Self-funding can be an excellent option for employers; however, it's essential to understand the impact of different self-funding mechanisms. In particular, understanding level funding is crucial to addressing questions and concerns employers may have based on their understanding of self-funding.

Let's briefly explore the differences between funding claims, under self-funded medical benefit plans, on a level-funded basis and funding under a traditional arrangement. Below are some basic definitions followed by comparisons across several factors important to employers.

Overview: Level-funded administration

Level-funded administration allows small- to mid-size employers to monthly fund their claims at a set amount each fund. By definition, level funding provides employers with predictable (i.e., level) monthly payments, regardless of claim activity. That predictability allows for better budgeting and forecasting, as well as increased peace of mind.

With stop-loss insurance coverage, the employer is protected against large numbers of covered claims, individual catastrophic claims, or both. Because the employer funds its plan for expected claims, there is an opportunity for a refund if the group's claims are lower than expected.

Overview: Traditional funded administration

For many employers with self-funded health benefit plans, particularly in the larger-group market, employers pay as claims are processed throughout the year. That means employers are taking on all the cash flow risk. In the case of large medical claims, employers have to fund those claims when they are submitted for reimbursement under the benefit plan. For companies without significant cash reserves, this poses a tremendous amount of risk.

Impact on monthly payment stability

Level funding: Level funding is calculated based on the expected claims during the 12 months and, regardless of claims, employers will pay 12 equal payments (with additional costs for administration and stop-loss insurance coverage). Employers pay all covered claims (up to the stop-loss attachment points) but don't need to pay more than their set payment in any given month. In addition to stop-loss, level-funding helps eliminate claim-cost volatility. Plus, it may be a lower-cost alternative to fully insured health benefit plans, with similar benefits.

Traditional funding: Traditional funding usually results in low claim payments at the beginning of the year but payments increase later as more claims are processed. If the employer experiences a heavy claim month, or a large claim, their cash outlay can increase significantly. Employers need to have more cash on hand to be able to cover increases in the claim costs.

Impact on claims cost and refund potential

Level funding: Monthly payments are often set at a 'max-funded' rate, which means the carrier/third-party administrator receives the most dollars a plan is required to fund over the full plan year. The rate typically ranges from 110 percent to 125 percent of expected claims and varies depending on state requirements and selected stop-loss coverage. If all funding is not used, employers may qualify for some form of a refund.

Traditional funding: Plan costs or contributions can fluctuate month to month, depending on claims. Because funding occurs at the time claims are adjudicated, refunding plan dollars generally is not necessary.

Impact on run-out periods

Level funding: The run-out period is the time immediately following the end of the health benefit plan year when carriers/third-party administrators continue to process eligible claims incurred during the health benefit plan year period. If employers have paid 12 months of payments, the funding will cover claims received in the contractual run-out period. No additional funding should be necessary to pay for such claims.

Traditional funding: Any covered claims processed in the run-out period will still need funding.

Impact on reporting

Level funding: Employers have access to HIPAA-compliant claim utilization reporting, allowing them to analyze several factors, including: health conditions, hospital charges, prescription drug utilization and high-cost chronic diseases within their group. This information helps employers determine what education is needed to improve their employees' outcomes and plan efficiency. It's also helpful for developing future plan designs to better meet the needs of the group.

Traditional funding: Reporting is similar to level-funded.

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Nearly one in five covered employees are enrolled in a small employer self-funded plan, reflecting growth based on studies in 2018 and 2019.

Is this an option you should be considering? Given the predictable nature of level-funding, it can be an attractive alternative. Especially considering the volatile environment we're all currently living in. I hope you now better understand the differences between level-funding and traditional funding arrangements and can use this article to make an informed decision on your future plans.

Andy Tsakrios is a regional sales manager with Trustmark. Based in Boise, Idaho, he oversees sales distribution across 16 states supporting the company's sales of self-funded plan designs and stop-loss insurance.

Read more: 

• Why brokers should explore level-funded plans for small group clients
• Free-market health care solutions
• How self-funding can address changing health care needs