-party administrator and claim prefund account, regardless of claim activity. This allows for better budgeting and peace of mind for the client.
Clients prefund an account to pay covered claims incurred by their employees and dependents under their self-funded health benefit plan. To help minimize the risk and protect their business against large unexpected claims, clients purchase stop-loss insurance. Stop-loss insurance pays covered claims that are more than what was funded or that exceed a specified amount.
When covered claims are paid out of the claim pre-fund account, one of two things can happen:
- If covered claims are less than what was funded, clients may receive the surplus either as an administrative fee credit or cash at the end of the year. Or…
- If covered claims are more than what was funded, the stop-loss insurance pays the balance so the client doesn’t have to.
Level-Funding Basic #1: Administration
When a client adopts and implements a self-funded health benefit plan, allowing their eligible employees and dependents to obtain benefits set forth in their Plan Document (a written description of the benefits to be provided by the plan), the client will also enter into an Administrative Service Agreement with a carrier or third-party administrator (TPA).
Under the Administrative Service Agreement, the carrier/TPA is responsible for processing or adjudicating eligible employees’ and dependents’ claims in accordance with the terms of the Plan Document and for printing or making available the Plan Document.
The administrative fee for providing these services is typically based on group size, the negotiated broker compensation and other plan design selections. Because no two groups are the same, this fee can vary.
The carrier/TPA may also provide additional support to the client, such as forwarding stop-loss insurance premiums, filing stop-loss insurance claims with the carrier, administering eligibility, contracting for PPO network access, providing access to wellness programs, access fees for value-added services, and runout administration.
Some carriers/TPAs bundle administration services with stop-loss insurance. This can streamline processing of stop-loss claims. When the TPA and stop-loss insurer are not affiliated, it can take longer for the stop-loss insurer to verify the stop-loss claims are eligible for payment.
Level-Funding Basic #2: Stop-Loss Insurance
With stop-loss insurance coverage, there is less risk for the client. If covered claims are more than what is funded by the client, the stop-loss insurance pays the balance, and clients are protected against large unexpected claims. There are two kinds of stop-loss insurance that are part of the coverage:
Aggregate Stop-Loss Insurance protects the client from unusually high overall claims. If total covered claims for all covered persons in the group are more than the overall claim liability limit of the client during the contract period, the stop-loss insurer reimburses the client under the terms of the stop-loss insurance policy.
Specific Stop-Loss Insurance protects the client from unusually high claims of a particular covered person. If covered claims for a particular covered person are more than the specific deductible during the contract year, the stop-loss insurer reimburses the client under the terms of the stop-loss insurance policy.
Stop-loss insurance coverage may include advance funding. This means that if an employer has a large eligible claim but there isn’t enough money in the pre-fund account, the stop-loss carrier would advance the funds to the client’s pre-fund account. The eligible claim is then paid, and the stop-loss carrier recovers the funds in the following months as money is deposited in the claim pre-fund account.
Level-Funding Basic #3: Claims/Benefits
“The average premium for family coverage has increased 22 percent over the last five years and 47 percent over the last ten years.”1
Increasing costs have clients seeking creative ways to offer affordable health benefits to attract and retain employees. One way to offset these costs is to adjust the benefits being offered, such as increasing member cost share (i.e., coinsurance, deductible, copays and out-of-pocket limits).
Offering a plan design that provides benefits employees value is a critical component when designing plan options. If brokers can come to the table with various solutions for clients to consider and the knowledge and confidence to explain the advantages of moving to a level-funded model, they can open a new level of opportunity in the market.
Tailoring a benefit package to meet the needs of the individuals on the plan while having access to review claims reporting means employers have more control of where their money is going and understand how it is being spent.
Worth Considering Every Time
While level funding is not for every client, it is worth presenting in nearly every circumstance. With some education in presenting level funding as an option, clients may have the opportunity to not only save money but continue to offer valuable benefits to their employees. The three basic components of level funding described above can help clients get started with a concept that can be a more affordable option than their current plan and provide them with a health benefit plan that is more flexible and customizable.
- Forbes. State of Small Business: What Recent Surveys Say at End of 2021. Dane Strangler. 12.2021.
- Kaiser Family Foundation 2021 Employer Health Benefits 2021 Summary of Findings. 11/2021.