There are three ways to fund a medical plan: fully insured, self-funded, and level-funded, which is a blend of the first two. These funding methods all have the same cost components—claims administration, pharmacy, and stop-loss insurance—but differ in the amount of flexibility and risk involved. Essentially, the more flexibility you have, the more risk you’re taking on.
The risks come from claims. In a health insurance plan, there’s always a chance that the total cost of claims will exceed the funds set aside. Since health plans can’t simply stop paying covered claims when money runs out, the plan administrator must have a strategy in place to manage that possibility.
Fully Insured: Low Flexibility, Low Risk
In a fully insured plan, the insurance carrier selects all cost components. They take on all the risk but also keep any profit gained when claims are lower than funding.
As an employer, your role in a fully insured health plan is pretty limited. You choose what to offer your employees from the carrier’s pre-set menu and purchase that coverage through monthly insurance premiums. The insurance carrier is then responsible for claims administration and generally maintaining the plan.
Level-Funded: The Middle Option
A level-funded plan is an option for employers who are unsure about self-funding or want to test the waters before making that move. Level-funded employers still pay a set premium each month, which are set aside to pay for claims, administrative fees, and stop-loss (which is, essentially, insurance for your insurance). Level-funding may be a budget-friendly option, due to the consistent premium and the fact the health plan will never pay more than the billed premium.
Level-funded plans offer some of the flexibility that comes with a self-funded plan. Also, you could receive a surplus refund if the plan’s claims are lower than the premium for the year. For employers using level-funding as a stepping stone to self-funding, this arrangement can offer you more insights into the costs of your plan than you typically get from a fully insured carrier.
Self-Funded: High Flexibility, High Risk
With a self-funded plan, you own all the risk and the control. You can “unbundle” your cost components and change plan design to suit your company’s goals (within reason), which can make for some significant savings. If the plan performs well, the plan keeps the profit, so you can put that towards next year’s claims or pass on those savings to your employees.
To keep the plan running, you’ll still pay a fee to a third party to administer the claims and provide stop-loss insurance. But unlike fully insured and level-funded options, these don’t have to be the same carrier. Essentially, if one administrator makes the claims process for your employees, but a different carrier does a great job of keeping pharmacy costs low, you don’t have to choose between them. You can have a different carrier focus on just a piece of the health plan.
One Size Does Not Fit All
While self-funding might sound like the way to go, that’s not always the case. In fact, fully insured, level-funded, and self-funded arrangements each carry their own benefits and downsides. Deciding which one to employ for your health plan depends on a number of factors that are unique to every business and organization. Need help determining what’s right for your needs? Keep an eye out for our upcoming post on evaluating your funding type.
