Health insurance terminologies can sometimes be confusing, and “level funded” is one of those terms that many people may not be familiar with. In the realm of health insurance, “level funded” refers to a specific type of insurance plan that offers a balance between the features of traditional fully insured plans and self-funded plans. In this article, we’ll explore what “level funded” means in health insurance and its key characteristics.
1. Hybrid Approach:
Level funded health insurance is a hybrid approach that combines elements of both fully insured and self-funded health plans. This type of plan is often offered by smaller and mid-sized employers as an alternative to traditional fully insured health plans.
2. Monthly Premiums:
With level funded plans, the employer pays a fixed monthly premium to the insurance carrier. These premiums are typically lower than those of traditional fully insured plans.
3. Risk and Benefits:
Level funded plans shift some of the risk from the insurance carrier to the employer. The employer assumes responsibility for paying claims up to a certain predetermined level, often referred to as the “specific deductible.” The insurance carrier, in turn, covers claims that exceed this specific deductible.
4. Claims Fund:
The employer’s fixed monthly premiums are divided into two parts. A portion covers expected claims (based on the company’s historical claims data), and the remaining funds are placed in a claims fund. This claims fund is used to pay for actual claims as they occur.
5. Stop-Loss Coverage:
To protect against unexpected or catastrophic claims, employers often purchase stop-loss insurance. This coverage ensures that the employer is not responsible for excessive claims costs that go beyond a certain threshold, known as the “aggregate stop-loss.”
6. Advantages of Level Funded Plans:
a. Cost Control: Level funded plans offer cost predictability since the employer knows the maximum amount they will be responsible for in a given year, thanks to the stop-loss coverage.
b. Potential Savings: These plans can be more cost-effective than traditional fully insured plans, especially for employers with relatively healthy employees.
c. Customization: Level funded plans can be tailored to the specific needs and risk tolerance of the employer.
d. Claims Data Access: Employers often have access to claims data, which can help them identify trends, encourage wellness programs, and make informed decisions about plan design.
7. Considerations:
a. Risk Tolerance: Employers should assess their risk tolerance before opting for a level funded plan. While there is potential for cost savings, there’s also the possibility of higher claims costs.
b. Stop-Loss Coverage: Adequate stop-loss coverage is crucial to protect against unexpected and catastrophic claims expenses.
8. Notable Differences:
It’s essential to distinguish level funded plans from self-funded plans, where the employer is entirely responsible for claims payments. Level funded plans offer more risk protection through specific and aggregate stop-loss coverage, while self-funded plans assume a higher level of risk.
In conclusion, “level funded” in health insurance represents a hybrid approach that combines elements of fully insured and self-funded plans. It provides employers with cost predictability, potential cost savings, and the ability to customize plans while shifting some of the risk to the employer. Employers should carefully assess their risk tolerance and consider stop-loss coverage when exploring level funded health insurance options.
