Selecting the right health insurance plan for your business can feel like a big decision, especially if you’re a small or medium-sized company. Employers need to strike a balance between offering quality healthcare benefits and managing healthcare expenses efficiently. Understanding the options such as level funded plans and fully insured plans can make a significant difference in cost management, employee satisfaction, and long-term financial health.
Both types of plans have their pros and cons, and knowing the difference helps in making an informed choice tailored to your company’s specific needs.
Understanding Level Funded Plans
Level funded plans offer a hybrid approach between traditional fully insured and self-funded plans. With this plan, employers pay a fixed monthly amount, which covers administrative costs, stop-loss insurance, and a claims fund for paying medical claims. The advantage of level funded health plans is that they provide cost control while offering a potential refund at the end of the year if claims costs are lower than expected.
These plans are particularly beneficial for small to mid-sized businesses with a relatively healthy workforce that may want more flexibility in how they manage healthcare expenses but still want to limit their financial risk. The level funded health plan also allows for a level of customization in wellness programs and other benefits, helping employers tailor plans to meet their specific needs.
Understanding Fully Insured Plans
In a fully insured health plan, the employer pays a fixed premium to an insurance company that covers the cost of employee claims, administrative costs, and profit for the insurance provider. With this structure, the insurance carrier assumes all the financial risk, ensuring that the business isn’t responsible for paying claims directly.
This type of plan is straightforward—businesses pay the premium, and the insurance company manages everything else, including absorbing the risk if claims costs exceed expectations. This is ideal for businesses that want standardization and predictability in their health insurance plan costs. The trade-off, however, is that the fully insured plan typically offers less flexibility than other options.
Key Differences Between Level Funded and Fully Insured Plans
Understanding the key differences between these plans is essential for making the best decision for your business and its unique needs.
Financial Risk: In level funded plans, the employer assumes little to no risk, potentially receiving a refund if claims costs are low. In fully insured plans, the insurance company takes on all the risk.
Cost Variability: Level funded health plans typically have lower monthly premiums and can result in more savings if fewer claims are made, while fully insured plans have a fixed, predictable premium regardless of actual claims.
Flexibility: Level funded plans offer more customization in terms of benefits and wellness programs. Fully insured plans are more standardized and offer less room for tailoring.
Administrative Responsibility: Employers with level funded plans may need to work with a third party administrator to manage claims and compliance, if the carrier does not offer those services. Fully insured plans reduce the employer’s administrative burden since the insurance carrier handles everything.
Employee Benefits and Satisfaction: Fully insured plans provide consistency and predictability, while level funded plans may offer more generous benefits if fewer claims are made.
Pros and Cons of Level Funded Plans
While level funding can provide significant cost savings and greater control over plan design, they also come with certain complexities and participation requirements that may not be ideal for some companies.
Advantages of Level Funded Plans
A key feature of level funded plans is the structure of stop loss insurance, which kicks in when catastrophic claims exceed a certain threshold. This ensures that the employer isn’t left covering higher than expected claims. Another key benefits are the greater control over plan design allowing businesses to customize their health benefits and the potential cost savings wherein a business may receive a refund for the unused portion of the claims fund.
Disadvantages of Level Funded Plans
Despite these benefits, level funded plans come with some challenges. Managing the plan can be complex, sometimes requiring the involvement of a third party administrator, if the carrier does not offer those services. Moreover, these plans typically have strict participation guidelines, requiring a certain number of employees to participate in the plan, which can limit their feasibility for smaller businesses or companies with fluctuating workforce sizes.
Pros and Cons of Fully Insured Plans
For businesses seeking financial predictability and simplified management, fully insured plans are a popular choice.
Advantages of Fully Insured Plans
The primary advantage of a fully insured plan is the financial predictability it offers. Businesses pay a set premium to the insurance carrier, and the insurer handles all the costs associated with paying claims and covering administrative costs. This fixed structure gives companies peace of mind, knowing they won’t be surprised by unexpectedly high medical bills. Additionally, the administrative burden is significantly reduced with fully insured health plans, as the insurance provider handles everything from compliance with regulations to processing claims, making it a much simpler option for employers.
Disadvantages of Fully Insured Plans
On the downside, fully insured plans tend to be more expensive over time, as employers are paying for the certainty and stability of not assuming any financial risk. This often leads to higher potential costs for companies, especially if the workforce is generally healthy and not using the plan as much. As mentioned, businesses also have less control over benefits and coverage options, as fully insured plans tend to be more standardized, limiting employers’ ability to customize healthcare benefits to better suit their workforce’s specific needs.
When to Choose a Level Funded Plan
Level funded plans can be a great choice for businesses that want more control over their healthcare spending and benefits. These plans are especially suitable for small to medium-sized businesses with a stable and relatively healthy workforce.
Companies looking to balance their budget constraints with the potential for cost savings may find level funding appealing, as it offers a chance for refunds if claims costs are lower than expected.
Additionally, this plan is ideal for employers with a strong ability to educate their employees and manage healthcare spending. Businesses that value customization in their health benefits and want flexibility in plan design will benefit most from this option.
When to Choose a Fully Insured Plan
A fully insured plan is often the best option for businesses that have a relatively unhealthy workforce and prioritize stability and simplicity in their health insurance. These plans are well-suited for companies that are okay with the typical renewal increase they receive year over year.
Businesses that are less comfortable with the variability of potential refunds and want the reassurance of a consistent, stable health plan without having to handle additional administrative tasks will likely find fully insured plans to be the better choice.
With fully insured plans, compliance is straightforward since they come with ACA-mandated benefits, and the insurance carrier manages all regulatory tasks. In level funded plans, there’s more flexibility, but the TPA or carrier typically handles compliance with both federal and state regulations.
Decision-Making Framework
Choosing the right health insurance plan requires a careful assessment of your company’s specific needs and priorities. Below are key factors to consider when making your decision:
- Assess your business size, employee demographics, and the overall health of your workforce to understand the scope of coverage needed.
- Evaluate your company’s administrative capacity, compliance, and plan design, especially if considering a more flexible option like level funded plans.
- Consider the financial impacts, including potential cost savings or the stability of fixed premiums.
- Factor in employee preferences, ensuring that the chosen plan supports employee satisfaction by offering a balance of coverage, affordability, and benefits.
- Consult with insurance professionals or brokers to gain insight into which plan (level funded or fully insured) best aligns with your company’s goals and risk tolerance.
How to Transition Between Plans
If your business is moving from a fully insured plan to a level funded plan, the first step is to assess your company’s claims history and overall financial risk tolerance. You’ll need to work with a third party administrator or broker to set up the new plan, including designing the benefits package. Regular communication with employees is crucial to ensure a seamless switch and address any concerns they may have.
For businesses transitioning from level funded to fully insured, the process focuses on simplifying your plan structure. This shift often involves less administrative work, but it’s important to keep employees informed about changes to their health benefits and coverage details during the transition.
Comparing the Long-Term Impacts
In the long run, the choice between level funded and fully insured plans can have significant cost implications for your business. A level funded plan might offer cost savings, especially in years with fewer claims. In contrast, the stability of a fully insured plan can be easier to budget for over time, although it may come at a higher cost overall.
Beyond financials, the type of plan you choose can also influence employee retention and satisfaction. A well-designed, flexible level funded plan may improve employee engagement, while a consistent, predictable fully insured plan offers reassurance and stability.
Making the Best Health Plan Decision for Your Business
Picking the right health insurance plan can have a big impact on your company’s finances and employee satisfaction. Both plans offer distinct benefits and challenges, but what really matters is aligning your choice with your business goals, financial situation, and the unique needs of your team.
Don’t hesitate to reach out to an insurance professional for advice—they can help you navigate the complexities and find the perfect fit for your company. In the end, the right plan can help you control costs, manage risk, and keep your employees happy and healthy.
