Fully Insured vs Level Funding

This Article Starts a 3-part Series called “Alternative Funding”

Employers often ask me, “Should we look into self-funding?” While there are many different self-funding options, level-funding (a form of self-funding) is typically the most prevalent for small to mid-sized employers. In this article, we’ll be looking at the similarities, strategies, and pros/cons of these two funding arrangements.

What is Fully Insured?

Fully insured is when employers pay a fixed premium to an insurance company for the employees that are enrolled in a health plan, and the insurance company covers those employees’ medical claim expenses.[1] Think of this as your “traditional” health plan.

What is Level Funding?

Level funding is a form of self-funding where the employer pays the same premium each month to cover the cost of claim payments, administration, and stop-loss insurance. Stop-loss insurance protects the plan from claims that exceed a pre-determined amount between the employer and the insurance carrier.

With level funding, there’s transparency in claim cost, administrative cost, and the potential for a claim surplus. A claim surplus is when actual claims are less than projected for the plan year & the company receives a credit.

Similarities

While there are plenty of differences between the two arrangements, three similarities include:

1.      Premiums won’t fluctuate month to month (unless employees add coverage or drop coverage).

2.      You’ll never write an additional check if you have a bad claims year (like you would for some self-funding options).

3.      Same/similar networks.

Pros & Cons - Fully Insured

Pro: Less Risk/Volatility

If you’re an unhealthy group, there’s less risk/volatility if you’re fully insured. Typically, carriers pool together their “small groups” and give an average rate increase based on the age or demographics of the group. This can be a good thing if you’re company experiences high claims.

Con: You’re “Flying Blind”

Typically, if you’re fully insured and have under 100 enrolled on the plan, you can’t receive claims data from the carriers. You’re essentially “flying blind,” meaning you have no clue how your company is performing medically. This makes it tough to create programs that can directly impact employees, like diabetes management or pharmacy rebates.

Con: Could be Leaving $$ on the Table.

If you have a good claims year while being fully insured, you’ll still be receiving a renewal increase. No credits or lower premiums.

Pros & Cons – Level-Funding

Pro: Can Receive $$ Back

If you have a good claims year with level funding, you can share in the claim surplus.

§  Example – If your claim’s fund is set at $100,000 for the plan year, and your group only incurs $70,000 in claims, you either receive a portion or 100% of that money back (depending on the contract).

Pro: Premiums could be Reduced
If you’re a relatively healthy group, the medical premiums could be reduced depending on the medical risk profile of the company.

Pro: You have Access to Claims Data
You’ll have access to monthly claim reports that tell how your company is performing. You won’t have to “fly blind.”

Con: More Renewal Fluctuation

Because you’re judged on the group’s claims and medical risk profile, a bad claims year could result in higher renewals.

Con: Forfeit $$$ if Switching Carriers

Typically, you only receive the claim funding surplus if you renew with that specific carrier. With most level-funded products, you lose the surplus if you switch carriers.

Overall, there are many factors on which funding arrangement your company should utilize within the medical plan.  Company demographics, risk tolerance, broker support, and education strategies are all important factors to take into consideration as you navigate these waters.  

If you have any questions or want more information, feel free to email me at Christian@BenXConsulting.com

[1] https://www.peoplekeep.com/blog/fully-insured-vs-self-insured-health-plans