From Sticker Shock to Savings: How Level-Funded Plans Are Taking Control of Healthcare Costs
Todd Young
unleashing potential through affordable benefits, making a difference while protecting what matters most - I help businesses with 1-100 employees work towards a net zero budget using the Cash-Wise Business Tuneup Program
When it comes to health insurance, employers have different paths to follow. Two main options are Standard Medical Plans and Level-Funded Plans. These choices impact how employers handle healthcare expenses, assess risks, and create customized coverage. Standard Medical Plans are the industry standard, easy to get in place, while Level-Funded (Self-Funded) plans are quickly making up lost ground with small to medium size employers. Let's dive into the details step by step, making it easy to understand.
Funding Structure:
Standard Medical Plans: These conventional health insurance plans involve employers paying fixed premiums to an insurance company. Premiums are shaped by projected employee healthcare costs. Community underwriting is often used to assess risk and set rates.
Level-Funded Plans: These plans combine self-funding and insurance. Employers pay a fixed monthly amount that covers expected claims and includes stop-loss insurance for large claims. Third Party Administrators (TPAs) manage claims fund disbursement and administration. Direct individual underwriting determines rates based on the specific group's risk profile with a questionnaire from each employee.
Risk Assessment:
Community-Based Underwriting: (Standard Medical Plans):
Community-based underwriting is a method used by insurance companies to assess the risk and determine the premium rates for a group of people collectively, rather than evaluating each individual separately. In this approach, the insurance company considers the overall characteristics and claims history of the entire group to calculate the average risk and set the rates accordingly. This method simplifies the process by treating the group as a whole entity, without extensively analyzing the unique health circumstances of each individual within the group. It's a more generalized way of determining premiums that doesn't take individual variations into account as much as other underwriting methods, such as direct underwriting.
Direct Individual Underwriting: (Level-Funded Plans):
Direct individual underwriting is an approach used by insurance companies to assess the risk and set premium rates for each individual separately, taking into account their specific characteristics and circumstances. Instead of treating a group as a whole, like in community-based underwriting, direct individual underwriting focuses on the unique risk profile of each person.
With this method, the insurance company considers factors such as the individual's medical history, age, lifestyle, and other relevant information to determine their specific level of risk. This personalized approach allows for more accurate pricing that aligns with the individual's actual health and circumstances. It's a more granular and detailed way of evaluating risk compared to community-based underwriting, as it takes into consideration the specific nuances of each policyholder's situation.
Which Underwriting Method To Use,Community-Based Underwriting or Direct Individual Underwriting?
Both Community-Based Underwriting and Direct Individual Underwriting have their impacts on insurance premiums. Community-based underwriting, which evaluates risk and sets rates based on group characteristics, can sometimes result in higher premiums for healthier individuals, as their specific risk profiles might not be fully considered. Conversely, individuals with higher risk factors could benefit from lower premiums under this approach. This method might lead to inaccurate pricing within diverse groups, potentially causing some individuals to overpay due to their own risk profiles.
On the other hand, direct individual underwriting, which tailors premiums to each person's unique characteristics, can also lead to higher costs for certain individuals. This approach considers factors like medical history and lifestyle, potentially resulting in higher premiums for those with greater risk factors. While this method ensures fair pricing based on individual risk, it might mean higher costs for people with complex medical histories. Despite the potential for higher premiums, direct individual underwriting provides a more personalized insurance experience, ensuring that individuals pay premiums that better reflect their actual risk, without subsidizing others' costs unfairly.
Cost Control:
Standard Medical Plans: Employers' costs can vary due to premium fluctuations tied to anticipated healthcare expenses. Year-to-year costs can be unpredictable.
Level-Funded Plans: Employers benefit from cost stability. The fixed monthly payment covers projected claims and includes a buffer against significant claims through stop-loss insurance. TPAs manage claims fund disbursement and often offer cost control insights.
Risk and Rewards:
Standard Medical Plans: Employers bear minimal risk as insurance carriers handle claims and costs. Savings potential is limited.
Level-Funded Plans: Employers embrace more risk through self-funding but stand to save when actual claims are below projections. TPAs oversee claims fund management, offering insights to manage and mitigate risk.
Claims Fund Surplus:
Here are three ways employers can make use of their claims fund dollars:
It's important to note that if actual claims exceed the expected claims, the stop-loss insurance component of the level-funded plan kicks in. This insurance helps protect the employer from catastrophic claim scenarios.
To implement any of these options, the employer works in collaboration with their Broker & TPA. The TPA plays a pivotal role in assessing claims data, managing the claims fund, and offering insights into potential cost-saving measures. The employer's choice regarding claims fund dollars should align with the organization's financial goals, employee satisfaction strategies, and long-term benefit planning.
Ultimately, the level-funded approach provides a level of transparency and control over healthcare costs that can be highly appealing to employers seeking to optimize their benefits strategy. It allows them to proactively manage their financial resources and potentially create a more positive impact on both their employees and the organization as a whole.
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Customization:
Standard Medical Plans: These plans offer limited customization, with insurance carriers providing preset packages.
Level-Funded Plans: Employers can tailor benefits, networks, and coverage to their needs, often guided by TPAs, who assist in designing plans that suit the group's unique demographics.
Features Unique to Level-Funded Plans:
Third-Party Administrator (TPA):
TPAs manage claims fund administration, processing and paying out claims, negotiating with healthcare providers, offering cost control strategies, and providing transparency into claims data.
Medical Network Renting:
Some insurance carriers like Aetna, Cigna, and open networks like Healthcare Highways, offer their medical networks to TPAs. This allows employers to access established provider networks while self-funding their plans.
Reference-Based Pricing:
Open networks like Healthcare Highways employ reference-based pricing, which sets reimbursement rates based on a benchmark, which is typically a multiplier against a national rating system, which is Medicare. This can lead to potential cost savings and more flexibility in provider choices.
Premium Savings:
Level-funded plans often offer premium savings compared to fully insured plans. Savings of around 20%-25% are common, and for healthy groups, savings can be as substantial as 35%-40%.
Plan Design:
Level-Funded plans often come with lower deductibles, sometimes as low as $500 or even less. They include co-pays for regular visits to the doctor, consultations with specialists, and urgent medical care. The co-insurance rate typically falls between 70% and 80%, which means the insurance covers that percentage of the costs. The maximum amount you'd have to pay in a year, referred to as the maximum out-of-pocket cost, is usually around $6,000 for individuals. However, when it comes to tests and diagnostics, you usually still need to pay the deductible and co-insurance, as this follows the established industry standard.
How Premiums Are Paid:
Standard Medical Plans: Paid directly to the carrier without the possibility of receiving surplus funds, and depending on the carrier, claims management can be a challenging process.
Level-Funded Plans: Direct to the Third Party Administrator (TPA), with the following break-down:
Conclusion:
In the decision-making process between level-funded plans and standard medical plans, it's crucial for employers to weigh factors like risk tolerance, budget, customization needs, and the health profile of their employee base. TPAs play a significant role in claims fund management and plan administration, offering insights & tools to reward employee behavior (Wellness checkups, Telehealth, Urgent Care, shopping prescriptions) to optimize cost control and risk management strategies. Consulting with insurance experts or benefits consultants can aid in navigating the complexities of both options and determining the best fit for the organization.
In a level-funded health plan, employers have the opportunity to take a more hands-on approach to their healthcare costs. One of the distinguishing features of a level-funded plan is the claims fund, which is the portion of the premium that is set aside to cover expected medical claims for the covered employees. This claims fund is managed by the Third-Party Administrator (TPA) on behalf of the employer.
When it comes to employee benefits, the rising costs of healthcare have become a major concern for employers. This is where the choice between level-funded plans and standard medical plans becomes important. Understanding these options and their details can help employers make smart choices that balance the organization's finances and the well-being of their employees.
When deciding between level-funded and standard medical plans, employers need to consider factors like their willingness to take risks, budget limits, customization needs, and the overall health of their employees. Third-Party Administrators (TPAs) play a key role in managing claims funds and running plans, offering insights that help control costs and manage risks effectively. Getting advice from insurance experts or benefits consultants is crucial for navigating the complexities of both options and finding the best approach for the organization.
What's more, level-funded plans offer more than just cost benefits. They provide a platform for employers to design benefit strategies that match their goals and their employees' unique requirements. This approach empowers employers to create benefits that not only make financial sense but also promote a culture of well-being and support. With level-funded plans, the usual path of rising healthcare premiums can be changed, guiding organizations toward a future of financial stability and happier employees.