Level (partial-self) funding: A data-driven path to self insuranceby Aaron Huang, November 2, 2015
The Affordable Care Act has caused a fundamental shift in the way employers think about offering healthcare and health plans to employees. Starting in 2016, the onset of the Employer Mandate and the expansion of Community Rating for more businesses (depending on state) are forcing employers to explore other options to control rising premiums while continuing to offer competitive benefits for employees.
Increasingly employers are looking to self-insure, or manage their own health claims, as early as possible in order to remove the additional costs major insurers charge them to account for administrative overhead (marketing, admin fees, etc.). Companies also self insure to avoid onerous taxes and fees associated with many fully insured health plans. Taken together, employers must weigh the costs and benefits of self-insuring relative to staying fully insured. With the ACA mandates, many companies are looking to self insure sooner. Employers armed with the right tools and insights have the advantage.
Level-funding: A data-driven path to self insurance
If your group is fully insured (you offer plans and pay monthly premiums to major insurers), your plan options are limited and you often pay more. You are subject to a variety of mandated benefits, and you probably don’t have much (if any) say in the plan design. You’re essentially limited to off-the-shelf choices offered by your insurer. Every year, you simply make a decision about how much of the cost sharing you can afford to take on, and how much you’ll have to push onto employees.
Large companies have more options. If they fall into the right size range (usually 200 employees and up), they may be able to self-insure, where they manage their own claims, offer their own plans and essentially become their own insurer. When they do, they can determine their own plan design, avoid state mandated ACA taxes, and often significantly reduce their costs.
Getting visibility into your group health profile is mission critical in determining the right time to self-insure. A few large claims in the past year can significantly increase the cost to self-insure – and having access to this insight during financial planning can help determine whether full or self-funding is the right move for your company.
A critical path for employers approaching 50 FTE
In the current health insurance environment, another option — partway between fully-insured and self-insured — has emerged, and small companies are finding it appealing. Known as level-funding, this option can save money and frustration for groups as small as 30 individuals.
Instead of the employer becoming their own insurer as in a self-insured model, they work directly with an insurance company (and a broker like Lumity) to handle administration, with the insurer determining premiums and handling claims throughout the year. Premium payments are calculated by the insurance company to cover the cost of administration and expected claims plus a small percentage to cover unexpected expenses. Once the premium is set, it remains the same, or level, for the year.
At the end of the year, claims are examined and the insurer sets a new premium for the next year. If claims were higher than expected, the level-funded premiums are likely to increase. If claims are less than anticipated, the employer is eligible for a partial refund of the difference, which can often be applied to the next year’s rates to keep them flat.
How data (and insights) can make a difference
This is the reason data is so important. From one year to the next, understanding the health profile of your dynamic group is critical in assessing whether level-funded plans are the best option. Your health profile changes throughout the year as new employees are hired and current ones leave the company. If your group is healthier than average, you save money (often a substantial discount to fully insured options) without compromising benefits since your rates will be based on expected claims. If your group has several large claims for the year, you may decide to look at a fully-insured plan structure the subsequent year.
Like in a self-funded plan, premiums for level-funded plans tend to be 10% – 40% lower than they would be for a comparable fully-insured policy. Level-funded plans are more flexible, too, in part because as nationally governed plans under ERISA, they don’t need to meet the various state mandates. This allows companies to offer a plan that is consistent regardless of where their employees live and work. They can customize their insurance plan for their specific employees, and continue it year after year, rather than being forced to adapt every year as insurance costs take a bigger and bigger bite out of company (and employee) budgets. And like self-insured plans, level-funded plans do not pay premium taxes.
Understanding the benefits of level-funding is important, but the next step is even more so. Now you have to decide if it is the right strategy for your group. It isn’t for everyone. You need data, the right tools, and a thorough understanding of your options. You have a business to run. Don’t try to figure this out on your own.
With our powerful, technology-driven systems, Lumity is in a unique position to help you make an informed choice. We gather the necessary data in an automated and anonymous way, crunch the numbers using our proprietary algorithms, and deliver the answers you need. Your decision will be clear, and it won’t be made based on intuition, a great sales pitch, or simply out of frustration. Instead, it will be a data-driven, non-partial recommendation based upon your company’s unique situation. You get the information you need, and it won’t cost you a dime. Call Lumity first, and we’ll help you make that all-important next call – which plans are right for your company?