Understanding Level Funding: A Smart Solution for Small to Medium-Sized Businesses

Navigating the complexities of employee benefits can be a significant challenge for small to medium-sized businesses (SMBs). Balancing the need for competitive benefits packages with the imperative to manage healthcare costs requires a strategic approach. One solution that has been gaining traction is level funding. This financial arrangement offers a middle ground between traditional fully insured plans and self-funded plans, providing a blend of predictability and flexibility. In this blog, we will explore what level funding is, how it operates, its benefits and drawbacks, and why it might be the right choice for your SMB.

 

What is Level Funding?

 

Level funding is a hybrid approach to financing employee health insurance that merges aspects of fully insured and self-funded plans. In a level-funded arrangement, businesses pay a consistent monthly premium to an insurance carrier. This premium covers expected employee claims, administrative fees, and includes stop-loss insurance for added protection. The insurer manages and pays employee claims using the collected premiums, similar to a fully insured plan, but with some features of self-funding.

 

How Level Funding Works

 

With level funding, businesses make regular monthly payments that are predictable and fixed, which greatly aids in budgeting and financial planning. This setup resembles the cost predictability of a fully insured plan. However, level funding includes a self-funding component where businesses may receive refunds or credits if actual claims are lower than projected. Conversely, if claims exceed expectations, businesses might face additional costs, though these are typically mitigated by stop-loss insurance, which covers claims beyond a certain threshold.

 

Benefits of Level Funding

 

One of the most significant advantages of level funding is cost predictability. Businesses benefit from fixed monthly premiums, which makes budgeting easier and reduces financial uncertainty. This consistent cost structure is similar to that of fully insured plans but with the potential for additional financial benefits.

 

Another advantage is the potential for cost savings. If the actual claims are lower than expected, businesses might receive refunds or credits, providing a financial benefit that can be particularly advantageous for companies with a healthy workforce or effective healthcare cost management. Additionally, level-funded plans often come with lower administrative costs compared to fully insured plans due to the flexibility of self-funding.

 

Flexibility is another key benefit. Level-funded plans typically offer more customization options for plan design, allowing businesses to tailor benefits packages to better meet the needs of their employees. This flexibility extends to greater data transparency, as businesses often have access to detailed claims data. This transparency supports informed decision-making and helps identify cost management opportunities.

 

The inclusion of stop-loss insurance in level-funded plans provides a safety net against unexpectedly high claims. This protection allows businesses to manage the risk associated with self-funding, making it a more secure option compared to traditional self-funded plans.

 

Drawbacks of Level Funding

 

While level funding offers numerous benefits, it is important to be aware of its potential drawbacks. One significant drawback is the possibility of additional costs if actual claims exceed projections. Despite the safety net provided by stop-loss insurance, businesses may still face financial implications if claims are significantly higher than anticipated.

 

Level funding can also introduce a level of administrative complexity. Managing claims, overseeing stop-loss coverage, and handling potential refunds or adjustments requires diligent administration, which can be more involved than managing fully insured plans.

 

Additionally, while level funding provides predictable monthly premiums, there is some variability at the end of the plan year. Businesses may not always receive a refund, and the amount of any refund can fluctuate based on actual claims experience. This variability, while often manageable, introduces a degree of uncertainty that businesses need to consider.

 

Compliance with regulations is another consideration. Level-funded plans must adhere to various legal requirements, including those imposed by the Affordable Care Act (ACA). Ensuring ongoing compliance and handling necessary reporting can add to the administrative burden.

 

Is Level Funding Right for Your SMB?

 

Determining if level funding is suitable for your business involves assessing several factors. Consider the size of your employee population and your claims experience. Level funding can be particularly advantageous for businesses with a stable or predictable claims history. Companies with a smaller or healthier workforce may benefit from the potential cost savings and flexibility associated with level funding.

 

Financial stability is another crucial factor. The fixed monthly premiums of level funding aid in budgeting, but it’s important to be prepared for the possibility of additional costs if claims exceed projections. Assess your organization’s risk tolerance and financial capacity to handle potential variability in claims costs.

 

Administrative capacity is also a key consideration. Level-funded plans may require more oversight and management compared to fully insured plans. Evaluate whether your organization has the resources to handle claims monitoring, stop-loss management, and compliance requirements. Engaging with insurance brokers or consultants who have experience with level-funded plans can provide valuable guidance and help navigate the complexities involved.

 

How to Implement Level Funding

 

If you decide that level funding is the right choice for your business, implementing it effectively involves several steps. Start by engaging with an insurance broker or benefits consultant who specializes in level funding. Their expertise will help you evaluate options, design a plan that fits your needs, and manage the complexities of implementation.

 

Carefully assess plan options by selecting an insurance carrier that offers level-funded plans and has a strong reputation for service and stability. Work with your broker to design a plan that aligns with your business goals and employee needs, considering factors such as benefits, network options, and employee preferences.

 

Ongoing management is crucial. Regularly monitor claims experience and utilization data to ensure the plan remains effective and cost-efficient. This data can inform decisions about plan adjustments and cost management strategies. Stay informed about regulatory requirements to ensure compliance and handle necessary reporting.

 

At the end of the plan year, conduct a thorough review of the plan’s performance. Assess the claims experience, evaluate any refunds or additional costs, and make adjustments as needed for the following year. Continuous improvement is key, so use the insights gained from level funding to optimize your benefits program and enhance employee satisfaction.

 

Conclusion

 

Level funding offers a valuable solution for small to medium-sized businesses seeking to balance cost predictability with the potential for savings and flexibility. By providing fixed monthly premiums, stop-loss protection, and customizable plan options, level funding can help businesses manage healthcare costs more effectively while offering a competitive benefits package.

 

However, it is essential to carefully evaluate your organization’s specific needs, financial situation, and administrative capacity before adopting level funding. With the right strategy and expert guidance, level funding can be a powerful tool for optimizing your benefits program and achieving your business objectives.  Benely works with all types of insurance offerings for their clientele.  Please connect with us to find out more.