In the intricate world of healthcare financing, level funded health insurance has emerged as a popular option for many employers. This model blends elements of fully insured and self – insured health plans, offering a unique approach to managing healthcare costs. Let’s explore in detail how it functions, its benefits, drawbacks, and how it stacks up against other insurance models.
Basics of Level Funded Health Insurance
Definition
Level funded health insurance is a hybrid plan. In a fully insured setup, an employer hands over a fixed premium to an insurance carrier. The carrier then shoulders the entire risk of paying out claims for the employees. On the other hand, in a self – insured plan, the employer directly bears the financial brunt of employee claims. Level funded health insurance combines aspects of both.
The Core Idea
With level funded health insurance, employers pay a pre – set, fixed monthly premium, much like in a fully insured plan. However, there’s a twist. Employers also set aside money in a reserve account. This reserve account steps in to cover claims that go beyond a certain limit, known as the attachment point. The insurance carrier usually manages the plan, handling tasks like claim processing. But when claims exceed the attachment point, the employer is financially responsible.
Key Components of Level Funded Health Insurance
Premium Calculation
Actuarial Analysis
Insurance carriers rely on actuarial data to calculate the level funded premium. Actuaries look at factors such as the age, gender, and health status of the employee group. For example, if a company has a large number of older employees, the premium will likely be higher. Older people generally need more medical care. Actuaries also study historical claims data from similar groups. If companies with similar demographics in the same industry had high claims in the past, the premium will be adjusted accordingly.
Administrative Costs
The carrier adds administrative costs to the premium. These costs cover things like claims processing, customer service, and managing the network of healthcare providers. Administrative costs can vary. A plan with a vast network of providers may have higher administrative costs. This is because the carrier has to manage relationships with more doctors, hospitals, and other medical facilities.
Stop – Loss Insurance Premium
The cost of stop – loss insurance is a crucial part of the premium calculation. Employers buy stop – loss insurance to limit their financial exposure. The stop – loss insurance premium depends on the attachment point (the level at which stop – loss coverage starts) and how volatile the expected claims are. A lower attachment point means a higher stop – loss insurance premium. The carrier takes on more risk in such cases.
Reserve Account
Purpose of the Reserve Account
The reserve account is a vital part of level funded health insurance. It acts as a buffer for claims that exceed the attachment point. Employers contribute to this account over time, and the money in the account earns interest. For instance, if the attachment point is set at 100,000 perclaim and an employee has a claim of 150,000 the reserve account will cover the $50,000 difference.
Funding the Reserve Account
Employers can fund the reserve account in different ways. One common method is to make regular contributions as part of the premium payment. These contributions are calculated based on the expected claims and the desired size of the reserve account. Another way is to make lump – sum contributions at the start of the plan year or at specific times. The size of the reserve account is closely monitored. If the claims experience is very different from what was expected, adjustments may be made to the contributions.
Claims Settlement from the Reserve Account
When a claim is higher than the attachment point, the insurance carrier first pays up to the attachment point from the premium pool. The rest of the amount is paid from the reserve account. If the reserve account doesn’t have enough money to cover the claim, the employer may need to add more funds. For example, if the reserve account has
30,000 and a claim of 120,000 (with an attachment point of 100,000)comesin,the carrier pays 100,000, and the reserve account pays $20,000. The employer may then need to refill the reserve account to be ready for future high – cost claims.
Stop – Loss Insurance
How Stop – Loss Insurance Works
Stop – loss insurance is like a safety net for the employer in a level funded health plan. There are two types: specific and aggregate. Specific stop – loss insurance covers individual claims that are above the attachment point. Aggregate stop – loss insurance, on the other hand, caps the employer’s total liability for all claims in a given period, usually a plan year. For example, if the aggregate stop – loss limit is set at $500,000 for a plan year and the total claims for all employees go over this amount, the stop – loss insurance carrier will pay the extra.
Attachment Point and Limit Selection
The employer and the insurance carrier work together to decide on the attachment point and the stop – loss limit. The attachment point is usually based on the employer’s risk tolerance and financial situation. A lower attachment point gives more protection to the employer but costs more in terms of the stop – loss insurance premium. The stop – loss limit also needs careful consideration. If it’s set too low, the employer may still face big financial risks in case of many high – cost claims. If it’s set too high, the employer may be paying for more stop – loss coverage than necessary.
Claims Process with Stop – Loss Insurance
When a claim is made that exceeds the attachment point, the insurance carrier first processes the claim as normal. If the claim amount is above the attachment point, the carrier tells the stop – loss insurance carrier. The stop – loss insurance carrier then reviews the claim and figures out how much it’s liable for, based on the stop – loss policy. The payment process can be complicated, especially when there are multiple claims and different levels of coverage under specific and aggregate stop – loss policies.
Advantages of Level Funded Health Insurance
Cost Control
Predictable Premiums
One of the big advantages of level funded health insurance is the predictability of premiums. Employers know exactly how much they’ll pay each month. This makes budget planning easier. A small business, for example, can plan its annual budget better. It knows its monthly health insurance premium will be a fixed amount, no matter how many claims its employees make in that month.
Potential for Savings
If the employee group has fewer claims than expected, the employer can save money. The money in the reserve account that isn’t used for claims can be carried forward or used to lower future premiums. For instance, if a company has a healthy workforce and fewer claims than thought, the reserve account money can be used to reduce the premium in the next plan year. This saves the employer money.
Transparency in Costs
Level funded health insurance offers more cost transparency compared to fully insured plans. Employers can see how much of the premium goes towards administrative costs, stop – loss insurance, and claims. This transparency helps employers understand where their money is going. They can then make better decisions about plan design and cost – cutting measures.
Flexibility in Plan Design
Customization
Employers have more freedom in designing health plans with level funded health insurance. They can choose the level of benefits, the network of providers, and other plan features based on their employees’ specific needs. A company with many employees in a rural area, for example, may choose to include more rural healthcare providers in its network. A company with a younger workforce may focus on offering more preventive care benefits.
Ability to Adjust Plan
Level funded plans can be changed more easily than fully insured plans. If an employer notices a change in employees’ healthcare needs, like an increase in a particular disease, it can adjust the plan benefits. This flexibility allows employers to better meet the changing healthcare needs of their workforce.
Risk Management
Controlled Risk Exposure
The combination of the reserve account and stop – loss insurance helps employers manage their risk. The reserve account is the first line of defense against high – cost claims. The stop – loss insurance limits the employer’s liability in case of really big claims. This two – step approach to risk management gives employers more control over their financial exposure to healthcare costs.
Risk Sharing
Level funded health insurance also involves risk sharing between the employer and the insurance carrier. The insurance carrier takes on the risk of paying claims up to the attachment point. The employer shares the risk of claims above the attachment point through the reserve account and stop – loss insurance. This shared risk model can be good for both sides. It makes their interests align in managing claim costs.
Disadvantages of Level Funded Health Insurance
Financial Risk for the Employer
Unforeseen High Claims
Even with stop – loss insurance, the employer still has some financial risk. If there are a lot of high – cost claims in a short time, the reserve account may run out of money. The employer may then have to make extra contributions. For example, if a small company has a few employees who all get seriously ill at the same time, the employer may struggle to cover the claims above the attachment point.
Volatility in Costs
While premiums are fixed in the short term, there can be long – term cost volatility. If the claims experience of the employee group gets worse over time, the employer may have to increase contributions to the reserve account or pay higher stop – loss insurance premiums. This makes it hard for employers to accurately predict their healthcare costs over a long period.
Complexity in Administration
Claims Processing and Reconciliation
Level funded health insurance has more complex claims processing and reconciliation compared to fully insured plans. The insurance carrier has to work with the employer regarding claims above the attachment point and the use of the reserve account. There may also be complex calculations to figure out the employer’s liability for claims and the reimbursement from the stop – loss insurance carrier.
Plan Monitoring and Adjustment
Employers need to closely watch the plan’s performance. This includes looking at the claims experience, the reserve account balance, and the effectiveness of cost – cutting measures. This takes more time and resources than a fully insured plan. If an employer doesn’t monitor and adjust the plan well, it may end up with higher costs or not enough coverage for its employees.
Initial Set – up Costs
Reserve Account Funding
Setting up a reserve account requires an initial investment from the employer. The employer has to decide how much money to put in the reserve account based on its risk tolerance and expected claims. This initial funding can be a big financial burden, especially for small businesses.
Stop – Loss Insurance Premiums
The cost of stop – loss insurance can be high, especially for plans with low attachment points. Employers need to carefully think about the cost – benefit of buying stop – loss insurance at different coverage levels. In some cases, the high cost of stop – loss insurance may cancel out some of the potential savings from a level funded health plan.
Comparison with Other Health Insurance Models
Fully Insured Health Insurance
Premiums
In a fully insured plan, premiums are based on the insurance carrier’s assessment of the overall risk of the employee group. Premiums are usually more stable but may be higher than in level funded plans, especially if the employee group has a good claims history. With level funded plans, employers can save on premiums if the claims experience is better than expected.
Risk Transfer
In a fully insured plan, the insurance carrier takes on all the risk of paying claims. The employer has no direct financial responsibility for claims other than paying the premium. In level funded plans, the employer shares some risk through the reserve account and stop – loss insurance.
Plan Design Flexibility
Fully insured plans often have less flexibility in plan design. They are based on standard packages offered by the insurance carrier. Level funded plans allow for more customization to meet the specific needs of the employer and its employees.
Self – Insured Health Insurance
Financial Risk
In a self – insured plan, the employer bears the full financial risk of paying claims. This can be a huge burden, especially for small to medium – sized businesses. Level funded plans reduce the employer’s risk by using a reserve account and stop – loss insurance.
Administrative Complexity
Self – insured plans require the employer to handle all aspects of claims processing, network management, and compliance. Level funded plans rely on the insurance carrier for many administrative tasks, reducing the administrative burden on the employer.
Cost Control
Self – insured plans offer more potential for cost control as the employer has more direct control over plan design and cost – cutting measures. But without proper risk management, self – insured plans can also lead to higher costs. Level funded plans provide a more organized way to control costs with premiums, reserve accounts, and stop – loss insurance.
Case Studies
Case Study 1: Small Manufacturing Company
A small manufacturing company with 100 employees switched from a fully insured health plan to a level funded health plan. The company had a relatively young and healthy workforce, but its fully insured premiums were rising steadily. After switching to a level funded plan, the company could set a fixed premium based on its actuarial data. In the first year, the claims experience was better than expected. The company saved money as it didn’t use all the funds in its reserve account. The next year, the company used some reserve funds to lower its premium, resulting in significant cost savings.
Case Study 2: Medium – Sized Service Company
A medium – sized service company with 500 employees chose a level funded health plan. The company had a diverse workforce with various healthcare needs. By going for a level funded plan, the company could customize its plan to include more preventive care benefits, which were important for its employees. However, in one year, there was a sudden increase in high – cost claims because a few employees got seriously ill. The company’s reserve account ran out, and it had to make additional contributions. But because of the stop – loss insurance, the company’s overall financial exposure was limited. It could still provide healthcare benefits to its employees without major problems.
Conclusion
Level funded health insurance offers a unique set of features that can be appealing to many employers. It provides cost control through predictable premiums and potential savings. It also offers flexibility in plan design and a structured way to manage risk. However, it comes with its own challenges. These include financial risk for the employer, complexity in administration, and initial set – up costs. Employers thinking about a level funded health plan need to carefully consider their financial situation, risk tolerance, and employees’ healthcare needs. By doing this, they can decide if level funded health insurance is the right choice for their organization. They can then make the most of its benefits while minimizing its drawbacks. As the healthcare landscape keeps changing, level funded health insurance will likely stay an important option for employers trying to manage their healthcare costs effectively.
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