If you’re a financially stable small or midsize business, and you seek a flexible benefit plan for your employees that also manages to keep costs in check, you’re likely finding limited options. Fully insured plans tend to restrict options that are both creative and flexible, while traditional self-funding models may also be unfeasible without verifiable claims data to identify risk and potential monthly claims. As a result, many employers end up paying sharp increases each year due to being pooled with other small plans.
Additionally, groups with 50 or less employees will eventually be subject to the Affordable Care Act’s (ACA) modified community rating rules, which combines large populations based on data that may or may not relate directly to each individual’s level of health. This may result in employees being charged significantly higher premiums than they probably deserve based on their specific health levels.
Thankfully, there is an alternative funding strategy – level funding – that enables small and midsize businesses to pay a consistent premium each month while controlling their plans and accessing claims data as well under a self-funding model. Essentially, level funding allows businesses to benefit from the advantages of self-funding – including avoidance of premium taxes, state health coverage mandates and certain ACA-related fees – while mitigating disadvantages such as unpredictable cash flows and external management fees.
How Level Funding Works
As the name suggests, level funding offers fixed or level monthly costs for employee health coverage. With a level-funded plan, your business works with a third-party administrator (TPA) to come up with the business’ expected claims for the year. To that amount, the TPA adds a “claims corridor,” or cushion, which typically is between 15-25 percent. For example, if your company is expected to generate $100,000 in claims during a given year, then rates will be based on $125,000 in claims. Combined with administrative fees and stop-loss insurance, this becomes the annual premium. That amount is then divided by 12 to arrive at the total monthly cost.
As the year progresses, claims will come in, and the TPA will pay them. If any claims dollars remain from the estimated claims bucket at the end of the year, your business will receive a refund. If your business’ claims exceed that allotted amount, stop-loss insurance will fund the difference. Your business will not be liable for those additional claims charges.
For financially stable, low-risk businesses, level-funding products often are lower in cost than similar products offered under the ACA’s community rating rules.
Details Matter in Controlling Plan Costs – Level Funding Provides Them in Abundance
Businesses with level-funded plans have access to detailed claims reporting that shows how and where employees overspend and underspend. This valuable information can enable you to customize your health plan to control costs while better serving your employees based on their historical spending and spending patterns.
You can also use this information to identify trends that may contribute to higher overall plan costs. If, for example, a large percentage of employees are using emergency rooms for care that could just as effectively be delivered in urgent care centers or primary care doctors’ offices, you can then develop and deploy communications that educate employees on which options are best for different scenarios. The same idea holds true in terms of identifying trends in prescription drug usage—by spotting trends in the data, you can educate employees on strategies (e.g., generic vs. name-brand medications) that save them, and you, money. Finally, your business can keep the costs of a level-funded plan in check through disease management programs.
Businesses that utilize data to direct appropriate employee education strategies save significant dollars through level funding. While it requires a real commitment to data analysis and employee education, it’s a model that delivers claims data access, flexibility and a real opportunity to control costs year in and year out.
To learn more about level funding opportunities for your business, please contact Ross W. Farro, President, Cleveland Market, Marsh & McLennan Agency, formerly Benefits Resource Group. Marsh & McLennan partners with privately held businesses, individuals and public companies that seek solutions that go beyond traditional employee benefits services to help them better manage their bottom line. You may contact Ross by phone at 216-393-1820 or by email at Ross.Farro@mma-mw.com.
Disclaimer: This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.