Bridging budgets and benefits: The value of level-funding

For small to mid-sized companies looking to control costs and provide high-quality health care to employees, level-funded plans are an off-the-shelf solution that offers savings and other benefits. However, not all level-funded plans are created equal — so it’s important to understand the plan specifics and ask the right questions before signing the dotted line.

In essence, a level-funded health plan is a hybrid between a traditional fully insured plan and a self-funded plan. With level-funded plans, employers benefit from the predictability of a monthly payment — similar to fully insured plans — with the added opportunity to achieve savings found in self-funded plans. For some employers, this is a win/win that offers control, flexibility and savings — as well as access to data that can help them make informed decisions about their benefit plans.

Why are level-funded plans desirable?

Cost-savings. Level-funded plans allow employers to contribute fixed monthly costs that are based on the number of participating employees, which provides financial stability while covering claims and administrative fees. However, the employer may receive a refund if actual claims incurred are lower than expected, rather than paying a set premium for every employee at the organization under a fully insured arrangement. What’s more, a strong level-funding program from a reputable third-party administrator (TPA) should offer access to pharmacy rebates passed onto the employer. Having access to this extra savings is a significant advantage for employers — especially for smaller companies (around 25-150 employees), which may not have the cash flow of a larger organization.

While embracing level-funded plans introduces a calculated element of risk, the strategic integration of stop-loss coverage serves as a robust financial safeguard. Activating when claims surpass a predefined threshold, stop-loss coverage effectively shields businesses from the potential financial strain of catastrophic claims. This blend of risk mitigation and financial protection empowers small businesses to embrace self-funding with confidence.

In addition, level-funded plans prioritize transparency, providing businesses with a clear overview of their health care spend. This heightened transparency facilitates collaborative efforts between businesses and TPAs in effectively managing health care costs. This data can provide insights into the health needs of the workforce, enabling employers to implement targeted wellness programs and interventions. Clarity on plan utilization also empowers CFOs with a strategic tool to optimize financial resources and make informed decisions in steering health care expenditures.

Related: Crossroads of tech and benefits: Navigating self-funded benefit plans in 2024

How to evaluate a level-funding plan

In the health benefits market, not all level-funded plans are the same. Here are several key considerations when evaluating a level-funded program.

• What happens to the claims surplus at the end of the year? Some plans don’t return claims surplus while the best-of-the-best plans return 100% of these funds to the employer. You may also want to know if the funds are returned in the form of a check or a credit toward future claims.

• How is the pharmacy managed and what happens to the rebates? Pharmacy spend is one of the leading causes of rising health care costs. It’s paramount to understand how the prescription drug formulary is developed (does it drive to the lowest net cost medications?) and work with a pharmacy benefit manager who can handle the admin side and process drug rebates — I firmly believe 100% of rebates should be passed back to the employer.

The answers to these questions will help ensure the level-funding programs you are considering are right for you and your employees.

We all know health care costs continue to increase across the country, but the good news is that employers have more options now than ever to offer best-in-class health benefits at a lower cost to their employees. The value of level-funded health plans lies in the fusion of stability, opportunity for savings and transparency. Level-funded plans offer small businesses a solution that not only meets their unique needs but also provides a pathway to long-term financial health. With the right plan and the partnership of an innovative TPA, employers have the resources and insights to achieve their goals and customize the best benefit solutions for their employees.

Todd Martin is the Chief Sales Officer at Nova Healthcare Administrators, Inc., where he develops sales and marketing strategies.