Downside of level-funded health plans:
- Financial Risk: Potential for significant cost increases if claims are higher than expected.
- Cash Flow Challenges: Consistent monthly payments regardless of actual claims can strain finances, especially with unexpected high-cost claims.
- Regulatory Compliance: Staying compliant with changing regulations can be complex and costly.
- Nondiscrimination Testing: Must meet specific criteria to avoid penalties, adding administrative oversight.
- Variable Costs: While initially predictable, costs can vary significantly year-to-year based on claims experience.
Level-funded health plans often appeal to small and medium-sized businesses as they offer an alternative route to traditional insurance. They blend features of fully insured and self-funded plans by allowing businesses to pay a fixed monthly fee while handling claims. While they can offer cost-control and potential refunds, they also introduce risks. Particularly for employers with fluctuating claims, these plans might not always provide the stability one seeks.
I’m Les Perlson. With over 40 years in the health insurance industry, I’ve seen the downside of level-funded health plans and the complexities they pose for businesses. My expertise ensures you’ll gain a clear understanding of these challenges. Now, let’s dig into the financial risks these plans can present.
Financial Risks and Uncertainties
Level-funded health plans can seem like a great option for many businesses, but it’s important to be aware of the financial risks and uncertainties they bring along. These plans combine elements of fully insured and self-funded plans, which can lead to some unique challenges.
Financial Risk
One major concern with level-funded plans is the potential for unexpected financial exposure. If your claims are higher than anticipated, the financial impact can be significant. While the fixed monthly payments can help with budgeting, they don’t eliminate the risk of increased costs if claims exceed the expected amounts.
Even with stop-loss insurance, which provides a safety net for catastrophic claims, businesses can still face financial strain. Stop-loss policies have specific thresholds, and if claims don’t reach these levels, the employer is responsible for covering the costs. This can be especially challenging for smaller businesses with limited cash reserves.
Claims Variability
Claims variability is another critical aspect to consider. Unlike fully insured plans, where the insurance company assumes the risk, level-funded plans require the employer to shoulder some of the risk. This means that if your employee population experiences a year with higher-than-average claims, your costs could skyrocket.
For example, imagine a scenario where several employees require expensive treatments or surgeries. These high-cost claims can quickly deplete the funds set aside for claims, leaving the employer to cover the difference. The unpredictability of claims can make it difficult to plan and manage finances effectively.
Moreover, if claims are consistently higher than expected, it could lead to increased renewal rates. On average, renewal rates can jump by over 35% in the first year, which can negate any initial savings and make long-term budgeting challenging.
In summary, while level-funded plans offer a blend of predictability and potential savings, they also come with financial risks and uncertainties that businesses must steer carefully. Understanding these aspects is crucial for making informed decisions about whether this type of plan aligns with your company’s financial goals and risk tolerance.
Next, we’ll explore the administrative burden that comes with managing a level-funded health plan.
Administrative Burden
Managing a level-funded health plan can be like juggling, with many moving pieces that need attention. While these plans offer predictable monthly costs, they come with their own set of challenges, particularly when it comes to administrative fees and complex management.
Administrative Fees
Level-funded plans often involve fees that can add up quickly. These fees are usually for services provided by Third-Party Administrators (TPAs). TPAs handle tasks like claims processing, compliance reporting, and other administrative duties. While they can lighten the workload, they don’t come cheap.
For small businesses, these fees can be a significant expense. It’s crucial to weigh the cost of these services against the benefits they provide. Some businesses find that the fees offset the potential savings from lower premiums, making it less cost-effective than anticipated.
Complex Management
Managing the complexities of a level-funded plan requires constant oversight. Employers must keep a close eye on claims and expenses to ensure that the fixed monthly payments are sufficient. This can be a daunting task for smaller businesses without dedicated HR or benefits staff.
Compliance is another area where complexity arises. Level-funded plans must meet various regulatory requirements, including ACA reporting and PCORI fee payments. These tasks require meticulous record-keeping and can be a significant administrative burden.
The Role of TPAs
Many companies rely on TPAs to manage these complexities, but it’s important to choose wisely. A mismanaged plan can lead to compliance issues and financial penalties. Employers must ensure that their TPA is handling tasks like ACA reporting and PCORI fee payments correctly.
In summary, while level-funded plans offer predictability in some areas, they come with a heavy administrative load. Companies must assess whether they have the resources to manage these tasks effectively or if they need to seek external help. We’ll examine how these plans can limit plan design flexibility.
Limited Plan Design Flexibility
When it comes to level-funded health plans, plan design flexibility can be a double-edged sword. On one hand, these plans offer customization options. On the other, they can limit your choices in unexpected ways.
Customization Limits
Level-funded plans might promise flexibility, but they often come with strings attached. While you can tailor some aspects to fit your workforce’s needs, there are boundaries. For example, you might want to offer a wide range of wellness programs or telemedicine options. However, the available options might not cover everything you want.
In some cases, the stop-loss insurance that protects you from high claims can also restrict plan designs. Insurers may limit the types of benefits you can include, focusing instead on core health services to minimize their risk.
Plan Options
The variety of plan options available with level-funded plans can seem appealing at first. You can choose from basic plans that cover essential health benefits to more comprehensive ones. But there’s a catch: not every option is available in every state. Some states have strict regulations that can limit what you can offer.
Moreover, the choice between different types of plans, like PPOs and HMOs, can be limited by the insurer’s network. While a PPO might offer more provider flexibility, it may also come with higher costs. Conversely, an HMO might be more budget-friendly, but it could restrict employees to a limited network of providers.
This balancing act between customization and limitations means that businesses need to carefully evaluate their workforce’s needs against what’s feasible. In the end, while level-funded plans offer some degree of flexibility, they may not be as adaptable as they first appear.
Let’s look at how these plans can lead to potential increased costs despite their initial appeal.
Potential for Increased Costs
Level-funded health plans often seem like a cost-effective option at first glance. However, there are hidden elements that can lead to increased costs over time. Let’s break down two key areas where costs can rise: stop-loss premiums and unexpected expenses.
Stop-Loss Premiums
Stop-loss insurance is a safety net that shields employers from catastrophic claims. It kicks in when claims exceed a certain amount. But this protection doesn’t come cheap.
Stop-loss premiums can be a significant expense. They are calculated based on the risk profile of your workforce and the coverage limits you choose. If your employees have higher health risks, expect higher premiums. This can eat into the savings you might have anticipated from switching to a level-funded plan.
Moreover, these premiums can increase annually. Just like with fully insured plans, as claims history changes or if the insurer anticipates higher future claims, they may raise your stop-loss premiums. This unpredictability can make budgeting challenging.
Unexpected Expenses
While level-funded plans aim to offer predictable costs, unexpected expenses can still arise. For instance, if actual healthcare usage is higher than projected, it can strain your cash flow.
Imagine this: A series of high-cost claims hits early in the year. The funds allocated for claims might get depleted quickly, putting pressure on your business’s reserves. Even with stop-loss insurance, you might need to cover these costs until reimbursements kick in.
Additionally, there’s the risk of underfunding. If the actuarial forecasts used to set your monthly contributions are off, you might face a shortfall by year-end. This could mean a hefty payment to cover the deficit or increased rates for the following year to make up for it.
In conclusion, while level-funded plans promise cost control, the reality can be different. The combination of rising stop-loss premiums and unexpected expenses can lead to costs spiraling beyond expectations.
Let’s explore the regulatory and compliance challenges that accompany level-funded health plans.
Regulatory and Compliance Challenges
Navigating the regulatory and compliance challenges of level-funded health plans can be a daunting task. These plans, while offering potential cost savings, come with their own set of rules and requirements that employers must follow closely.
ACA Compliance
Level-funded plans are categorized as self-funded for compliance purposes, which means they must adhere to certain Affordable Care Act (ACA) mandates. This includes filing ACA employer mandate returns using Forms 1094 and 1095. Even if your business isn’t classified as an applicable large employer (ALE), you’re still required to complete these forms.
A third-party administrator (TPA) might handle this reporting for you, but as the employer, you’re ultimately responsible. It’s crucial to confirm with your TPA that they will complete the ACA reporting on your behalf each year. Failing to meet these requirements can result in penalties, which could negate any cost savings from the plan.
State Regulations
In addition to federal compliance, level-funded plans must also steer a patchwork of state regulations. State laws can vary widely, affecting everything from stop-loss coverage availability to specific health benefits that must be included in the plan.
For example, certain states have unique mandates, such as requiring coverage for specific treatments like infertility or autism. These mandates can impact the design and cost of your health plan. It’s essential to be aware of these state-specific requirements to ensure compliance and avoid potential fines.
Moreover, state insurance departments regulate the administration of health insurance policies, which can influence plan availability and pricing. This makes it critical to stay informed about both federal and state regulations affecting your level-funded plan.
In summary, while level-funded health plans offer flexibility and potential savings, they come with regulatory problems. Employers must be diligent in adhering to both ACA and state-specific regulations to maintain compliance and avoid costly penalties.
Next, let’s address some frequently asked questions about level-funded health plans to further clarify common concerns.
Frequently Asked Questions about Level-Funded Health Plans
Are level-funded plans ACA compliant?
Yes, level-funded plans are designed to be ACA compliant. They must cover essential health benefits and preventive services, just like fully insured plans. This ensures that you meet legal requirements for providing health insurance to your employees. However, since they are considered self-funded for compliance purposes, you must file ACA employer mandate returns. This involves using Forms 1094 and 1095, even if your business isn’t an applicable large employer (ALE). Always verify that your third-party administrator (TPA) handles this reporting, as you are ultimately responsible.
What are the cons of self-funding?
Self-funding, while offering potential savings, comes with notable drawbacks:
- Financial Risk: Employers bear the risk of paying claims. High claims can be financially straining.
- Cash Flow Needs: Adequate cash flow is essential to cover unpredictable claims.
- Administrative Burden: Managing a self-funded plan involves significant administrative tasks, such as claims processing and compliance.
- Stop-Loss Insurance Costs: To mitigate risk, employers often purchase stop-loss insurance, which adds to costs.
These factors make self-funding a complex choice that requires careful consideration and planning.
What are the pros and cons of fully insured health plans?
Fully insured plans offer both advantages and disadvantages:
Pros:
- Predictable Costs: You pay a fixed premium, making budgeting straightforward.
- Less Administrative Work: The insurance company manages claims and compliance.
- Risk Transfer: The insurer assumes the financial risk for claims.
Cons:
- Higher Costs: Fixed premiums can be more expensive than self-funded options.
- Less Flexibility: Limited control over plan design and benefits.
- No Refunds: Any surplus from lower-than-expected claims goes to the insurer, not you.
Choosing between fully insured and level-funded or self-funded plans depends on your company’s specific needs and risk tolerance. Each option offers unique benefits and challenges, requiring careful evaluation to determine the best fit for your organization.
Next, we’ll explore more about the potential for increased costs associated with level-funded health plans.
Conclusion
As we’ve seen, level-funded health plans present a compelling option for businesses looking to balance cost control with comprehensive employee benefits. However, like any insurance model, they come with their own set of challenges and risks. Understanding these is crucial for making informed decisions that align with your company’s goals and employee needs.
At NPA Benefits, we specialize in providing flexible, cost-saving health insurance solutions that prioritize control for both businesses and individuals. Our expertise in self-funded health insurance plans means we can guide you through the complexities of level-funded options, helping you steer financial risks, administrative burdens, and compliance challenges.
Our commitment is to offer solutions that not only meet your immediate needs but also support your long-term objectives. By choosing a level-funded plan, you have the opportunity to enjoy predictable costs with the potential for refunds, all while maintaining the flexibility to adapt as your business evolves.
For a deeper understanding of how level-funded health insurance plans can benefit your business and to explore the options available, visit our services page on health insurance benefits. Let us help you find the right solution that supports your team’s health and your company’s success, today and into the future.
