Self-Funded vs. Level-Funded plans: What’s the Difference?

Serious pensive young marketers in glasses sitting at table and discussing strategy: curly-haired lady offering idea and pointing at laptop screenSelf-funded and level-funded plans explained 

Considering self-insured health plans for your employees can be difficult, especially if you’re not familiar with all of the available options. If you’re doing your research, you’re probably asking yourself which ones are better, self-funded or level-funded plans? 

Before answering, let’s go over the basic definitions of each and explore the differences between level-funded and self-funded health plans so you can make the best decision.

In a nutshell, self-funded plans provide a pay-as-you-go healthcare model. Level funding puts a cap on those costs. More precisely, Kaiser Family Foundation (KFF) explains:

  • Self-funded plan: “An insurance arrangement in which the employer assumes direct financial responsibility for the costs of enrollees’ medical claims. Employers sponsoring self-funded plans typically contract with a third-party administrator or insurer to provide administrative services for the self-funded plan. In some cases, the employer may buy stop-loss coverage from an insurer to protect the employer against very large claims.”
  • Level-funded plan: “An insurance arrangement in which the employer makes a set payment each month to an insurer or third-party administrator which funds a reserve account for claims, administrative costs, and premiums for stop-loss coverage. When claims are lower than expected, surplus claims payments may be refunded at the end of the contract.”

You were probably unfamiliar with these terms until now, especially if you’re a small or midsize business owner or if you’re looking into insurance options for your employees for the first time. In general, fully-funded plans offered by larger, more traditional carriers are more recognizable.

An insurance company, not the employer, sponsors a fully-funded plan and holds the insurance policy. In this scenario, your company would pay a fixed monthly fee to the carrier to pay the employee claims and administer benefits on your behalf.

Fully-funded plans are relatively expensive and suited for larger enterprises. Carriers control the costs entirely and can inflate rates each year without much explanation. The fact that your company must pay a fixed rate, regardless of whether employees use their healthcare benefits or not, makes this option unaffordable for most smaller businesses. 

This is one reason why self-funded and level-funded plans’ popularity increased over the years and is still on the rise. Here’s some data to back that up:

  • In 2020, 60% of covered workers in firms with three or more employees were in partially or entirely self-funded plans.
  • Between 1999 and 2014, the proportion of public and private sector workers covered by a self-funded health plan increased from 44% to 61%.
  • 13% of small firms offered a level-funded plan in 2020.
  • 31% of covered workers in small firms are in a plan that is either self-funded or level-funded in 2020, higher than the 24% registered in 2019.

Now that we’ve reviewed the basics, let’s dig into self-funding and level-funding in more detail to help you understand the differences between them so you can make the best decision.

Related: Debunking common small business medical insurance myths 

Self-funded insurance 

As mentioned above, an employer sponsors a self-funded plan rather than an insurance company. The employer pays directly for the healthcare used by employees. 

With many self-insurance plans, you pay for what your employees use without a cap. You may pay less than expected if employees have fewer claims than you budgeted for, or you may pay more than anticipated if employees make excessive health claims. 

As a result, employers can find it hard to plan for their healthcare costs. More than expected claims or “catastrophic” claims can throw off healthcare budgets, leaving you scrambling to come up with the difference. For example, a substantial claim in the first month of a plan year could eat up an annual healthcare budget right off the bat.

But, within self-funded insurance are level-funded plans, an option that removes most of these cons. Let’s take a closer look.

Level-funded plans

A level-funded plan is a type of self-insurance that includes monthly cash flow stabilization. That means you pay for the health insurance you use (like all self-insurance plans). But with level-funding, you have a cap on costs. It’s also known as “level-funding” or a “partially self-funded” plan.

As an employer with a level-funded plan, you’ll pay a fixed monthly amount for each employee’s benefits. If claims end up being low, you’ll get money back — often as a rebate or a credit towards the next year’s policy. If claims are high and go over a predetermined level (or cap), then your carrier’s stop-loss insurance kicks in to cover the excessive costs. Your payments are “level.”

As a result, employers with level-funded plans have peace of mind they’ll avoid unexpected high fees and can more accurately predict their healthcare budgets.

How else is level-funding different?

These are some of the main differentiating factors of level-funding insurance:

  • Flexible benefits: Level-funded plans are more flexible for small and midsize businesses in terms of the benefits they offer. Companies can customize the options based on the features, coverage employees will prefer, and available budget. Also, premium carriers will include more modern benefits, such as being able to choose your own doctors without worrying about them being in network, telemedicine, mental healthcare, physical wellness, and maternity-specific perks—many of them at no additional cost.
  • Customer service: Top level-funded insurance carriers offer dedicated, qualified customer service professionals who will help you and your employees navigate the benefits, process claims, and complete other administrative procedures. This will save you from the hassles of dealing with a broker or third-party administrator. 
  • Access to technology: Modern, state-of-the-art insurance carriers that offer level-funded plans, will provide your HR staff and any other administrators with apps and tools to manage health benefits with ease.
  • Small business-friendly: Small and midsize businesses increasingly choose level-funded plans. Because the ACA introduced tax credits for companies with 2-49 employees offering healthcare, level funding has entered the spotlight as many small businesses provide healthcare for the first time.
  • Access to plan data: Having access to plan data is another level-funded benefit. Your company keeps total control of the amount and types of claims you pay. Greater data transparency will enable you to implement proactive wellness and prevention initiatives for your employees. 

Related: Healthcare for startups: Where to start

Should You Offer a Level-Funded Plan?

When considering level-funded vs. self-funded plans, ask yourself if taking on the cost of your healthcare claims with the leveled pricing model’s predictability would work for your business. If your healthcare costs are regularly higher than average, you may want to look beyond the “pay as you go” self-funded model in its entirety. 

On the other hand, a level-funded plan may be more suitable for you if:

  • You’re a startup, small, or even midsize business. A fully-funded insurance model could be a better fit for larger firms.
  • You want to give your employees more options to fit their budgets and their healthcare needs.
  • You want more flexibility, greater control over your plan, and more predictability from year to year.
  • Your company’s location allows for level-funded plan adoption. State regulations will determine payment and other terms. Make sure you research the applicable conditions based on your specific company before deciding if level-funding is right for you.

Sana will help you define the best level-funded plans that adapt to your business needs. Obtain premium benefits for your employees with full medical, dental, vision, and more without the hassles and high costs of traditional carriers. Get a quote now.

Originally published May 17, 2021 10:00:12 AM
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Adrienne Smith May 17, 2021