Where’s the Risk? How Level Funded and Self-Funded Medical Plans Affect Your Rates.
What is the question everyone asks a health insurance agent? How can I get the best rates for the best plan? Not an easy answer! As employer are challenged with the desire to provide rich benefits while keeping costs within budget, often the plan that is offered becomes a compromise of benefits.
Over the last 5 years here in Utah we have seen the average In Network annual Deductible for a PPO plan increase from $992 in 2015 up to $1,578 for 2020.
Related to that, the In Network Out of Pocket Maximum average here in Utah increased from $5931 in 2015 to $13,767 in 2020. More than double! While there are several factors that cause this increase, increase in pricing has caused employers to make plan changes. (UBA Health Plan Survey Findings Design Trends Data)
So how do you get the best price on health insurance while keeping value in your benefits plan? Self-Funding and Level Funding are one of the options. Here we will review of these options, and some outline some considerations.
Before we begin, let’s talk about Medical Loss Ratio (MLR) The affordable care act requires that fully insured medical plans MLR paid claims must not fall below a level of 85% of premiums collected for large employers and 80% for small employers. When MLR fall below those standards, the member or group must be refunded. We don’t see refunds often, or for very large amounts in the fully insured market. Interested in learning more about MLR? Kaiser Family Foundation has a great article here: https://www.kff.org/health-reform/fact-sheet/explaining-health-care-reform-medical-loss-ratio-mlr/
When discussing funding for a health insurance plan, its all about where the risk is.
Fully Insured plans have an arrangement between employers or groups and insurance carriers where the insurance carrier is taking all the risk. Underwriters assess the risk, and they calculate how much they think will be spent, and then give the group a rate. Small Employers are “community rated” which gives the same rate to everyone that lives in that area at the same age. At the end of the year if the claims come out:
Higher (loss for the carrier), the insurance carrier is out the money. They will probably increase your premiums at renewal, but if your group doesn’t renew with that carrier, the carrier cannot get any more money on that plan year from the group.
Lower (loss for the group)– refund only issued to group if the MLR requires it by law.
Level Funded Plans avoid some of the mandates required by the Affordable Care Act. The risk is shifted to be “Shared” by the group and by the insurance carrier. Health status of the Group will lower or increase rates. Once underwriters have assessed the risk in the group, they calculate the premiums to cover risks, and estimate a premium to be collected each month. Generally, they “Max” out the risk for a worse case scenario. At the end of the year if claims come out:
Higher: Specific and Aggregate Stop Loss will cover any overages (ex: claims that exceed $30,000). You pay a little additional for this coverage in you plan, but its generally required, and helpful. Increase in these kinds of claims will increase your renewal rates, but if you decide not to renew your plan with that carrier, they will not collect any more premiums for that plan year from you.
Lower: A refund calculation is made based on the contract. The insurance carrier keeps a portion, and the group gets a portion back. Typically, the amount is 50/50 or 70/30 (30% to carrier)
o Because of the possibility of a refund, its to the advantage of the group to do all they can to see that the plan runs well.
Self-Funded plans arrange your medical plan for the employer group to take all the risk. The insurance carrier is simply administering the claim, and then they send the bill to the employer group to fund. The risk is still underwritten, and calculations are made for the health of the group, but the group isn’t billed “monthly premiums”. Groups can decide to hold this amount aside (to fund claims) or come up with their own calculation. Instead of monthly premium bill, each time a claim comes through to the carrier, money is taken out of a specific account funded by the employer. Reports are generated monthly that contain list of claims that were paid out, rather than a bill. Specific and Aggregate Stop Loss coverage will help cover catastrophic claims above a certain level, but generally it is higher than with Level Funded plans (ex: claims that exceed $100,000).
Because the money comes out real time from the employers account, any amounts over or under the estimate at the beginning of the year are 100% employers.
United Benefit Advisors (UBA) has reported in their annual Health Plan Survey an increase in Self-Funded Plans. The west region had growth from 2018 to 2019 with 32% increase in the west for small employers and 30.7% for employers 100-499 employees. This is a larger increase than in previous years which shows us that even those that didn’t consider it before may want to explore these kinds of plans.
So why would someone want a Self-Funded Plan? Here are a few considerations:
The most obvious is health of your group. If your employees are younger than average, or healthier than average, costs are lower than the “Community” rated groups that are Fully Insured.
Some of the carriers built in fixed costs such as administration costs can be lower, around 5-8%
There will be a reduction in ACA and premium taxes, as well as possible elimination of carrier profit margins
As mentioned with the Level-Funded plans, there are certain parts of the Affordable Care Act that can be excluded from the plan. They are more flexible in plan design, so employers would have more control over cost.
Employers have an increase ability for employee engagement. You know what makes your employees happy!
What are some reasons against having a Self-Funded Plan?
Costs are more un-predictable, so there is a chance the plan will cost you more. You may have good months and bad months for cost.
There are more requirements placed on an employer under Affordable Care Act and ERISSA. Privacy and Documentation are more of a burden on HR.
Self-Funded plans have lots of technical details that require knowledge and expertise. Make sure your agent has the correct experience.
Funding the claims and building up your reserve can be expensive at first, and negatively impact your company’s assets.
Considerations for a Self-Funded Plan:
Wellness Plans can really have a positive impact on your plan. Rewarding healthy habits, preventive care, and smoking cessation will bring your costs down. Having a comprehensive Wellness plan is vital. Some carriers have wellness built into plans but get all the details, so you have the best one for your employees that result in high plan success.
Third Part Administrators (TPA) can help with some of the additional burdens of Self-Funding. From administration to reporting, there are many things you can get help with.
Consider some of the pharmacy programs available. Pharmacy costs continue to be one of the biggest problems with controlling costs. There are lots of different ways to keep control of Pharmacy costs.
UBA White Paper on Self-Funding
UBA Self-Funding Fact Sheet Utah 2019