What Any Employer needs to know about: Fully-Insured, Self-Insured, Level-Funded Benefits

In today’s market, companies are constantly looking for concepts to control rising costs of medical and ancillary benefit lines of coverage for employees. These days, employers with as few as ten full-time employees are finding other arrangements which can allow them more control or at least more understanding of their annual premium increases. This helps them to invest more money in their business or attract and retain new employees. In any of different insurance models below a company must reach their own balance between costs and risk.

Fully Insured – “Traditional Plans”

Fully Insured is what most people are familiar with when it comes to insurance. The individual or employer pays a premium and to insurance carrier; in return, the insurance carrier is responsible for paying future medical claims that are covered. In return, the business and the employees are guaranteed at maximum the premium costs and the “out-of-pocket” maximum cost to receive care in a dire situation.

How the Fully Insured model or Traditional model is dying

Now, because an insurance carrier must obey the law of large number in order to pay for incurred medical claims across their entire book of business or “pool”. This typically leads to increased premium rates year after year as medical service prices increase as well as claims on their book of business. The business can look to shop for new premium rates or plans each year to offset these costs.

The idea of “pooling” has always been a part of any insurance model. In simple terms, if a hundred people are insured at let us say $100,000, the insurance carrier’s hedging a bet that those 100 people won’t have claims that exceed $100,000. Anything less than $100,000 the carrier pockets as profit, anything above that $100,000 amount, results in an increase in premium rates the next year on the people or companies that caused the pool to go over $100,000 to make up for the loss. Sounds simple enough right? You charge the people that are using the benefit more money, and those that are not utilizing it the same rates or decrease their rate to incentive them to stay healthy.

This was the case until the enactment of the ACA commonly known as the Affordable Care Act. Before this was enacted, carriers could increase the price on the insurance offered to individuals and employers that were deemed higher risks and whom they knew had higher claims based on the history of that person or employer, just like in our 100-person $100,000 example.

The ACA has now mandated what is called “community rating” to offset increase on certain “high-risk or high claimants” within a certain geographic region. Carrier can still increase premiums on certain factors such as age. So, group coverage may be cheaper for a 20-year-old versus a 60 year, however, a carrier can not charge someone who is the same age different rates for the same plan regardless of known health risks.

The benefit of community rating is companies with a high number of high conditions can find insurance coverage which is not priced completely out of their range. However, employers with few health risks and conditions are finding that their insurance rates have increased beyond the point where they can justify the cost based on what they use. The reason for this is that there is no incentive for high risk or health people to be prudent in controlling costs as their own claims are dropped into a larger bucket of which renewal increases are calculated, and insurance carriers are handcuffed to same pricing models for all individuals regardless of risk.

Because of this, companies with healthy populations looking into other methods of funding, thus, Self-Funded and Level Funded options in ways to incentive a healthy population and control rising costs.

Self-Insured or Self-Funded Plans – The almost Anti-Traditional model

Self-funded is almost the opposite of fully-insured model as the employer assumes the risk and responsibility of medical claims, rather than contracting with an insurance carrier to pay claims. So, as the name suggests it is exactly what it says: a company provides all funds to pay for expected claims. The employer essential forms its own “pool” with the participants being the employees. This is typically only utilized by larger employers, think 500+, the reason for this is that the company needs a large enough pool in order to more accurately predict claims that will be incurred. Also, most self-funded plans need a way to administer claims and smaller companies typically would not have the funds to handle it or enough funds to pay a third-party administrator (TPA) to administer claims filed.

Since the employer is on the hook for claims, typically most groups utilized what is called Reinsurance or Stop Loss.

Like how an insurance carrier would want to hedge their bet, the employer would want to hedge theirs. Reinsurance or stop loss prevents the employers from the liability of a large claim, employers pay a premium for protection in case their actual claims exceed what was expected of the “pool”. Think of it in concept working as an umbrella policy would on your house.

It is very much in the interest of self-funded groups to incentive employees to stay healthy as a one or a handful of claims can reach the number of estimated claims. As all costs come out of the company’s bottom lines and conversely, all savings benefit the company’s bottom line. Thus, virtually all self-insured companies have wellness programs, biometric screenings, exercise programs, exercise, and weight loss programs, smoking cessations that are backed by a well-motivated management team to encourage employees to participate.

Level-Funding – the best of both worlds (for the right employer)

At its simplest level, level-funding is the smaller version of self-funding for groups in the small employer range (10-500 FTEs) in regard to they do not have to be community rated. These plans are typically carried out and administered by a subsidiary of a fully-insured carrier.

Typically, with level-funded the employer pays premiums like a fully-insured plan each month and the carrier administers claims like a fully-insured plan. What the carrier then does on the back end is allocate that amount to administrative fees, maximum expected claims, and reinsurance just like self-funded groups on behalf of the employer.

Sometimes, because of this they are referred to as partially self-funded because the carrier and the employer split the saved amount claims. 

Both the self-funded and level-funded plans for small employers, avoid the community rating, which can save employers and employees money, but only if the costs of its claims stay as low as the cost-per-employee.

So which is right for my company?

An employer should always try to find a qualified licensed insurance professional to help them access their insurance needs. Typically, that would be in the form a licensed insurance broker or brokerage office, they should have access to some form of all models and carriers for which you to make the best judgment for your company as they are not tied down directly to one specific carrier.

You can make the following generalities about each model.

Fully-insured plan removes most risk from the employer and employees, but the guaranteed cost of the plan will be higher.

A self-insured plan leaves almost all risk on employer, but has the greatest chance of savings.

Level-funding attempts to combine the best of both worlds, but is really only viable for small employers or specific risks.

In conclusion, there is never a right answer, the thing to do is to ask the right questions.

How many employees do I have, and are they healthy?

What are our current benefits? What could be improved?

How much is my potential budget versus what is my maximum budget for benefits? 

If we saved money, how else could we allocate those funds to grow the business?

With any quality licensed insurance broker/agent, emphasis on quality, you should be able to sit down and answer the questions to find out which kind of insurance funding best meets your needs.

This article was written by Phoenix Captive Solutions C.F.O. Blake Coats, any views or opinions do not necessarily reflect the opinions of either Phoenix Captive Solutions LLC, or any associated entities.  

Feel free to write to Blake at blake.coats@phoenixcaptive.com  

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