Understanding Level Funding and How to Guide Your Clients
With 10%+ rate increases, new options may appeal
By Tiffany Stiller
As originally published in California Broker
For many individuals covered by the Affordable Care Act (ACA) health plans, premiums are expected to rise dramatically in 2023. According to an analysis by the Peterson Center on Healthcare and Kaiser Family Foundation (KFF), insurance plans participating in the ACA Marketplace project a median premium increase of 10% in 2023, with most increases falling between 5 and 14%. Also, unlike in previous years, only a handful of insurers anticipated lowering their premiums.
The study also found that the factors driving increased costs were not specific to ACA plans. The main factors identified — health cost trend, which takes into account inflation in the health sector and changes in utilization; continuing impacts of the pandemic and recent changes in federal policies — have implications for employer-sponsored coverage as well.
Employers that have traditionally relied on fully-insured health plans may have sticker shock from reviewing their recent options, making self-funding health plans seem more appealing.
With self-funded health plans, employers must pay claims as they are received. Both the number and cost of claims can vary wildly from month to month with no way to predict spending. This creates risk and financial uncertainty that can be daunting for employers who are accustomed to predictable monthly costs.
Level-funding can be a good transitional step for companies looking to move from fully-insured health plans to self-funding. Level-funding provides the consistent, predictable monthly expenditures of a fully-insured plan, but with the flexibility and lower regulatory obligations of self-funding.
What is Level-Funding?
Level-funded plans are a type of self-funded plan where employer contributions are made on a monthly basis. The employer pays a carrier a set amount each month, which helps with budgeting and financial planning. The monthly fee covers estimated costs for expected claims, administrative costs, and stop-loss insurance, which caps the total annual losses for self-funded plans.
Benefits of Level-Funding
Unlike self-funded plans, the cost of a level-funded plan is consistent from month to month, creating more stability in financial planning for the year. At the end of the plan year, carriers make adjustments based on whether the total claims costs are higher or lower than what was projected for the year. For lower costs, the adjustment may come in the form of a refund. (If actual claims are higher than expected, there may be a premium increase on the stop-loss insurance renewal.)
Like self-funded plans, level-funded plans are not subject to all of the requirements of the ACA and may be exempt from some state-level insurance requirements. As part of their level-funded plan offerings, some carriers include services and programs that make it easier for employees to make informed healthcare decisions and adopt healthy lifestyle practices. For example, telemedicine offers virtual visits that can be easier to schedule, more convenient, and less expensive than visiting an urgent care clinic or doctor’s office. Similarly, implementing wellness programs as part of a level-funded plan can help employees and their families build and maintain healthy lifestyle habits that lead to lower claims costs over time.
Is Level-Funding right for your client?
One of the key benefits of working with a broker is the ability for business owners to get expert guidance from someone knowledgeable and experienced in designing and implementing benefits offerings. Employer clients expect their broker partners to bring them new ideas for consideration and to educate them on options they are unfamiliar with. Here are five questions to get the conversation started with your clients:
- Are you familiar with level-funding and have you considered it as an option for your group?
For many small businesses, the idea of self-funding may seem so far away that they have never considered anything other than fully-insured options. Many clients need an introduction to level-funding and how it might benefit them.
- Are you feeling priced out of fully-insured coverage, but still interested in offering benefits?
If your client has historically relied on fully-insured coverage, but received a significant premium increase, they may be reconsidering their ability to provide sponsored coverage. These employers will look to their broker partners for guidance on other options that can be tailored to their needs and budget.
- Even if your current rates didn’t go up much, are you overpaying for your coverage?
Given that many carriers are increasing their premiums in 2023, employers may accept relatively small increases without question. Clients are looking to their broker partners to help them understand whether or not they are getting a good value for their money.
- Are you looking for more control over health care costs?
Even if a client is largely satisfied with their current coverage and costs, the continuing impacts of the pandemic and general inflationary environment cannot be ignored. Understanding the potential of level-funded coverage can help clients make better informed decisions about their overall financial plans.
- Are you willing to try something new?
Every client has a different appetite for risk. Even after answering “yes” to the first four questions, some employers will still be more comfortable sticking with the familiar. If you’re confident that the client would benefit from level-funding, continue to share information and revisit the conversation periodically. It may just take time for them to become more comfortable with the idea of change.
Transition to Self-Funding — or don’t
Level-funding can be a great way for employers to test the waters of self-funding, but with lower risk and no long-term obligations. After a few years and a better understanding of the health of their employee base, some employers may want to move to a true self-funded model. Others may find that, for one reason or another, they are more comfortable offering fully-insured health plans, despite the higher costs and more stringent regulatory requirements. Still others may find level-funding to be the “just right” balance that’s right for their business and employees. The only way to find out is to start the conversation.