Even though insurance premiums rose 4% from 2020 to 2021 (and are continuing to rise in 2022), small businesses may not necessarily be getting more out of their health plans. And given record-breaking inflation and a challenging labor market, a health plan that reduces costs and expands benefits is critical for small businesses today.
Traditionally, small business employers have leaned toward fully-insured health plans while larger companies have gravitated to self-insured plans. Looking beyond this oversimplified breakdown can unlock a better understanding of what these types of structures provide business owners. Why do larger companies use self-funding? Is self-funding more risky than fully insured? How can smaller businesses access the benefits of self-funding without taking more risk?
The role of an insurance carrier changes depending on if a company uses a self-insured plan or fully insured plan.
For self-funded health plans, the employer pays the insurance provider to administer the health plan (adjudicate claims, provide member support, pay providers, etc.) The company itself acts as the insurer, paying the claims as they are incurred from their own bank account. Fully-insured health plans instead pay the insurance carrier to act as both administrator and insurer, with employers paying a fixed premium each month.
Self-funded companies have the benefit of paying exactly for the amount of healthcare that is used by their employees, but they have no idea how much this will be month over month. On the other hand, a fully-insured company knows exactly what they will pay each month, but they are paying regardless of the amount of healthcare used by employees.
Importantly, the fully insured employer has no control over plan design, features, or any other incentives. While self-insured plans offer more control, only 16.1% of companies with fewer than 100 employees were self-insured in 2020.
Gaining in popularity are level-funded plans. Effectively serving as a hybrid between a fully-insured and self-funded plan, a level-funded plan offers the ability of a fully-insured plan with the insights of a self-funded one. The Kaiser Family Foundation’s 2021 Employer Health Benefits Survey reported that 42% of small firms had a level-funded plan, compared to just 13% in 2020.
In a level-funded plan, an employer pays a monthly fee that includes the estimated cost for claims, stop loss insurance premium, and administrative costs. The employer gets predictable monthly spend and the possibility of money back if claims are less than expected. What’s critical to note is that level-funding does not pose any more financial risk to the employer. top loss insurance protects the employer for any claims that exceed their monthly payment. For example, if an employer pays a monthly fee of $500 for an employee and that employee has an emergency surgery that exceeds that amount, the stop loss insurance kicks in to pay anything above the amount.
For small businesses navigating this tumultuous time, a level-funded plan can provide greater value – ensuring high quality care at a lower cost. While it is imperative to understand what it means if your health plan is fully insured, self-funded, or level funded, it is more important to analyze and understand the benefits and coverage levels of the underlying plan. At Poppins Health we often say how you pay for a plan is not as important as what you are paying for.
