Self Funded plans are governed by ERISA, not the state insurance department, which allows for more plan design flexibility, less mandated coverages, and less taxes than fully insured plans. Self funded plans pay only for the healthcare their members consume, whereas in the fully insured market, rates are set based on the collective claims experience of a much larger pool of employers which may contain thousands of other employer groups. To mitigate claims risk within self funded plans, most plans are layered with stop loss insurance which provides employers with insurance coverage in the event one of their members incurs catastrophically high claims OR their entire member population incurs higher than average claims. Many self funded plans can be arranged so that employers pay the same amount every month (easy budgeting) but receive a refund of unused dollars at the end of the year.
Self insurance is no longer an extreme step for employers to take. In fact, HHS found almost 30% of firms with between 100 and 499 employees self-insure. And that number jumps to 80% among employers with 500 or more workers. Still, plenty of firms aren’t ready to fully self-fund. If you fall into that category, a hybrid of a fully insured and self-funded plan may work.
Level-funding combines elements of a fully insured plan structure with the tax benefits of self-funding.
A major reason firms choose fully insured plans over self-funding is risk comfort. In exchange for predetermined and fixed premiums – per-employee per-month (PEPM) – from employers, insurers take on the risk of a fully insured structure, whereas self-funded plans assume the risk (i.e., claims) themselves.
Of course, virtually all self-funded plans have stop-loss insurance.
Level-funding offers some middle ground. Like fully insured options, a level-funding plan design charges an employer a fixed PEPM premium for coverage. After a certain time period (one or two years), usage is reviewed.
If health claims wind up being lower than expected, employers may qualify for a premium refund. If claims are higher than expected, premiums may go up at renewal. But, because these plans still require firms to purchase a stop-loss component, employers never have to pay more than the premium amount.
One of the most attractive features of level funding is the plan’s status. Because a level-funding option is considered self-funded, they are typically exempt from state taxes as well as a good deal of the health reform law’s insurance taxes. (Note: These plans are subject to an annual transitional reinsurance fee.)