Self-Funded Captive vs Level-Funded Insurance: Understanding the Difference

Highlights 

• While both can reduce healthcare spending, understanding group captive vs level-funded insurance can help you provide better employee coverage.

• Group captive insurance involves pooling your resources with other members to spread out the risk.

• Level-funded insurance is an alternative to conventional fully-funded insurance, offering cost-efficiency and improved data insights. However, its benefits are constrained.

• When comparing the two insurance options, consider cost structures, reporting, flexibility, coverage, return of unused premium, and benefit design.

Choosing the right health insurance plan is a major decision that impacts your employees and your bottom line. The 2023 Health Benefits Survey by the Kaiser Family Foundation revealed that the average employee insurance premium rose 7%.

This highlights the escalating costs of healthcare and emphasizes the need for businesses and their employees to find cost-effective insurance plans. Healthcare inflation is a primary reason health insurance rates continue to get more expensive.

Instead of a traditional insurance plan, self-funded group captive or level-funded insurance may offer more flexibility and lower costs. But before you decide, it’s important to understand the differences between group captive and level-funded plans so you can choose the right option for your business.

What is Group Captive Insurance?

Group captive insurance, also known as stop-loss captive insurance, is a self-funding model that lets you team up with other businesses to reduce health insurance costs. How does it work? You and your fellow members pool your resources to cover health claims, spreading the risk you would face alone. A captive empowers small to midsize businesses to safely and confidently self-fund their health insurance. It provides the same risk predictability as a Fortune 500, even if you only employ 25.

This pooling is backed by stop-loss insurance, which steps in if claims exceed a certain amount. This protects the entire captive from the financial impact of unexpected catastrophic or high-cost claims.

When you belong to a group captive, it can mean lower premiums and more control over the plan’s details — from the benefits you offer to how claims are processed. This provides greater predictability and control over healthcare costs and lets you tailor coverage to your needs.

Because a group captive plan is self-funded, you get back any unused premiums at the end of the year. With specialized coverage and lower premiums, group captive insurance can help you attract and retain employees for a happier, healthier workforce.

What Is Level-Funded Insurance?

Level-funded insurance is an alternative to conventional fully-funded insurance, offering cost-efficiency and improved data insights. However, its benefits are constrained.

In essence, it combines elements of both fully funded and self-funded insurance models, but it falls short in delivering comprehensive data insights and lacks full reimbursement for unused funds, making it a less favorable option.

In a level-funded plan, employers make monthly payments covering administration, claims, and stop-loss insurance expenses. Your monthly premium is calculated based on the estimated maximum cost, or worst-case claims projection, which also includes stop-loss insurance to mitigate high-dollar claims risk.

If your claims turn out to be lower than anticipated, you’re usually entitled to a refund —  but there’s a caveat. Level-funded plans typically refund only around 50% of the unused spend, contingent upon agreeing to renew for the following year. This condition, commonly known as “handcuffs” in the insurance industry, essentially binds you to the plan annually. Opting out means forfeiting the refund altogether.

While level-funded plans provide some claims data, they offer limited avenues for effectively reducing costs. You lack control over plan design, documentation, Third-Party Administrator (TPA), Pharmacy Benefits Manager (PBM), or provider network.

Consequently, you have minimal ability to influence costs for better affordability. Essentially, level-funded plans offer a take-it-or-leave-it proposition — there’s little room for negotiation or customization.

What is the Difference Between Level Funded and Captive?

Group captive and level-funded insurance plans are both viable alternatives for small businesses seeking to manage healthcare costs. Although both aim for cost-effectiveness, they vary in their structure, data reporting, flexibility, and the impact they have on employee retention. Level-funded plans also come with substantial limitations that impact both the availability of data and the flexibility of plan design.

Let’s explore the key differences between these two types of insurance.

Cost Structures

Group captive insurance plans are structured so that approximately 85% of costs are variable, with about 15% in fixed expenses. This breakdown offers the flexibility to lower expenses through cost containment measures and claims data.

A cost-saving benefit of self-funded group captive insurance is that with funds adding up from year-round cost containment strategies, you may have unused premiums. Under Roundstone’s group captive plan, you get back 100% of these unused dollars at renewal time — no strings attached.

Level-funded plans have a larger portion of fixed costs. This can provide some stability in predicting payments but offers less opportunity to reduce expenses in real time based on claims. And as we discussed above, while you may receive a 50% refund of unused premiums, you’ll have to renew your plan to receive it.

Flexibility in Coverage

In a self-funded group captive insurance vs. traditional plan, you have the freedom to customize your employee health insurance coverages. This means you can add services as needed, such as telehealth or behavioral health coverage, well-being plans, or direct primary care programs.

You can also partner with a pass-through or transparent PBM to see better cost savings on high-cost drugs and prescriptions like insulin or blood pressure medications.

Level-funded plans are more rigid, with set plan options and coverage limits. They offer less customization but more rigid coverage options year on year.

Employee Retention and Benefits

Recruiting and retaining employees means creating a workplace where they feel valued and respected. A recent Gallup Poll found that 85% of employees said that addressing benefits and wellness issues would improve their satisfaction with their employer.

An advantage of self-funded group captive insurance is that it allows for personalized benefits that cater to your employees’ specific health and wellness needs, like choosing a plan with chiropractic care or better mental health coverage. This can boost their satisfaction and loyalty to your company.

Group captive plans rely on member input, which means your employees have a say in their healthcare choices. This involvement can make them feel more valued and directly connected to the benefits they receive.

How to Transition from Level-Funded to Self-Funded Health Insurance

Switching from level-funded to self-funded captive insurance is a consideration that often occurs based on employers being exposed to some aspects of self-funding and wanting a more robust self-funded solution. Once some data insight is available, most employers want more. Once some savings are retained, all employers want more. The group captive is the perfect response to these demands.

Administrative considerations include notifying your employees and adjusting payroll deductions. Switching could also mean changing your benefits administration platform to accommodate the new insurance structure. Fortunately, with a self-funded plan, you can hire a TPA, who does all the heavy lifting so the impact on your HR department is minimal.

It’s important to work with a knowledgeable customer service manager (CSM) who can guide you through the transition. Roundstone CSMs can help you understand the steps and paperwork involved in switching from a fully insured plan to a group captive arrangement.

We can pair you with a TPA to help get the details of your plan on paper and communicate the changes to your team for a smooth transition — or you can choose Bywater, our own in-house TPA. Your TPA can guide you on compliance requirements, set up a timeline for the changes to minimize disruption to your business operations, and help you see cost savings benefits as soon as possible.

Get More Flexibility and Saving With Group Captive Insurance From Roundstone

ROUNDSTONE is an innovative employee health benefits company. We help small and midsize organizations offer competitive benefits at a lower cost by self-funding health insurance through our group medical captive. The Roundstone Captive enables companies to self-insure safely by pooling hundreds of employers together to share risk and save money.

With easy onboarding and personalized support every step of the way, the Roundstone Captive offers control, flexibility, and transparency and returns all savings back to employers where they belong. We believe in always aligning with the employers’ best interests and remain committed to our mission — quality, affordable healthcare and a better life for all.

If you’re wondering, “Is self-funded group captive insurance right for my business?”, speak with a representative from Roundstone. Our self-funded insurance option offers flexibility and savings. With our group captive plan, you can tailor your coverage to suit your business needs and take control of your health insurance spending.

Contact us today to see how your business can see better cost savings and a better life for all with the advantages of group captive insurance.