The Alternative to Fully-Insured Health Plans: What It Means for Employers

If your business offers health insurance benefits to employees, you’ve likely heard of alternative funding models like self-funding or level-funding. But what exactly do these alternative approaches entail, and why are more employers considering them instead of traditional fully-insured plans?

Traditional Fully-Insured Plans

With a fully-insured health plan from an insurance carrier, employers pay a fixed premium every month to provide coverage for their employees. The premium rates are set by the insurance company based on the employer’s demographics, claims history, and other factors.

Essentially, the employer transfers all the risk and responsibility for paying claims over to the insurance carrier in exchange for that fixed premium payment. Any unused premium dollars are kept by the insurance company as profit.

The Alternative Funding Approach

In contrast, alternative funding methods like self-funding give employers more financial control and risk-sharing potential when it comes to paying employee medical claims.

With self-funding, rather than paying premiums, employers pay the actual claims as they are incurred up to a predetermined limit. Employers purchase stop-loss insurance to cover catastrophic claims over that set amount.

This means if claims end up being lower than expected in a given year, employers can benefit from those savings on claim costs rather than premiums being profit for an insurance carrier.

Level-funding is a variation where employers pay a fixed per-employee amount each month, similar to a premium. But unlike premiums, the level-funded amount is directly added to an employer’s claims fund. Any surpluses remain with the employer rather than an insurance company at the end of the year.

Why More Employers Are Considering Alternative Funding

So why are more businesses exploring self-funding, level-funding and other alternative approaches? The potential advantages include:

• Lower overall costs compared to fully-insured premiums
• Flexibility to customize health plan designs
• Avoidance of certain taxes and fees on fully-insured plans
• Ability to take advantage of unused claim dollars rather than forfeit to insurers
• More data and transparency into claims for better cost management

Certain stop-loss insurance coverages also incentivize wellness and preventative care to control claims costs.

While alternative funding does mean employers take on more risk initially, the potential savings and flexibility make it an attractive alternative actively considered by many employers struggling with rising traditional premium costs.

If your business is weighing different options for offering competitive health benefits at an affordable cost, examining alternative funding models is certainly worth exploring versus sticking solely with a fully-insured approach. The risks and rewards look different for each employer based on their specific situation and employee population.

To find out more about NARFA’s proven strategies for helping members win big each year by controlling health plan costs while maintaining rich employee benefits, please contact us. Our team can advise what strategy may be the right fit for your company.