Given the array of plans and coverages available, finding the best group health insurance solution can be challenging for both business owners and insurance brokers. Traditionally, most small business owners have accepted the status quo, fully insured group health insurance model. Even small business owners who struggled with rising healthcare costs remained fully insured, often because they believed that only businesses with hundreds of employees could benefit from self funding and other cost reduction strategies.
Fortunately, the group health market has evolved dramatically over the last decade, and groups with fewer than 100 employees now have more and better options. Level funded health insurance is one such option for these small groups. It is an increasingly popular way for small- and medium-sized businesses to try to get control of their costs without all the risk and effort of transitioning to a traditional self funding arrangement, or joining a captive.
As a result, the proportion of small businesses with level funded health insurance is increasing dramatically. According to a recent report from the Kaiser Family Foundation, approximately 38% of people in organizations with 200 or fewer employees participated in a level funded plan last year. What once was a difficult switch to self funding is becoming a standard practice for well-informed small business owners.
With level funded insurance, a group makes a flat monthly payment to an insurance carrier or Third Party Administrator (TPA), which then covers insurance, claims, and administrative costs for all employees in the business. At the end of the year, the group can receive a refund if claims come in lower than anticipated. If claims are higher than expected and the group opts to stick with the plan, the premium will generally increase the following year. This compares to traditional, fully insured health insurance in which the insurance carriers pass along increases after high claims years but don’t return the surplus to the group after low claims years.
Level funded health insurance is a form of self funded insurance that is frequently better for small businesses. Like traditional self funding, most level funded plans allow the employer to access more data regarding plan spending and to benefit financially from years in which their claims experience is better than expected. Unlike traditional self funding, however, level funded health insurance generally does not require the employer to set aside funds for claims and pay those claims as they come in. Instead, level funded health insurance allows employers to pay predictable monthly payments — just like traditional fully insured plans — with the added benefit of having the opportunity to get money back at the end of the year.
Level funded health insurance offers many benefits for small business owners, including:
Predictability: Employers pay the same monthly amount (with adjustments made if enrollment increases). Businesses therefore know what to expect. For small businesses without significant cash reserves, level funded insurance provides some of the benefits of self funding without the volatility in monthly cash flows.
The potential for a substantial annual refund: Unlike traditional, fully funded health insurance plans, level funded insurance has the potential to provide refunds to companies when claims come in lower than estimated. The amount of the potential refund can vary significantly depending on the level funded product, so companies should consider the refund terms when evaluating level funded options. Some products offer the opportunity to get a full refund of excess claims spending, which can lead to substantial savings for some groups — but this is not true in all cases, so groups and brokers should be careful when examining plans.
While large firms have been saving money by self funding for years, level funded products are increasingly accessible and affordable for small groups. In many cases, small groups can pursue level funding without claims experience, and some products do not require individual health questionnaires. As a result, small businesses and organizations are increasingly adopting level funding for their group health insurance. According to the Kaiser Family Foundation, "forty-two percent of small firms offering health benefits offer a level funded plan in 2021, much higher than the percentage (13%) last year."
As is evident in this chart from the KFF report, the increase in the adoption of level funded and self funded plans by small businesses has led to the percentage of companies using such plans being nearly equal to that of those using traditional fully insured health coverage — which is a significant change from just a few years ago. The Kaiser report added that, “The substantial increase [in the adoption of level and self funded plans by small businesses] for 2021 suggests that that there may be a significant shift in the small group market toward health-status-based rating, so it will be important to monitor this trend to see if continues over the next several years.” 64% of workers in larger businesses also have self funded or level funded plans, which is an indication of their popularity for companies that can afford to use the plans. Level funded health insurance now makes self funding a more realistic possibility for smaller businesses.
The primary drawback of switching to level funded insurance is that it requires brokers and employers to invest time in understanding their options and picking the right plan for their companies. Level funded health plans vary considerably in their costs and features, so companies should be careful to understand the terms of their contract before signing up and consider what is suitable for their business and employees.
Additionally, some level funded plans limit what doctors or networks patients can use to access healthcare to keep the plan's total costs down. It is crucial to find a plan that meets the needs of your groups — whether they need access to a national PPO network such as Aetna or Cigna or would benefit from a narrow network or reference-based pricing model.
Level funded health insurance isn't the right option for every small business, but it is an exciting opportunity for many. Brokers and employers must study all their options and be deliberate when deciding whether level funded plans are right for them.
How is Radion Health responding to the growing demand for level funded insurance?
To meet the needs of small groups transitioning from fully insured health plans, Radion Health has launched a new level funded insurance product: Level Funded Plus - Powered by Great American Insurance Group. If you want to learn more about this product, please read our next post (What is Level Funded Plus - Powered by Great American Insurance Group?).
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