Do you ever go to the store to buy toothpaste but have a hard time choosing between the 30 different varieties? What seems like such a singular product selection is made a little more difficult because of the plethora of brands and “flavors.”
Although not as trivial a purchase as toothpaste, not all health insurance plans are the same. There is no one-size-fits-all option that meets the needs of every employer — or employee.
In this blog, we’re discussing level-funded and fully-insured health plans, the pros and cons of each and the major differences between the two. As always when choosing health benefits for your employees, it’s crucial to research your options, and select what works best for your business.
What is Level-Funded Health Insurance?
Level-funded health plans are those in which employers pay a monthly set premium amount to a third-party administrator, commonly known as a TPA. These funds are placed in a reserve account for claims, administrative costs and premiums for stop-loss coverage. Stop-loss insurance reimburses employers for claims that exceed a set amount, negating the risk of financial fallout from catastrophic claims.
This type of health insurance is especially beneficial for small businesses that want to offer their employees quality health insurance but are not able to afford a fully-insured plan. In 2022, 36 percent of covered employees working at a small business were enrolled in a level-funded plan. Level-funded insurance plans also are advantageous for companies trying to achieve more control over their healthcare costs.
With level-funded health plans, the premiums are based on the claims history of a company’s employees. Businesses with 50 or fewer employees can calculate their premium using employee zip code, age and other similar cost factors.
What are Fully-Insured Health Plans?
With fully-insured health plans, employers pay a fixed per-member premium (typically monthly) to a third-party commercial insurance carrier that covers their employees’ medical claims. Although this type of plan does not cover deductibles and copays, its premiums pay for administrative expenses and stop-loss and employee fees. Basically, the premium funds collected by the insurance company are put into a large pool of money which is used to pay for claims across a group of employers.
A majority of employers utilize a fully-insured health plan because it removes most of the risk and places it with the insurance company. The result of that mitigated risk is plans that are typically higher in cost.
Level-Funded Insurance vs. Fully-Insured Health Plans: Key Differences
Financial Risk
One of the biggest differences between fully-insured health plans and level-funded insurance is the level of risk. With fully-insured health plans, the risk is primarily on the insurance company, not the employer, but premiums are usually higher because of this coverage. Level-funded insurance results in employers assuming part of the risk, but that’s where stop-loss insurance comes in — to limit financial responsibility for excessively high claim costs.
Costs
The premiums for fully-insured health plans typically are higher than level-funded ones. Why? The cost of fully-insured plans includes fees for not only claims but also administrative fees and stop-loss coverage. In level-funded insurance, though, employers have the potential to split with the insurance carrier any funds left at the end of the year after all claims are paid.
A level-funded plan can help small businesses budget for and better control rising costs but is not recommended for companies with employees who have major illnesses or take high-cost prescription medications. Level-funded plans also come with lower taxes. Such health plans are exempt from state taxes, health insurance taxes and Affordable Care Act taxes on insurance premiums.
Regulation
Due to stop-loss regulations, level-funded health insurance is not available in every state. In addition to meeting the standard for minimum essential coverage, this type of health plan must offer essential health benefits and comply with the Employee Retirement Income Security Act (ERISA) and certain provisions of the Affordable Care Act (ACA).
Fully-insured health insurance plans are subject to state regulations and some federal minimum mandates and standards, including HIPAA and COBRA. However, the responsibility for complying with these regulations is typically outsourced to insurance carriers.
Pros and Cons of Level-Funded Health Insurance
Advantages of a Level-Funded Health Plan
Less Risk
The stop-loss insurance included in level-funded plans minimizes an employer’s risk exposure by negating excessive claims. Businesses are protected from catastrophic medical claims or a series of them that would otherwise likely severely impact them financially.
Cost Savings
Although level-funded plans certainly can be more expensive, they offer cost savings in other ways. First, there is the potential for a surplus refund. Next, even if the plan is more costly, an employer can spread the payments over 12 months.
Then, there are the tax benefits. Level-funded plans are exempt from state taxes, health insurance taxes and Affordable Care Act taxes on insurance premiums.
Increased Flexibility
The flexible structure of level-funded insurance gives employers more control over the customization of their plans. Businesses can select coverage options that best meet the specific needs of their employees.
More Predictability
Employers who prefer the predictability of fully-insured plans can utilize the level-funded option to receive a refund for unused employee healthcare. They know exactly what they are paying monthly for health insurance, enabling them to better manage their budget.
Disadvantages of a Level-Funded Plan
Level-funded health plans typically are more expensive than fully-insured ones. Also, level-funded insurance can, depending on the carrier or third-party administrator, be more complicated than fully-funded health plans.
Pros and Cons of Fully-Insured Health Plans
Advantages of Fully-Insured Health Plans
Financial Predictability
Businesses of all sizes appreciate financial predictability, especially when inflation is high and costs continue rising. Fully-insured health plans offer this predictability by ensuring employers know in advance their premium costs. They’re able to proactively budget and plan for these consistent costs and face fewer monetary variances. A bonus? Fully-insured health plan premiums are tax-deductible.
Reduced Risk
With a health insurance company dealing with employee claims, employers who utilize fully-insured plans lower their financial risk. They also enjoy a lack of price volatility because the carrier covers any overages due to unexpected claims.
Convenience
The administrative duties necessary for administering a health plan are time-consuming. Most employers want to be dealing with growing their business, not filing insurance claims. Fully-insured health plans enable employers to hand the administration of employee insurance off to the insurance company, a feature far more convenient than with self-insured plans.
Disadvantages of Fully-Insured Health Plans
It probably won’t surprise you that fully-insured health plans are sometimes more expensive than self-insured ones. That convenience we just mentioned comes at a cost — and a higher tax burden. These plans also offer less customization but are regulated more.
Higher Costs
Because insurance companies who offer fully-insured health plans negotiate rates directly with healthcare providers, the premiums and other costs of care are typically more expensive than those of self-insured plans. Employers who select fully-insured health plans pay premium taxes of two to three percent and do not get any refunds for unused care. And, the price negotiation process has to be completed each year.
Less Customization
With fully-insured plans, employers have limited flexibility to customize plans. The insurance carrier determines the design of the plan, the network it includes and the premium rates. That means employees have limited control over their care options. Plus, insurance companies often require prior authorization for certain treatments or medications, which can be frustrating for employees.
More Regulations
All fully-insured health insurance plans are subject to state regulations and some federal minimum mandates and standards (i.e., Affordable Care Act, HIPAA and COBRA). Self-funded plans are only regulated federally under the Employee Retirement Income Security Act (ERISA).
Conclusion
Whether you choose a fully-insured health plan, a level-funded one or some other type of health insurance for your employees, it’s crucial to weigh the pros and cons of each before making your decision. Because understanding the details of such plans often is confusing, it’s best to enlist the help of experienced employer services professionals.
At StenTam, we provide industry-specific solutions for your workforce, ongoing compliance reviews and consulting and more. We’ll help you build and continue to refine best-in-class benefits solutions that work best for your business. Contact us today to get started!
