As more companies enroll in health plans to provide employee benefits, many businesses still struggle to maximize the value of their insurance options. Understanding the difference between traditional insurance and level funded plans can help employers make smarter decisions, ensuring they get the most from their health coverage. Both approaches offer distinct advantages, but the key is finding the one that aligns with your budget, your employees’ needs, and your company’s long-term goals.
Choosing the right health insurance plan can have a direct impact on your bottom line. Whether you opt for the stability of a fully insured plan or the flexibility and cost savings of a level funded plan, it’s essential to assess your business’s unique requirements. For many small and midsize businesses, selecting the right plan isn’t just about offering coverage—it’s about controlling costs, managing risk, and providing meaningful benefits that keep employees happy and healthy.
Understanding Traditional Insurance
Traditional insurance is the go-to option for many businesses. In this type of plan, the insurance carrier bears the financial risk of employees’ healthcare expenses. Employers pay a fixed monthly premium to the insurance provider, and that covers the healthcare costs of their employees.
Since the insurance company takes on the responsibility of paying claims, employers don’t have to worry about claims costs fluctuating throughout the year. This setup provides predictability in terms of monthly expenses, and the administrative costs are typically handled by the insurer.
Key features of traditional insurance plans include comprehensive coverage options and a straightforward payment structure. These plans can be fully insured, where the insurance company assumes all the risk, or self-insured, where the employer takes on more responsibility for covering healthcare costs. Fully insured plans, in particular, are popular among small businesses due to their simplicity, while larger businesses might explore self-insured plans for greater cost control.
Exploring Level Funded Insurance
Level funded insurance offers businesses a hybrid approach to managing healthcare expenses. With level funded plans, employers pay a fixed monthly amount, which includes administrative costs, anticipated claims, and stop-loss insurance. This structure is designed to offer the cost stability of traditional insurance while giving employers more control over their health plan.
Key features of level funded plans include the potential for substantial savings if actual employee claims come in lower than anticipated. This approach also provides transparency, as employers have more insight into how their healthcare dollars are being spent. Many businesses appreciate the flexibility level funded plans offer, as they can provide cost control without the unpredictability associated with fully self-funded health plans.
Cost Structure Comparison
In traditional insurance, employers pay a fixed monthly premium to the insurance carrier. This premium covers claims, administrative fees, and the insurer’s profit. While predictable, employers won’t see savings even if claims are low. In level funded insurance, employers also pay a fixed monthly amount, but it includes estimated claims costs, administrative fees, and stop-loss insurance. If claims are lower than expected, employers may receive a refund, offering potential savings.
Understanding risk pools also plays a key role in determining insurance costs. In traditional insurance, employees are part of a larger risk pool managed by the insurance company. This means that premiums are calculated based on the overall health risks of the group.
In level funded plans, employers are responsible for their own claims pool, meaning the company’s specific employee health trends play a bigger role in determining costs. As a result, businesses with younger, healthier employees may see significant savings with level funded health plans compared to traditional insurance, where they share risks with a broader pool.
Administrative Costs: Traditional vs. Level Funded
In traditional insurance, administrative costs are baked into the premium. The insurance carrier manages everything from claims processing to compliance and paperwork, allowing employers to focus on their business without worrying about managing the day-to-day details of employee healthcare. This can be a relief for smaller businesses with limited resources. However, the convenience comes at a cost, as traditional insurance plans often include high administrative fees in their monthly premiums.
Level funded plans can offer opportunities for savings when it comes to administrative costs. While these plans also include administrative expenses in the monthly premiums, there’s a possibility for businesses to save up to 25% compared to fully insured plans. This is largely due to the fact that level funded plans provide more transparency, and employers have more control over how healthcare dollars are spent. Additionally, level funded plans typically work with a third-party administrator (TPA) to manage claims and other administrative tasks, which can be more cost-effective compared to traditional insurance carriers
Risk Management and Flexibility
Traditional insurance relies on risk-sharing, where the insurance company absorbs the financial risk of covering employee healthcare costs. Employers pay fixed premiums, and the insurer handles claims, making this a low-risk option for businesses. In level funded plans, the risk is partially shared. Employers pay fixed monthly costs that include stop-loss insurance to protect against high claims, but they also have the chance to benefit from lower claims through refunds.
Flexibility in plan design is another key difference. Traditional insurance offers limited customization, with pre-packaged plans provided by the insurance company. In contrast, level funded plans give businesses more flexibility, allowing them to adjust benefits, wellness programs, and other elements to fit employee needs. This flexibility allows for greater control over healthcare costs, as businesses can design a plan that suits their workforce and financial goals.
Plan Design and Coverage
Coverage levels in both models vary based on the plan chosen. Traditional plans usually offer broad coverage with access to larger networks, while level funded plans can be designed with similar coverage but offer the opportunity for financial savings. Both models allow access to networks of healthcare providers, but level funded plans may offer more flexibility in choosing specific networks or providers.
Employee satisfaction depends largely on how well a plan meets their healthcare needs. Traditional plans are straightforward, with clear benefits and wide networks, which may increase satisfaction. However, with level funded plans, employees may appreciate the tailored benefits and wellness programs, which can enhance engagement and overall satisfaction with their health coverage.
Regulatory and Compliance Considerations
Traditional insurance plans come with clear compliance requirements, typically handled by the insurance carrier. Employers rely on the carrier to ensure the plan meets federal and state regulations, including the Affordable Care Act (ACA) and other relevant laws. Level funded insurance plans, though more flexible, are similarly managed by the insurance provider. This means that the carrier ensures compliance with all necessary laws, relieving the employer of regulatory burdens. However, businesses must be aware of any state-specific regulations, as these can impact plan design and costs in both types of insurance.
Financial Implications
When considering health insurance, cash flow plays a significant role in decision-making. Traditional insurance offers fixed premiums for 12 months, providing predictable costs that won’t fluctuate due to employee healthcare claims. This stability can be helpful for financial planning but doesn’t offer opportunities for cost savings if claims are low.
Level funded plans, on the other hand, provide businesses the potential to save on premiums. This can improve cash flow throughout the year, as businesses benefit from lower fixed costs. Additionally, if claims are lower than expected, employers may receive a surplus at the end of the year, which can further enhance financial stability.
Both traditional and level funded models have reserve and surplus requirements. In traditional insurance, the insurance carrier holds reserves to cover claims. With level funded plans, businesses may also need to maintain reserves, but the possibility of surplus offers a financial incentive that traditional insurance lacks.
Choosing the Right Plan for Your Business
Selecting the right health insurance plan depends on your company’s specific needs. Here are some key factors to help guide your decision:
- Business Size and Industry: Small to midsize businesses often benefit from the cost control and flexibility of level funded plans, while larger companies may prefer the predictability of traditional insurance.
- Employee Demographics and Needs: Consider the health needs and demographics of your employees when deciding which plan offers the best coverage.
- Long-Term vs. Short-Term Goals: Level funded plans can offer long-term cost savings, while traditional insurance provides immediate stability and predictable premiums.
Pros and Cons Summary
Traditional insurance offers businesses the benefit of predictable premiums and minimal financial risk, as the insurance carrier covers claims. Employers enjoy comprehensive coverage, access to wide provider networks, and little administrative involvement. However, there are no savings opportunities if claims are low, and businesses may face higher long-term costs due to fixed premiums and limited flexibility in plan design.
As mentioned, level funded insurance provides potential savings, allowing businesses to save up to 25% on premiums with the possibility of a surplus if claims are low. This option offers greater flexibility in plan design and more control over healthcare costs. However, it does come with certain downsides: level funded plans are not subject to state insurance mandates, which can affect coverage in some regions, and businesses need a minimum number of employees to enroll. Despite these considerations, the savings and customization make it a popular choice for small to midsize businesses.
Finding the Right Health Plan for Your Business
Giving the right health plan benefits is more than just a financial decision—it’s about ensuring the well-being of your employees while managing costs. Traditional insurance gives you stability with predictable premiums, but level funded plans offer the chance to save money and customize coverage to meet the specific needs of your team.
For small to midsize businesses, factors such as cost savings and increased control over healthcare expenses makes level funded plans an attractive option. Understanding these differences allows you to confidently select the best fit for your business, ensuring your employees get the coverage they need while you keep your budget in check.
