Level-Funded Healthcare Plans Can Save Employers Money
Healthcare costs represent one of the largest expenses for many businesses, and choosing the right type of plan is critical for managing these costs. When comparing healthcare plans, three common options include fully-funded, self-funded, and level-funded plans. Each type offers different levels of cost, risk management, and predictability. Level-funded plans, in particular, have gained attention as a way for employers—especially small to midsize businesses—to save money while maintaining predictable costs.
Here's how level-funded plans compare to fully-funded and self-funded plans and why they could be the right choice for your business:
1. Fully-Funded Plans: High Predictability, Higher Costs
In a fully-funded plan, employers pay a fixed monthly premium to the insurance carrier, who assumes all the financial risk of covering employee healthcare claims. The appeal of fully-funded plans lies in their stability. Since premiums remain constant for the entire year, they offer high predictability, making budgeting easier. However, this peace of mind comes at a cost.
Cost Structure: Employers pay a set premium, which does not change based on actual healthcare usage.
Predictability: High—consistent monthly payments.
Costs: Often more expensive, particularly for small businesses, because the premium is set to cover all potential risks, even if claims are low.
In short, while fully-funded plans provide financial stability, they may not offer the opportunity for savings when claims are lower than expected, making them less cost-efficient in the long term.
2. Self-Funded Plans: Flexibility with High Risk
With self-funded plans, the employer takes on the financial responsibility for paying employee healthcare claims directly. This offers greater flexibility, as businesses only pay for actual claims, but it also comes with significant financial risk. Employers must also pay for stop-loss insurance to cap potential losses in case of high claims, as well as cover administrative costs.
Cost Structure: Costs vary depending on actual healthcare usage.
Predictability: Low—costs can fluctuate significantly from month to month.
Costs: Potential for savings when claims are low but comes with significant risk if claims are high.
Self-funded plans are generally more suited for larger businesses that have the financial resources and risk tolerance to handle large, unexpected claims.
3. Level-Funded Plans: The Best of Both Worlds
Level-funded plans offer a middle ground, blending the predictability of fully-funded plans with the flexibility and savings potential of self-funded plans. Employers pay a fixed monthly fee that includes administrative costs, claims funding, and stop-loss insurance. If claims are lower than expected, the employer may receive a refund or rebate at the end of the year.
Cost Structure: Employers pay a consistent monthly fee, with the potential for a refund if claims are lower than expected.
Predictability: Medium—monthly costs are predictable, and stop-loss insurance provides protection from high claims.
Costs: Typically lower than fully-funded plans and more predictable than self-funded plans.
Level-funded plans offer employers more control over healthcare spending while capping financial risk. This makes them an attractive option for small businesses that want to balance cost savings with financial stability.
Why Level-Funded Plans Are an Attractive Option
Level-funded plans provide several key advantages for businesses looking to manage healthcare costs more effectively:
Lower Premiums: Because level-funded plans are based on expected healthcare usage, they often have lower premiums than fully-funded plans, where businesses pay for worst-case scenarios.
Risk Protection: With stop-loss insurance included, employers aren’t on the hook for catastrophic claims, making these plans safer than fully self-funded options.
Potential for Refunds: If claims are lower than expected, businesses may receive a refund at the end of the year—a feature that fully-funded plans do not offer.
Tailored for Small Businesses: Level-funded plans allow smaller employers to manage healthcare costs more effectively without the cost volatility and financial risk that come with self-funded plans.
Long-Term Savings with Level-Funded Plans
Employers who choose level-funded plans can expect several long-term cost-saving benefits:
Lower Premiums Over Time: Unlike fully-funded plans, which lock in higher premiums, level-funded plans often have lower premiums that are based on actual claims usage.
Refunds for Low Claims: Over time, businesses may receive refunds for unused claims funds, adding up to substantial savings compared to fully-funded plans.
Financial Protection: With stop-loss insurance, businesses are protected from catastrophic claims, ensuring that healthcare costs remain manageable even in high-claim years.
Predictable Costs: The ability to bundle claims funding, administrative fees, and stop-loss insurance into a single monthly payment makes budgeting easier and reduces cost fluctuations.
Conclusion: The Smart Choice for Small and Midsize Employers
Level-funded healthcare plans offer a cost-effective solution for small and midsize businesses looking to manage one of their largest expenses. By combining the predictability of fully-funded plans with the savings potential of self-funded options, they provide a middle ground that allows businesses to save money while maintaining financial stability.
Partnering with a knowledgeable health insurance broker can help your business navigate the complexities of level-funded plans and ensure that you are maximizing your healthcare investment for long-term cost savings.