Are you thinking which health insurance option is right for your business—level funded or self funded? Understanding the difference could help you make smarter financial decisions and better manage your healthcare expenses.
In 2022, approximately 65% of covered workers in small firms were part of a plan that was either self-funded or level-funded, reflecting the growing popularity of these models compared to just 24% in 2019. As businesses continue to seek cost-effective ways to manage employee health benefits, these two approaches offer unique advantages. Knowing which funding model best suits your company can make a significant difference in managing healthcare expenses and mitigating financial risk.
Each option comes with different structures, risks, and levels of control, making it essential for businesses to understand the nuances. Small to medium-sized businesses and benefits professionals stand to benefit from a deeper understanding of how these plans operate and how they can impact both employers and employees.
Understanding Health Insurance Funding Models
Health insurance funding models are key in shaping how businesses manage the cost of providing healthcare benefits. Both level funded and self funded insurance plans offer alternatives to traditional fully insured plans, with varying degrees of risk and cost control.
What is Level Funded Health Insurance?
Level funded health insurance is a hybrid approach that offers predictable costs for employers while incorporating elements of self funding. In level funded plans, employers pay a fixed amount per month which includes the cost of administering the plan, claims payments, and stop-loss insurance to protect against unexpectedly high claims. The insurance carrier or third-party administrator manages the plan, ensuring the employer’s risk is capped at a certain level.
At the end of the year, if the company’s healthcare claims are lower than expected, unused claims dollars are often returned, adding a cost-saving incentive for businesses. These plans offer the stability of traditional fully insured plans while allowing for potential savings.
What is Self Funded Health Insurance?
In a self funded health insurance plan, the employer assumes the financial risk of providing healthcare benefits to employees directly. Instead of paying a fixed premium to an insurance company, the employer covers the actual cost of claims as they occur, usually with the help of a third-party administrator (TPA) to manage the plan. Self funded health plans give employers more control over their plan’s design and the flexibility to customize healthcare offerings to their workforce. However, self funding comes with a higher level of financial risk, especially if claims exceed expectations.
Key Components of Each Model
Cost Structure
Level funded health insurance involves paying a fixed premium each month, which covers the overall health insurance costs. This allows employers to predict their monthly expenses more accurately. Self funded health plans, on the other hand, operate on a variable cost basis. Employers pay claims as they arise, which can lead to lower overall costs during months with fewer claims but carries the risk of higher costs if claims are unexpectedly high.
Risk Management
Managing risk is a key aspect of both funding models. Level funded health plans manage risk by combining elements of fully insured and self funded models. Employers face a fixed premium each month, and the stop-loss insurance ensures that higher-than-expected claims do not jeopardize the company’s financial health. This makes level funded plans more attractive to small businesses that want predictable costs with some potential for savings.
In contrast, self funded plans place the financial risk squarely on the employer. While this offers the potential for savings if employee health claims are lower than expected, it also means the employer must be prepared for the possibility of paying higher claims out of pocket. Employers still need to be mindful of cash flow and reserves to cover unexpected spikes in healthcare expenses.
Flexibility and Control
When it comes to plan flexibility, both level funded and self funded models offer advantages over traditional fully insured health plans. Level funded plan provides a balance between the flexibility of plan design and the predictability of a fixed premium. While a self funded plan offers control in a way that the employer is paying claims directly. Therefore, they have full authority over the specifics of the plan, from coverage levels to wellness programs. This level of control allows businesses to design a health plan that aligns closely with their employees’ needs while potentially reducing costs by eliminating unnecessary services or coverage.
Financial Implications
Level funded plans offer budget stability by providing predictable monthly premiums that cover administrative costs, claims funding, and stop-loss insurance. This fixed payment helps businesses manage their healthcare expenses without facing unexpected spikes in costs. Additionally, unused funds at year-end can be refunded, allocated to other business resources, or offered as an incentive to promote healthier employee habits.
Self funded plans also have the potential cost savings, especially for companies with a healthier workforce. Since employers pay claims as they arise, there’s an opportunity to reduce overall costs compared to fully insured or level funded plans. However, this approach carries more financial risk, requiring careful planning and stop-loss insurance to mitigate potential high-cost claims.
Administrative Considerations
With level funded insurance, carriers and insurance brokers handle much of the administrative work, making it easier for employers to manage. Brokers guide plan selection and ensure compliance, while the insurance provider processes claims. This simplifies the administrative burden for businesses, offering more support compared to self funded models.
Self funded insurance can be more complex, as the employer assumes the risk and responsibility for paying claims. Often, businesses will partner with a third-party administrator (TPA) to handle claims and compliance. However, self funded plans typically come with more regulatory obligations, which can require additional resources to manage effectively.
Employee Experience
Employees under level funded plans generally enjoy the same benefits they would receive with fully insured plans, with the added benefit of wellness programs that encourage healthier lifestyles. These plans are often more transparent, offering tools and apps that make it easy for employees to manage and understand their health benefits.
In self funded plans, employees may also experience customized benefits tailored to their needs, but there could be concerns about the plan’s stability, especially in smaller businesses. How employees perceive these plans often depends on how well the employer communicates the structure and advantages of the self funded model.
Comparing Risk Levels
Imagine a small tech startup with around 50 employees considering their health insurance options. They opt for a level funded plan because it provides a fixed monthly premium and caps their financial risk through stop-loss insurance. This gives the startup the stability they need, allowing them to budget without worrying about sudden spikes in healthcare costs.
Now, think of a large manufacturing company with 1,000 employees. They decide to go with a self funded plan. With a more predictable claims history due to the size of their workforce, they feel comfortable assuming the risk, knowing they can save more by paying for claims as they arise. They use stop-loss insurance as a backup but rely on their financial capacity to handle fluctuations in claims throughout the year.
Regulatory and Legal Considerations
The regulatory environment for level funded insurance involves fewer complexities than self funded plans. Since level funded plans blend elements of fully insured models, they often follow similar state regulations, making compliance easier for businesses. These plans are more straightforward from a legal perspective, providing a smoother path for employers.
Self funded insurance falls under the federal Employee Retirement Income Security Act (ERISA), which preempts state laws. While ERISA provides a consistent framework across the country, navigating its requirements can be more challenging for employers. Self funded plans must adhere to ERISA’s stringent guidelines, requiring careful attention to regulatory compliance.
When to Choose Level Funded Health Insurance
Level funded health insurance might be the better choice if your business is a startup or small to midsize company with lower-than-average healthcare costs. This plan offers predictability with fixed premiums while giving employers some flexibility in plan design. If you’re looking for a balance between stability and cost-saving opportunities, a level funded plan could be ideal.
Self funded health plans, on the other hand, are often preferred by larger businesses with more predictable claims. For these employers, self funding provides maximum control over the plan, allowing for greater customization and potential long-term savings. While riskier, self funded plans can be highly effective for organizations with the financial capacity to manage fluctuating healthcare costs.
Summary of Pros and Cons
Both level funded and self funded health insurance plans come with their own set of advantages and drawbacks. Understanding these can help businesses make more informed decisions based on their size, financial situation, and goals.
Advantages of Level Funded Insurance
As mentioned, one of the main benefits of level funded insurance is the predictability of costs. Employers pay a fixed monthly premium, making it easier to budget for healthcare expenses. Additionally, the lower financial risk due to stop-loss insurance makes it an attractive option for smaller businesses.
Disadvantages of Level Funded Insurance
However, level funded plans often come with participation guidelines, meaning businesses need a certain number of enrolled employees to qualify. Another drawback is that these plans are not subject to state insurance mandates, which may limit certain coverage options.
Advantages of Self Funded Insurance
Self funded insurance provides employers with greater flexibility and control over plan design, allowing for customized benefits that fit the workforce’s needs. It also offers the potential for significant savings, particularly for companies with healthier employees and fewer claims.
Disadvantages of Self Funded Insurance
The downside to self funded insurance is the higher risk and unpredictability, as employers must cover claims as they arise. Additionally, managing a self funded plan can be complex when it comes to navigating intricate regulations.
Finding the Right Health Insurance for Your Business
Choosing between level funded and self funded health insurance is all about balancing cost, risk, and flexibility. Level funded plans provide stability with predictable costs, making them a great option for smaller businesses looking to mitigate financial risks. On the other hand, self funded plans offer more control and potential savings but come with greater risk and administrative complexity.
By carefully weighing these factors, your business can find a solution that aligns with both your financial goals and your employees’ healthcare needs. The key is understanding what matters most to your organization and making an informed choice that benefits everyone.
Ready to take the next step in securing the best healthcare solution for your business? Whether you’re looking for budget stability or full control over your plan, understanding your options will help you choose with confidence.
