Highlights
- Level funding, marketed as a viable option for the provision of employer provided healthcare benefits, isn’t all it’s cracked up to be.
- Although level funding is seen as a cost-effective health insurance solution, the disadvantages of level funding often outweigh the positives for small to medium-sized businesses (SMBs).
- Self-funding, in contrast, is a more affordable health insurance solution for SMBs than level funding due to flexible plan design, fewer fixed costs, and no-strings-attached premium returns year over year.
Level-funded insurance has long been touted as a beneficial employee health benefits option for SMBs, offering a middle ground between traditional fully insured plans and self-funding.
At first glance, level funding appears to provide cost savings and greater control over healthcare expenses. However, upon closer examination, level funding becomes a less desirable option if your company is seeking affordable small business health insurance.
In fact, level funding offers the worst of both worlds: You don’t have much control over your employee healthcare plan to optimize savings, nor are you refunded any unused healthcare spend. You end up with a plan that, in reality, is not that much different from a fully insured healthcare plan.
Top Disadvantages of Level Funding for SMBs
According to the 2022 Kaiser Family Foundation Employer Health Survey, 38% of small firms offer a level-funded insurance plan for their employees. Many small to midsize businesses are drawn to level-funded insurance due to its perceived benefits. It promises cost savings, greater control over healthcare expenses, and a flexible alternative to fully insured plans.
Unfortunately, the reality of a level-funded plan is employee healthcare benefits that require signing a yearly contract with the insurer, which locks companies into a rigid and burdensome plan. This typically means higher variable costs, reduced plan flexibility, administrative and compliance responsibilities, and less savings than expected.
The following are some of the top disadvantages of level funding. Take a look before deciding on the right healthcare benefits plan for your employees.
1. Plan Termination Risks — Can You Depend on Your Plan Being Available Next Year?
Unlike traditional fully insured plans, level funding insurance carries the risk of plan termination due to unexpectedly high claims or poor financial performance. Choosing an alternative plan will most likely be more expensive. By self-funding under a captive, however, you are safeguarded against risk because your costs are controlled.
2. Conditional Premium Returns — The Problem of Handcuffs
Although level-funded plans may offer the possibility of returning claims surplus, SMBs are often handcuffed by the requirement to enter into an additional year-long contract in order to receive the refund. This essentially forces employers to continue with the plan, even if they’re dissatisfied with the expense of the plan or the care provided. This restriction limits the flexibility of SMBs to explore alternative insurance options or make changes to their coverage in a timely manner, potentially leaving them locked into a plan that may not fully meet their evolving needs.
As a self-funded healthcare solution, Roundstone returns all unused healthcare spend, pro rata, back to its members at the end of the year.
3. Lack of Flexibility in Plan Design
Level-funding plans offer limited plan flexibility regarding the design of your company health coverage. This leaves little room for customization to meet the specific needs and preferences of your business and its employees. You may have access to data, but you can’t do much with it. You’re stuck with whatever they give you.
Roundstone’s self-funded healthcare solution gives you complete access to your data so you can use it to drive down claims spend and further optimize savings.
4. Variable and Unpredictable Costs
Small to midsize businesses may face unpredictable and fluctuating costs with level funding insurance, as claims experience and healthcare utilization can vary significantly from year to year. Level funding can be a potentially risky venture. Additionally, there is significant limited flexibility for implementing cost containment solutions, making accurate budgeting and financial planning challenging. And if you do have high claim costs, you have no way to control them.
With self-funding, you have access to cost containment solutions and are protected against the risk of high claims by stop-loss insurance.
5. Higher Financial Risk
Level funding exposes small businesses to higher financial risks compared to fully insured plans or self-funded plans backed by a captive. With level funding, SMBs bear the brunt of excessive claims and cost overruns, potentially impacting their cash flow and financial stability.
By self-funding under a captive, your expenses are capped to a specific deductible.
6. Limited Availability
Level funding insurance options may not be readily available or accessible to all small businesses, particularly those with smaller employee populations or higher-risk profiles. With limited access to level funding, SMBs may turn to a fully insured plan with high premiums and no flexibility.
Roundstone’s self-funded solution works well for any employer with 20 to 500 employees.
7. Regulatory Compliance
Level funding requires strict adherence to regulatory guidelines and compliance standards. This may include prescription drug reporting under the ACA, employee contributions under ERISA, and nondiscrimination testing under the IRS tax code.
This places additional burdens on small businesses to navigate complex healthcare laws and regulations and increases the risk of non-compliance penalties. Because of the strict regulations required, overseeing a level funded plan can be its own full-time job.
By self-funding under a captive, compliance issues are handled by your Third Party Administrator (TPA). The employer does not have to do the heavy lifting.
8. High Employee Dissatisfaction
The limitations and complexities associated with level funded insurance can lead to employee dissatisfaction, as they may experience higher out-of-pocket costs, reduced benefits, and a lack of flexibility in choosing healthcare providers. This can negatively impact employee retention and lead to higher attrition rates.
By self-funding under a captive, you can design your company’s health plan to meet the needs of your employees better. You can opt for low deductibles and greater choice in healthcare. This allows you to provide the kind of quality benefits that attracts top talent and leads to well satisfied employees.
9. Cash Flow Challenges
SMBs may face cash flow management challenges with level funding. With these plans, you are required to pay a fixed monthly premium, regardless of actual claim costs, similar to traditional insurance. This can mean you’re spending money on healthcare coverage your employees don’t use, leading to lost funds.
With Roundstone’s self-funded solution, you only pay for the health benefits your employees actually use. Anything you don’t spend is returned, pro rata, at the end of the year.
10. Reduced Negotiating Power
Unlike large insurance carriers, SMBs with level funding have limited bargaining power when negotiating rates and terms with healthcare providers. This results in less favorable pricing and potentially higher overall costs.
Why a Self-Funding Group Captive Beats Level-Funding for SMBs
Self-funded health plans offer an exceptional alternative to level-funded insurance, providing SMBs with a cost-effective health insurance solution. With self-funding, you have unmatched flexibility to customize employee benefits according to your specific employee needs, a benefit not offered by standardized plans. It’s also easier to budget under a self-funded plan.
Unlike level funding, self-funded plans let you design your plan from the ground up, providing you with greater control over healthcare cost savings. You can choose vendors, providers, and incentives, including a transparent, efficient TPA to process your claims and Pharmacy Benefits Manager (PBM) to lower prescription drug costs.
Self-funding with Roundstone lets you access your claims data through innovative dashboard tools so you can implement cost containment solutions as needed throughout the year.
Best of all, your business receives a full cash refund on unused premiums each year. You will receive annual distribution checks for unused funds without signing a year-long contract.
Discover the Benefits of Self-Funding with Roundstone
While level funding may appear to be a good choice for SMBs, the disadvantages far outweigh the benefits. A self-funded group captive plan may be a better option for your company, offering greater flexibility, control, and transparency.
To discover the full range of benefits of self-funding, contact a Roundstone Advisor today. Our team will help you explore the advantages of self-funding for employee benefits and healthcare cost management.
To learn more about self-funding vs. fully insured insurance plans, download our free eBook.
