Now that the American Health Care Act has failed to advance, small businesses, and the brokers who serve them, are looking for ways to manage health care costs within the status quo of the Affordable Care Act (ACA).
As it did with individuals, the ACA community rating methodology benefitted some while burdening others. The community rating methodology spreads the costs associated with the differing risk of group (or individual) profiles over the entire risk pool. In the case of small groups, older and/or sicker groups benefitted from lower rates while younger and/or healthier groups pay more. Those small groups for which this “peanut-buttered” risk solution has resulted in increases to their health insurance may want to look at level-funded plans, an alternative to fully-insured plans.
Large groups have long been able to self-insure their health care coverage. Under a self-insured plan, employers directly cover the costs of their employees’ medical expenses. The employer is not subject to all of the required coverages, or essential benefits, that are core to the ACA. And, the employer is covered against extraordinary costs through participation in an insurance captive or through stop-loss insurance. Small groups, however, have not had the scale, systems, process or sophistication to self-insure. In short, it has been too onerous and risky for them to self-insure. Enter level-funded plans.
Level-funded plans are essentially pre-packaged self-insured health plans, with low attachment stop-loss coverage, that are now being marketed in most states to groups as small as 10 employees. Level- funded plans are being offered by commercial carriers and by a host of other third party administrators (TPAs). For the right groups, level-funded plans can save 30 percent versus a fully insured ACA small-group plan. And because of their structure, level-funded plans do not have the volatility in monthly cash flows, associated with self-insured plans, that can cripple a small business.
Here’s how a level-funded plan works. First, like large-group plans, level-funded plans are underwritten. Consequently, they tend to be attractive to healthier groups. A census is provided to the TPA, who determines a monthly cost comprised of three elements, each roughly representing one-third of the monthly payment: a claims allowance, a TPA fee, and a premium for stop-loss coverage. This consistent, or level, amount is funded by the company each month. The claims allowance goes into an account from which employee medical costs are funded. The TPA fee goes towards paying for the administration of the program, including adjudicating claims. And the stop-loss premium goes towards that coverage. As claims come in on a monthly basis, the TPA pays them out of the claims allowance. If there is an extraordinary claim on an individual or aggregate basis, the stop-loss kicks in. In no case does the employer have to pay more than the level amount.
At the end of the year, the performance of the group is evaluated. If the group has performed well, some of that claim allowance may be returned to the group. And the group may benefit from a lower “rate” for the next year on the basis that the monthly allowance should be less, as should the premium for the stop loss. If the group performs as originally expected, there should be little or no increase — a rarity in the ACA world.
But what if the group has a really bad year? In a bad year, the stop-loss kicks in to protect the employer. Again, the entire concept of the level-funded plan is that the employer never has to pay more than the level monthly amount. But as an underwritten plan, it is reasonable to expect an increase — perhaps even an untenable increase — in the level-funded plan. Here is where it really gets interesting. Today, in such a situation, the group can simply revert back to a community-rated ACA plan. Here, small groups have an advantage that large groups do not: they can revert back to a non-underwritten plan; one that is likely to be to their financial benefit.
So, for small groups, the question is why not explore a level-funded plan? With savings of up to 30 percent, protection against extraordinary costs, and the ability to fall back on an ACA plan, there is very little reason not to do so.
If it is so easy and beneficial, why are more small groups not migrating to level-funded plans? There are several reasons. First, in a handful of states (including New York and California), small-group, level-funded plans are not available because the states’ departments of insurance regulate the stop-loss attachment level, which dictates at what level the stop-loss can kick in. In short, these states do not allow the low attachment level required for a small-group, level-funded plan. Interestingly, legislation has been introduced at the federal level (H.R. 1304) to affirm that medical stop-loss is not health insurance and cannot be regulated as such.
Second is awareness. Level-funded plans are more complex, and many brokers serving small-group clients have not been trained on their structure, implementation and costs. Further, most digital health insurance sales and quoting platforms today, whether group and/or broker-facing, do not include level-funded plans. Some are addressing this by displaying “illustrative” quotes, subject to underwriting, to surface the cost savings of these plans.
The third reason is the momentum of fully insured small-group plans. For many businesses and brokers, it is just easier to roll their existing, or similarly configured, plan forward another year.
And finally, there have been some disreputable players offering level-funded plans. Poorly structured, these plans can leave a business, and its employees, at risk.
If you serve small-group clients of more than 10 employees, you may well want to consider a level-funded plan. It’s important to be well versed in these products. In the end, you may be able to save your client up to 30 percent on its health care costs, an enticing opportunity for any small business.