What is a Level-Funded Plan?

A level-funded plan is a type of self-insured health plan. An employer makes a monthly payment to cover costs of claims payments, administration and stop-loss insurance.

Level-funded health plans often cost less when compared to fully insured health plans. The level of risk assumption is shared by both the employer and the insurance carrier, and the employer is protected by stop-loss insurance — making this type of insurance more affordable for small- and mid-sized employers.

What are the three components of level-funding?

Claims fund: The employer sets aside a fixed amount to cover expected claims expense for the group.
Stop-loss insurance: Protects the employer against higher-than-expected claims. Employers will not have to pay more than their pre-established fixed costs. If their costs are higher than the fixed amount, stop-loss insurance pays the claims.
Administration: A third-party administrator, like PAI, provides health plan administration — such as paying claims, customer service, and other administrative tasks — so the employers can spend their time focusing on their businesses.

How does Level-Funding Work?

When level-funding a health plan, underwriting reviews employees’ previous claims, health care performance and health history. Based on the review, underwriting estimates the expected claim spend for the upcoming plan year.

Claim spend may increase in the upcoming year, so underwriting adds a safeguard to allow for a potential claim spend increase. Once they complete the review, underwriting establishes a total premium for the next 12 months and the employer (and/or employees) pay the premium on a monthly basis.

What are the benefits of level-funding?

The primary advantage of level-funding is cost savings. Employers don’t have to pay premiums based on community rates, which might be higher than you employee group’s risk. You only pay the established premiums, which cover the employees' approximate medical expenses. Other than claims, the only additional costs included are the fixed costs of the stop-loss insurance and the administrative fees.

When the year is over, the TPA will calculate your actual medical costs and compare them to the original estimate. If your claims are lower than expected, they will refund the difference. Additionally, you might get better rates for your stop-loss insurance the following year.

In addition to only paying for actual claims and fixed costs, here are some of the ways you can reduce your costs using level-funding:

Design a plan tailored to your company's needs. You're not simply accepting one of the standard options offered by an insurance carrier, so you can be more specific about areas of coverage that might not be necessary for your employees.
Receive detailed reporting on utilization trends gives you important information on where employees may be overspending.
Work on reducing claims by incentivizing your employees to improve or monitor their health, which could result in lower medical costs for your company.

With level-funding, the more your employees maintain their health, the more you might lower your claims — translating to a larger refund at the end of the year and a lower estimate for the following year.

Who is a level-funded health plan for?

A start up or small- and mid-sized employers or an employer with a fully insured model that is too expensive but the company wants to offer employees quality health benefits.
Someone who finds the importance of transparency on where their monthly payments are going and wanting more control over health care costs.
An employer who wants a predictable monthly payment plan without the financial burden of a fully insured plan.

Will level-funding work for your business?

Successful level-funding depends on a group's risk factor, size, and several other variables. Since every company is different and has a unique set of needs, it's challenging to determine what will work best without a thorough review of a business's current insurance situation, structure, costs, and future goals.