What are the advantages and disadvantages of different types of benefits plans, such as self-funded, fully insured, or level-funded?
Different types of benefits plans have different advantages and disadvantages, depending on your business size, budget, risk tolerance, and goals. Here is a summary of the main differences between self-funded, fully insured, and level-funded benefits plans:
- Self-funded plan: A self-funded plan is a pay-as-you-go financing model, where the employer assumes the financial risk of paying for employees’ health care claims under the cost-sharing terms of the plan. The employer can save money by avoiding insurance premiums, taxes, and fees, and by having more control over the plan design and administration. However, the employer also faces unpredictable and potentially high costs due to variable claims and catastrophic events. The employer may need to purchase stop-loss insurance to limit the total annual losses, but this does not help with cash flow issues when many claims must be paid at once.
- Fully insured plan: A fully insured plan is a fixed monthly amount financing model, where the employer pays a health carrier to cover the expected claims, the premium for stop-loss insurance, and the plan administration costs. The employer transfers most of the risk to the carrier and has predictable and stable costs. However, the employer also pays higher costs due to insurance premiums, taxes, fees, and profit margins. The employer has less control over the plan design and administration, and cannot benefit from lower claims or refunds.
- Level funded plan: A level funded plan is a hybrid financing model that combines elements of self-funded and fully insured plans. The employer pays a health carrier the same monthly amount to cover the estimated cost for expected claims, the premium for stop-loss insurance, and the plan administration costs. If the total claims costs are higher or lower than expected, the carrier makes adjustments at the end of the plan year in the form of a refund to the employer for lower claims or a premium increase on the stop-loss insurance renewal for higher claims. The employer shares some of the risk with the carrier and has more predictable costs than a self-funded plan. The employer can also save money by avoiding some taxes and fees, and by having some control over the plan design and administration. However, the employer still pays higher costs than a self-funded plan due to insurance premiums and profit margins. The employer also has less control over the plan elements than a self-funded plan.