Small and midsize businesses seeking flexible benefit plans for their employees that also provide a means to contain costs often feel their options are limited. The fully insured world restricts flexible and creative plan options, and many employers are stuck in a cycle of paying steep increases year over year because they’re being pooled with many other small plans.
A traditional self-funding model might also be out of the question without solid claims data to understand risk and your potential monthly claims.
However, there is another alternative funding strategy that may be right for small and midsize businesses that want to take control of their plans and access claims data while paying a consistent premium each month. It’s called level-funding, and it’s ideal for companies that like the idea of self-funding but want to keep the safety and stability of consistent premium payments.
In a level-funded plan, employers work with a third-party administrator to determine the expected claims for the year. The TPA adds a “claims corridor” to the expected claims amount, typically between 10-15%. This, along with the stop-loss insurance and administrative fees, becomes the annual premium. This number is divided by 12 to determine the total monthly cost.
Throughout the year, the TPA pays claims as they come in; at the end of the year, if any claims dollars are leftover from the expected claims bucket, the employer receives a refund. However, if the claims exceed the allotted amount, the stop-loss insurance kicks in to pay the difference, rather than the employer having to pay more.
Employers in a level-funded plan get access to detailed claims reporting, which highlights where employees are both overspending and underspending on their health insurance. With this information, employers can customize their health plan to better serve employee needs.
As with any self-funded plan, employee education and communication play a large role in cost containment. Employers have access to claims data and can see trends in their employees’ healthcare that could be driving up costs. For example, employers can look at how employees use urgent care centers, emergency rooms and primary care doctors’ offices, and educate employees on which care center is right for different situations.
Similarly, employers may need to take a bigger role in educating employees about prescription drug plans — from helping them understand a formulary, to discussing mail-in pharmacy plans and generic versus brand name medications.
Disease management programs also help level-funded employers control costs. Employers can help employees manage chronic health issues, or prevent those at risk from developing one.
Employee education and communication plans can take a variety of forms, including intranet messages, emails, posters and postcards — depending on how your employees best consume information.
Employers who understand their employee demographics and emphasize education have saved significantly with a level-funding benefits strategy. We know of one employer with 60 covered participants has saved 35% by moving from a fully-insured plan to a level-funded plan, and they are projected to receive a surplus at the end of the first year.
For financially stable and relatively healthy employers, level-funding is a step in the right direction toward traditional self-funding. While it does require more employee education, the results are access to claims data, plan flexibility and the ability to better contain costs from year to year.
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