Level Funded vs Fully Insured vs Fully Insured

Bottom Line:

Fully Insured: Fixed monthly costs and no cash back = complete protection
Level Funded: Fixed monthly costs and potential for 50% Surplus refund = complete protection when TLO embedded
Self Funded: Some fixed costs and Employer risk up to Stop Loss. Real time financials where Employer holds Reserves

Health insurance is an essential part of managing healthcare costs and ensuring that individuals have access to necessary medical care. There are several different types of health insurance plans available, including level funded, fully insured, and fully funded plans.

The Kaiser Family Foundation’s 2020 Employer Health Benefits Survey, with responses from 1,765 employers, found that 16 percent of small firms with 3 to 199 employees use level-funded health plans. There were slight differences between the smallest firms with 3 to 49 employees (14 percent with level-funded plans) and those with 50 to 199 employees (17 percent).

How Level-Funded Plans Work

Level funded plans are a type of self-funded health insurance plan that is designed to provide employers with more control over their healthcare costs. In a level funded plan, the employer pays a fixed amount each month to cover healthcare expenses for their employees. If the healthcare costs for a given month are lower than the amount paid by the employer, the excess funds are returned to the employer. However, if the healthcare costs exceed the amount paid by the employer, the employer may be responsible for covering the additional costs.

With a level-funded plan, an employer pays a health carrier the same monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance that covers health care costs over a set dollar amount, and plan administration costs. If total claims costs are higher or lower than expected, the carrier makes adjustments at the end of the plan year in the form of a refund to the employer for lower claims or a premium increase on the stop-loss insurance renewal for higher claims.

Stop-loss coverage is an essential part of this arrangement because it limits an employer’s financial responsibility for claims over a certain amount, either on a per-employee basis or for the entire covered population.

What is “TLO” in Level Funding?

TLO or Terminal Liability Option is a feature of stop-loss insurance. It protects a plan sponsor of a self-funded health plan in the event that the plan sponsor reverts to a fully-insured plan at the end of the plan year. A Terminal Liability Option extends the stop-loss coverage for a period of three or six months after the termination of the policy.

Why Use TLO?

Most stop-loss insurance contracts have an annual policy period and cover claims paid during the policy period. A claim paid after the expiration of a policy period is usually covered by the next year’s stop-loss policy. However, if a plan sponsor chooses to go from a self-funded health plan to a fully-insured plan, there will be a gap in coverage. The new insurance policy will not cover claims incurred prior to the start of the policy period, and the old stop-loss policy will not cover claims paid after the expiration of the policy period.
A Terminal Liability Option covers this gap by reimbursing the plan sponsor for claims, both specific and aggregate, incurred during the policy period but not billed and paid until after the expiration of the policy period.

Requirements of TLO

A plan sponsor must decide at the beginning of a contract year whether it wants a Terminal Liability Option. There are extra premiums associated with the TLO, which must be paid at the beginning of the plan period.

Fully insured plans are the most common type of health insurance plan. In a fully insured plan, the employer pays a premium to an insurance company in exchange for coverage for their employees. The insurance company is responsible for paying all healthcare expenses, and the employer has no financial responsibility beyond the premiums paid.

Fully funded plans are a type of self-funded health insurance plan that is similar to a level funded plan. In a fully funded plan, the employer pays a fixed amount each month to cover healthcare expenses for their employees. However, unlike a level funded plan, the employer is not responsible for any additional healthcare costs that may arise.

Each type of health insurance plan has its own advantages and disadvantages. Level funded plans can provide employers with more control over their healthcare costs, but they may also expose employers to greater financial risk. Fully insured plans provide the greatest level of financial security for employers, but they may also be more expensive. Fully funded plans offer a middle ground between level funded and fully insured plans, but they may not provide employers with the same level of cost control as level funded plans.

A Health Care Refund?

What really makes employers take notice when discussing level-funded plans is the potential for a refund on their health care spending if the plan’s actual claims are lower than expected. The promise of a potential refund is the main reason employers like level funding. Any incremental savings can up the ante as to what benefits the employer is able to provide to its employees.

To maximize any potential refund, employers need to lay the groundwork in the plan contract. Depending on the contract language, the administrator can retain one-quarter or more of any excess funds. In some cases, the contract may require that unused claims amounts be rolled over for use in future plan years.

According to Donovan Pyle, CEO of Health Compass Consulting in Orlando, Fla., in one article he was quoted as saying, “Some carriers who offer level-funded plans will keep a percentage of any reserve leftover….Stay away from those products.” He also suggested that employers make sure the contract does not require the employer to renew its contract with the carrier to receive an available refund.

Consider Workforce Demographics

Employers experiencing a bad year for employee health claims could see the opposite effect on costs if stop-loss insurance premiums increase significantly. This is where the relative age and health of the workforce can make a significant difference. For example, in a recent SHRM Connect discussion on level-funded plans, one employer tried level funding for a year but was forced to return to a fully insured plan when higher-than-expected claims made its stop-loss insurance renewal prohibitively expensive. Another employer delayed pursuing level-funding as a result of a few clusters of high claims. When that claims experience improved over time, the employer shifted to level funding with strong enough results to receive a refund in its first year.

Effective risk management can help increase the chance that an employer will receive a refund from its carrier. Employers with level-funded plans can take advantage of the more comprehensive claims reporting these plans provide. This allows benefits consultants and employers to take advantage of opportunities and to manage risk more effectively. Claims information that is more comprehensive can provide greater opportunities to consider the full costs and benefits of implementing pharmacy benefit management or case management programs for specific claims, for example.

Buyer Beware

When setting up a level-funded plan, it makes sense for employers to discuss the move with their current carrier. But it is important to keep all options open. It behooves the buyer to go with the best carrier for level-funded plans. While some larger carriers offer prepackaged options that may not be open to negotiation or customization, employers should still look for opportunities to maximize the potential of these plans.

It is important to note that Employers should avoid “minimum premium” language in stop-loss insurance contracts. This could require employers to pay the insurer a minimum monthly premium to cover incurred claims even if the employer lays off employees during the year, thereby reducing the number of covered employees and dependents.

Stop-loss contracts should also have a 12/18 clause that pays claims over an 18-month period as long as the claims were incurred during the 12-month contract term.

Above all, it is imperative for HR and benefits professionals to involve the company CFO throughout the process of identifying and choosing a carrier for a level-funded plan, as this is a financial transaction that could very well impact cash flow and other aspects of a company’s finances.

Ultimately, the choice between level funded, fully insured, and fully funded health insurance plans will depend on the specific needs and priorities of each employer. Employers should carefully evaluate the costs and benefits of each option to determine which plan is best suited for their organization. Additionally, it is important for employers to work with an experienced insurance broker or consultant to ensure that they are making informed decisions about their healthcare coverage.