You may be quite tired of the same old story: Another increase, another change in benefits, another quoting season, and the expectation of bad news. The implementation of the Affordable Care Act (ACA) has been both challenging and confusing for many employers. ACA community rating has benefited a few traditionally “less healthy” groups, however the rating methodology, compliance hurdles, and cost (at least in Ohio) have kept most groups in steadily shrinking transitional plans.
As in any challenging situation, creative minds rise to the occasion. In this case, newer-to-market level-funded health plans are an intriguing alternative to ACA plans for small businesses.
Level-funded products are designed to give employer groups the benefits and advantages of self-funding, while limiting the disadvantages by offering a “pre-packaged” hybrid of self-insurance for small employers (down to five enrolled locally). Historically, small businesses did not have the opportunity to self-insure their health coverage. Healthy groups continued to absorb increases of the pools of business, which became sicker over time. Today, many commercial carriers are offering level-funded plans that curtail claim volatility through fixed monthly premiums with the added bonus of a potential refund if claim costs are less than expected. These plans allow the small business to see the financial benefits that self-funded plans traditionally offered only to large groups.
So, why consider level-funded plans?
Premium payments are predictable and fixed monthly, avoiding volatility in monthly cash flows and risk of claims exceeding the monthly payments. Employers pay fixed premiums to cover claims funding, stop-loss premium, and administrative fees. Employers are not responsible for claims exceeding those fixed payments for those received during the 48 months following the end of the first year.
When is the last time you were told you may be eligible for a refund?
That’s right, a refund. Most level-funded plans refund a portion of the unused claims surplus at the end of the year, dependent upon the plan’s experience. After a three- to six-month run out period, your performance is evaluated and a portion of allotted claims dollars may be returned if you have run below maximum claim expectations (most carriers require that you renew with them to receive this reimbursement). The refund can be used to offset future increases.
Level-funded plans are exempt from state taxes on premiums (usually 2–3 percent of the total premium). In this case, only stop loss premiums are taxed. They are also exempt from the ACA’s Health Insurance Tax. The ACA does require all self-funded plans to pay an annual PCORI fee ($2.39 for 2019) and they are required to comply with ACA reporting requirements like an Applicable Large Employer.
Level-funded plans use medical underwriting and gender/age ratings, allowing healthier workforces to pay lower premiums. Community rating—required by ACA-regulated health plans—is avoided. Younger, healthier groups may benefit.
These types of plans are not subject to state-mandated benefits that allow small employers to tailor their coverage to their employees’ needs.
Level-funded plans are a great option for many employers, but they are complex. Ask your ARC Benefit Solutions representative about the structure, underwriting methodology, costs, and implementation to be well versed in level-funded plans.