While the Affordable Care Act (ACA) has resulted in significant health insurance plan premium increases, employers continue to seek the magic bullet to manage health care costs within the constraints of the ACA while still providing a comprehensive benefits package to their employees.
Historically, self-funded health plans have only been utilized by larger employer groups. However, the ACA’s small group community rating rules continue to result in unsustainable premium increases for small employers, making self-funding a viable alternative to ACA in the form of level-funded health plans.
Smart Business spoke with Craig Pritts, sales executive at JRG Advisors, about this self-insured hybrid health plan and whether it makes sense for your organization.
What is a level-funded health plan?
A level-funded health plan is an underwritten administrative services only or ASO product with integrated stop loss coverage offered by insurance companies and third party administrators (TPAs). As the name suggests, a level-funded plan has fixed or level monthly costs associated with the funding of the employees’ health coverage.
The level cost typically comprises three components: a claims allowance, a TPA fee and a stop-loss coverage premium. The claims allowance is utilized to fund employee medical costs. The TPA fee pays for the administration of the plan, which includes adjudicating claims. The stop-loss premium is utilized toward the coverage to protect the employer against any catastrophic claims.
How does a level-funded plan work?
As claims are incurred on a monthly basis, the insurance company or TPA pays them out of the claims allowance. If there is an extraordinary claim on an individual or aggregate basis, the stop-loss insurance kicks in. At no time does the employer pay more than the level premium amount.
At the end of the plan year, the employer group performance is evaluated. If the group performs well with little or no claims, a portion or all of the unused claim allowance is returned to the group. Additionally, the group could benefit from a lower rate for the following plan year since the monthly allowance and stop-loss premium should be less. If the group performs as originally expected, there is minimal or no premium increase — a stark contrast to the ACA world.
What if the employer has a bad year?
The stop-loss coverage component of a level-funded plan protects the employer in the event of high claims or a catastrophic claim within their employee population. Again, the entire concept of a level-funded plan is that the employer never has to pay more than the level monthly premium.
Since these plans are medically underwritten, it could be realistic to expect a premium increase at renewal. A small employer group in this scenario has an advantage over its larger group counterparts. They can simply revert back to a community rated (non-underwritten) ACA plan, which would likely be to their benefit financially.
How can level-funded plans benefit employers?
Level-funded plans offer the best of both worlds, combining features of fully and self-insured plans. They offer the cost predictability of fully insured while eliminating the risk exposure of self-insured plans. An employer only pays for incurred health care costs and can share savings at renewal if the plan year ran well.
Level-funded plans do not have the same regulatory requirements as fully insured plans, which eliminates the administrative burden on employers and reduces overhead expenses.
What’s the takeaway for employers?
Level-funded plans are more complex than fully insured plans, but also can provide employers a long-term strategy and solution to combat the ACA community rating rules and subsequent surprise premium increases. Employers should consult with an experienced insurance professional who is well versed in the structure, features, implementation and costs of level-funded health plans to determine if this alternative funding strategy is right for their company.
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