Why Small Businesses Should Consider Level-Funded Health for Their Employees

Recently, insurances companies, like United Healthcare, returned $1.1 billion in premiums to policyholders under the Affordable Care Act. Workers were notified in form letters from insurers this month that a “rebate” had been sent to their employer, who “must follow certain rules in distributing the rebate to you.” But even when employees paid a significant share of the premium, many employers are still deciding how, when or even whether to share the cash.

The law gives employers up to three months and considerable discretion to decide how to spend the employees’ money, so long as it is eventually used to benefit insurance plan participants. And while some employers are returning the money directly in paychecks, or planning “premium holidays” that increase take-home pay, others are weighing different options, benefits consultants said, like reducing next year’s premium, or spending the refund on so-called wellness programs or level-funded health plans.

Even if your company didn’t receive a rebate, the issue begs the question, what are the best insurance options for your employees? If you run a small business serve of more than 10 employees, you may well want to consider a level-funded plan to save up to 30 percent on health care costs, an enticing opportunity for any small business.

Now that the American Health Care Act has failed to advance, small businesses, and the brokers who serve them, are looking for ways to manage health care costs within the status quo of the Affordable Care Act (ACA).

As it did with individuals, the ACA community rating methodology benefitted some while burdening others. The community rating methodology spreads the costs associated with the differing risk of group (or individual) profiles over the entire risk pool. In the case of small groups, older and/or sicker groups benefitted from lower rates while younger and/or healthier groups pay more. Those small groups for which this “peanut-buttered” risk solution has resulted in increases to their health insurance may want to look at level-funded plans, an alternative to fully-insured plans.

Large groups have long been able to self-insure their health care coverage. Under a self-insured plan, employers directly cover the costs of their employees’ medical expenses. The employer is not subject to all of the required coverages, or essential benefits, that are core to the ACA. And, the employer is covered against extraordinary costs through participation in an insurance captive or through stop-loss insurance. Small groups, however, have not had the scale, systems, process or sophistication to self-insure. In short, it has been too onerous and risky for them to self-insure. That’ when to consider level-funded plans, which are essentially pre-packaged self-insured health plans with low attachment stop-loss coverage, that are now being marketed in most states to groups as small as 10 employees.

Here’s how a level-funded plan works. First, like large-group plans, level-funded plans are underwritten. Consequently, they tend to be attractive to healthier groups. A census is provided to the third-party administrator (TPA), who determines a monthly cost comprised of three elements, each roughly representing one-third of the monthly payment: a claims allowance, a TPA fee, and a premium for stop-loss coverage.  This consistent, or level, amount is funded by the company each month.  The claims allowance goes into an account from which employee medical costs are funded.  The TPA fee goes towards paying for the administration of the program, including adjudicating claims.  And the stop-loss premium goes towards that coverage.  As claims come in on a monthly basis, the TPA pays them out of the claims allowance.  If there is an extraordinary claim on an individual or aggregate basis, the stop-loss kicks in.  In no case does the employer have to pay more than the level amount.

At the end of the year, the performance of the group is evaluated.  If the group has performed well, some of that claim allowance may be returned to the group. And the group may benefit from a lower “rate” for the next year on the basis that the monthly allowance should be less, as should the premium for the stop loss.  If the group performs as originally expected, there should be little or no increase — a rarity in the ACA world.

But what if the group has a really bad year? In a bad year, the stop-loss kicks in to protect the employer.  Again, the entire concept of the level-funded plan is that the employer never has to pay more than the level monthly amount.  So, for small groups, the question is why not explore a level-funded plan?  With savings of up to 30 percent, protection against extraordinary costs, and the ability to fall back on an ACA plan, there is very little reason not to do so.

Considering a level-funded health plan for your employees? Give us a call at 303-721-1145.