These challenges often stem from a fundamental misalignment of incentives between traditional insurance carriers, healthcare providers, and employers. This misalignment can drive up costs and make it increasingly difficult for employers to offer affordable, high-quality healthcare benefits to their employees. One solution that has gained traction in recent years is Level Funding, a model that offers greater transparency, control, and potential cost savings for employers. With Level Funded plans on track to outpace fully insured plans by 2027, it’s important for broker and employer alike to understand their options.
One of the key issues in the traditional health insurance model is the misalignment of incentives between insurers, healthcare providers, and employers. This misalignment is particularly evident in how providers are reimbursed for the services they provide. Approximately 54% of healthcare providers operate at a loss, primarily due to the reimbursement rates they receive from Medicare and Medicaid. These government programs pay significantly lower rates than commercial insurance plans, often leaving providers with little to no negotiating power. As a result, providers rely on higher reimbursement rates from commercial insurers to subsidize their losses from Medicare and Medicaid patients. This imbalance forces providers to charge employers and their employees significantly more—sometimes up to five times the Medicare/Medicaid rates—for the same services.
Insurance carriers, on the other hand, have their profit margins capped at 15-20% due to the Affordable Care Act (ACA). To maintain or increase their profits, insurers may drive up the unit cost of services. For example, if a service previously cost $100, insurers might increase the rate to $500, knowing that their profit margin will be calculated as a percentage of this higher cost. This strategy not only increases the overall cost of care but also places a greater financial burden on employers and their employees.
Luckily, there are options to help alleviate the pressure the broken healthcare system is placing on employers. As the fully insured pool becomes more costly and less stable, employers are incentivized to explore alternatives like level funding. By transitioning to level funded plans, employers not only retain any Rx rebates and unused claims surpluses but also gain visibility into their claims data. This transparency allows them to identify cost drivers and implement strategies to control costs, ultimately leading to long-term rate stability.
Level funding arrangements offer a viable alternative to traditional fully insured plans, addressing many of the challenges and misaligned incentives we read about above that plague the current system. Unlike fully insured plans where employers pay a fixed premium regardless of actual claims costs, level funded plans allow employers to pay a fixed monthly fee that covers the maximum claims liability, administrative fees, and stop-loss insurance. This structure provides several key benefits:
Transparency and Control: Level funded plans offer a level of transparency that fully insured plans cannot provide. Employers receive detailed monthly reports that include data on healthcare usage, claims, and wellness program participation. This data empowers employers to better understand their healthcare spending, identify trends, and implement targeted interventions to control costs.
Surplus Potential: One of the most attractive features of level funding is the potential for employers to receive a surplus refund. If actual claims costs are lower than expected, the employer may receive a refund of the surplus funds at the end of the plan year. This creates a financial incentive for employers to actively manage their healthcare costs and promote wellness programs that can reduce claims.
Protection Against High Claims: Level funded plans include stop-loss insurance, which protects employers from unexpectedly high claims. This ensures that even if claims exceed the maximum liability, the employer is not responsible for additional costs beyond what has been funded. This protection provides peace of mind and financial stability for employers. This type of funding mechanism is the perfect step out of a fully insured plan, being that the employer still is paying a fixed cost, but is able to have insight and control over their plan.
Risk Management: With level funding, employers can take ownership of their health plan and apply risk mitigation strategies that are not possible with fully insured plans. Since 80% of an employer’s medical and prescription drug spending is typically comprised of claims, controlling these costs is crucial. Level funding allows employers to actively manage their risk, potentially reducing costs over time.
Level funding represents a powerful tool for employers seeking to regain control over their healthcare costs and align incentives with their long-term goals. By offering transparency, the potential for surplus refunds, and protection against high claims, level funded plans provide a strategic alternative to traditional fully insured models. As more employers adopt level funding and gain insights into their healthcare spending, they can take further steps toward cost containment and programs that promote wellness for their employees.
In an environment where healthcare costs continue to rise and traditional insurance models fail to deliver value, level funding offers a brightly lit path forward. Employers who embrace this model can not only reduce their healthcare expenses but also create a more sustainable and predictable benefits strategy for the future.
By: Lydia Bishop Widham, Vice President of Growth