Employers Are Flocking to Level Funding

Community rating in health insurance could be thought of like a night out at a high-dollar steakhouse with friends.

It might go like this: one person buys a $20 chef salad, another gets the $140 filet, and a third picks the $110 surf and turf. If you split the ticket three ways, that’s the equivalent of community rating—everyone pays the same healthcare premium in a region without consideration of health status or other factors.

But healthcare spending has continued to rise, by as much as 10% annually for businesses. For many organizations, paying for others’ steaks, when their employees are buying salads, has become unbearable, says Matt Chubb, national select employee benefits leader at USI Insurance Services.

Self-funded health plans are one option for businesses that don’t want a fully funded plan with community rating. But self-funded plans come with significant risk: one outpriced claim—say a specialty medication, traumatic injury, or premature newborn—could break the bank of a small employer.

This is where level funding comes in. These plans have been around for some time but have grown in popularity in recent years. They combine a self-funded plan with a stop-loss component that shields an employer from high-cost claims incurred by beneficiaries. Level funding may be a way for employers to enjoy some benefits of self-funding—transparency, reduced spending, and improved care— while mitigating the risk that comes with these plans.

“If small businesses aren’t looking at these plans, they should,” Chubb says. “It may not be right for you, but you’re doing yourself a disservice if you don’t consider them. When I go to the grocery store, I want a receipt. Small businesses’ fully insured plans say, trust us on the costs, there is no receipt. If I were an employer, I would want to see what I’m paying for my second-largest expense.”

Big Savings, Less Risk

The number of covered lives in level-funded plans has grown dramatically in recent years. According to the Kaiser Family Foundation, about 6% of covered workers in small businesses were enrolled in level-funded plans in 2018. By 2023, that jumped to 38%.

Level funding is an offshoot of self-funded health plans. This insurance tends to be geared toward small and midsize businesses that want to pay less than a fully insured plan might cost but are too risk averse for self-insurance. With these plans, the insurer uses a company’s claims history to calculate the anticipated annual medical costs for its workforce. The insurer then applies an administrative fee to run the program along with stop-loss premiums. That amount is split into level monthly payments the employer pays over a year.

Stop-loss insurance covers any high-cost claims that go beyond what the employer is expected to pay. The stop-loss here tends to have lower attachment points, or the dollar threshold at which the insurance company begins to pay a claim, than traditional stop-loss. These attachment points can either be aggregate (stop-loss insurance kicks in when total claims hit a certain point) or claim-based (the stop-loss pays if one large claim hits above a certain amount). This can vary by carrier or be based on state regulations (states have significantly varying restrictions on stop-loss).

At the end of the year, if an employer’s payments exceed its healthcare expenses, some money can be returned, usually in the form of lowered monthly payments the next year.

Nick Soman, founder and CEO of level-funded plan provider Decent, says businesses used to consider this approach only when they couldn’t get fully insured. Employers saw them as potentially unreliable, he says, especially before major carriers began offering the plans. But the market has warmed to these plans in recent years, largely due to rising healthcare costs.

“By my math, the amount that people have to pay for an employer-based plan has nearly quadrupled since 2000, which is crazy,” Soman says. “Employers are just asking now, ‘Can anybody give me any rate relief?’ We’re increasingly hearing that if level funding can save them money, and are good, trusted plans that will still be around in a few years, they’ll make a run at it.”

Because large-scale use of these plans is still new, there isn’t a significant amount of data on savings. But the developing industry consensus is that smaller, healthier organizations can reduce costs compared to being fully funded.

“It could be 20% to 30% and some even say as many as 60%—of small groups that could benefit from switching to level funding,” says Vince Murdica, global head of growth and HR compliance at software company Mitratech. “The market is definitely undersaturated. It could be a tremendous benefit for healthy groups and brokers should be converting clients to level funding where it makes sense.”

According to a report by UnitedHealthcare, the average surplus for the 37% of employers on level-funded plans who received a refund in 2022 was about $8,400. The average savings for businesses that moved from fully insured to level funding through UnitedHealthcare was about 17%.

However, employers typically only get about half of that surplus back at the end of the year. Part of it goes toward stop-loss, part of it goes to what is known as “runout,” or claims that trickle in the first few months of the year for services provided at the end of the previous year. The final amount depends on how the plan is structured. As a check for surplus payments would be taxable, the amount is often applied to coming monthly payments instead of being paid out in a lump sum.

“If you have between 10 and 200 employees and are looking for better value [than fully funding] and are not allergic to the idea of trying something different, a broker will likely bring one of these plans to you,” Soman says.

Level Funding Benefits

Small-business employers have very little visibility into claims, usage, and their population’s health. Employers buy a policy and pay a fixed premium to insurers, which then pay the medical claims. Businesses don’t manage claims, so they usually don’t get insight into what is being spent or how employees are using their insurance.

With level-funded plans, employers can receive monthly data reports and access some claims data (though usually less than what is available for self-funded plans, where employers are financially responsible for paying claims so they can have full visibility into their healthcare spend).

“In the fully insured world, you get zero flexibility with a pharmacy plan and zero transparency,” says Brian Ball, national vice president for employee benefits strategy and solutions at USI. “When you move to level funding, you get more transparency around your pharmacy spend. Information is power, so you can negotiate differently with these plans, which can lead to savings.”

Another benefit to level funding is bypassing certain health insurance regulations. Self-funded plans usually are not subject to state requirements for health plans. For instance, some states require health plans to cover chiropractic care, optometry, and in vitro fertilization (which, if it leads to multiple births, can produce million-dollar claims, Ball says). Self-funded plans sold to businesses with fewer than 50 employees also aren’t subject to benefit standards placed on small businesses in the Affordable Care Act. These include covering at least 60% of the cost of expected benefits under the plan and covering services like hospital care, prescription drugs, maternity care, and treatment for mental health and substance use disorders.

Level-funded plans are also a great way for brokers to help employers dip their toes into self-funding, according to Ball. “It’s a try-it-before-you-buy-it approach without all of the risk,” he says. “There are lots of risk-averse buyers and having some claims transparency helps them understand the likelihood of major adverse events, which is pretty small. The likelihood of hitting your maximum claim liability is 1% to 2% for a group with 500 covered lives.”

Survival of the Fittest

Brokers and consultants acknowledge that level funding works best for healthier workforces.

Heidi Lawson, a partner at the tech-focused law firm Fenwick, says these plans are well-suited for technology companies—for example, startups with fewer than 50 employees who are all in their 20s. To return to the initial analogy, these are the healthy salad eaters who now don’t pay extra for their friends’ love of red meat and perhaps their clogged arteries.

“If you are a healthy company with good claims experience—like a law firm with 10 men who are all under 30, so they have no pregnancies or age-related diseases—you are going to pay a low premium,” Murdica says.

With a wider mix of employees, companies may not know if they are healthy from a claims perspective—and the claims history is crucial in setting the annual costs the business is expected to pay. But carriers can determine whether the monthly payment will be worth moving a client to a level-funded plan. Carrier underwriting has improved, Chubb says, and newer AI underwriting tools make estimating costs easier by allowing insurers to tabulate a claims estimate using employees’ names, ZIP codes, birthdays, and gender without needing to ask medical questions for a company new to level funding.

“They are doing a better job now at catching groups that may end up costing well above what they could get at fully insured rates,” Chubb says. “But generally, if you are looking at pricing and are at least a healthier group you have a chance to win when you settle up on the claims bucket and maybe get 50% back.”

About 10% to 20% of companies are either highly healthy or highly unhealthy, Ball says. The vast majority are somewhere in the middle. A company’s annual renewal is almost always based on its claims experience when it is at 400 employees or more, regardless of plan type, he said. The actual losses determine the rates rather than an insurance company’s formula.

“We always tell buyers they can’t run away from their claims experience,” Ball says, adding that the transparency aspect could still be a sufficient benefit for those middle companies to consider self-funding in some fashion.

Even some unhealthier groups may benefit from level funding if it’s priced correctly relative to the skyrocketing cost of health insurance, Ball says.

But since level funding is generally a better fit for healthy groups, it could impact the entire market over time. If smaller companies with younger demographics use these plans more often, it leaves unhealthier groups in the fully insured market. The premiums from those younger, lower-cost groups won’t be available to subsidize the higher-cost beneficiaries.

“As level funding continues to take market share from fully insured plans, they are cherry-picking healthy groups because those are the ones that are better to underwrite,” Murdica says. “And what happens a few years from now when enough healthy groups exit the risk pool for community rating? We don’t have an answer.”

An Imperfect Solution

While most brokers agree that level funding is a good option for small businesses, there are drawbacks. One is limited plan flexibility. Especially when working with the BUCAs (Blue Cross Blue Shield, UnitedHealthcare, Cigna, and Aetna), these plans tend to be more “cookie cutter” bundled plan offerings for smaller groups, Chubb says.

“Small plans are pretty limited in terms of pharmaceutical solutions they have and they may have three or four choices of copays, but they mostly come as part of a packaged deal,” he says.

Level funding is also more difficult to offer employers located in states with certain regulatory requirements. For instance, in New York, companies with fewer than 50 people can’t buy stop-loss insurance. And businesses with 51 to 100 employees can only renew plans if they already had them as of 2015. That effectively cuts out businesses with fewer than 100 employees. In California, stop-loss insurance attachment points can’t be lower than $40,000, which may be too high for smaller businesses.

Since these plans are newly popular, the regulatory landscape could change over time. Because stop-loss policies are not health insurance, they aren’t required to comply with state-mandated healthcare coverage requirements, Lawson says. If these plans start pulling too many healthy members out of fully funded plans, it could cause competition tension. This could lead those fully funded plan operators to pressure regulators to take a closer look at level funding, she adds. If the government decided to regulate stop-loss policies more like health insurance, the additional rules could deter providers from participating in level-funded plans.

Health insurance is regulated at the state level, but level-funded plans are subject to federal laws including the Employee Retirement Income Security Act of 1974 (ERISA). The Department of Labor enforces ERISA, which is why it and other federal agencies have begun to look more closely at level-funded plans. In 2023, the Internal Revenue Service, the Department of Labor’s Employee Benefits Security Administration, and the Department of Health and Human Services sought comments on these plans in an attempt to better understand how they are regulated and if there should be changes. That effort has not advanced significantly.

The Self-Insurance Protection Act has also been introduced a couple times in the House of Representatives. The bill specifies that stop-loss coverage is not health insurance; it allows the plans to be used in combination with self-insurance plans; and it says states can’t pass laws that prevent employers from purchasing this self-funded coverage. The legislation has been passed out of the House at least once, in 2017, but gained no traction in the Senate.

Another challenge to increasing the use of self-funding could be brokers, according to Murdica. The natural renewal rate for brokers is about 90%, he said. Renewing clients on their current plans is an automated, simple process.

But to move a client to level funding takes much more work. A broker would have to obtain an organization’s claims experience, package it with stop-loss, and shop that information to three to five level-funded providers in its market. Those providers then send information with potential costs. The broker then must take that data to the client and explain these new plans.

Lawson also encourages employers interested in moving to level funding to do due diligence on potential service providers for these plans. She says employers should check if complaints have been filed against their third-party administrators (TPAs), ensure they have the appropriate licenses, and are compliant with relevant laws.

“There are a lot of groups that want to offer these plans, but they are technology companies and not healthcare companies,” Lawson says. “Employers should make sure to check with a few vendors to ensure they understand the regulatory landscape.”

For the first year an organization is in a level-funded plan, payments remain consistent. But if a claim hits too far into stop-loss, or the plan wasn’t underwritten well, employers can see large increases in their monthly payment at renewal. Good brokers are aware of this potential and should alert employer clients that are considering level funding, Soman says.

Another disadvantage of level funding is the way businesses have to pay what’s known as their claims pick—the anticipated total cost of claims for the year. An underwriter may tabulate that an organization’s claims pick is $600,000. In level-funded plans, businesses must fund that claims pick to the maximum amount. So, the monthly payment would be $50,000. While they may get some of that money back at the end of the year, paying that full amount monthly could be burdensome for small businesses.

Seeking Innovation

While level-funded plans may have their drawbacks, Soman says employers that are leaning into this trend are looking for plans that innovate to provide better care for less money.

Direct primary care is one way Decent is trying to tackle the issue. All participants in Decent’s level-funded plans also participate in direct contracting with primary care organizations. This means that employers contract directly with in-network primary care providers for a flat monthly rate. Direct primary care can reduce costs because, by paying a flat rate, members avoid copays and deductibles, which should encourage them to use primary care instead of more costly hospital emergency rooms or urgent care. And with direct primary care, providers are often able to spend more time with patients and emphasize preventive care, which can reduce costly chronic conditions that may otherwise go undiagnosed until they have progressed.

One reason Decent offers no-cost direct primary care is because a majority of the healthcare spend in the United States isn’t on primary care. While an exact figure is difficult to tease out, estimates put it between 5% and 10% of all U.S. healthcare spend. Hospitals account for the largest portion of spend at about 30%.

When health consumers build a relationship with a primary care doctor, theoretically, it cuts down on spending in other areas. For instance, if someone hurts their knee and needs an MRI, their primary care provider can direct them to low-cost, quality care as opposed to having the patient head straight for the ER, Soman says.

The company’s most popular plan is called Decent Zero because if plan members see in-network providers or get care recommended by their care navigation team, they pay nothing for primary care, behavioral health, and some specialty care (if members see someone out of network, there is a $3,000 deductible).

“Innovation is happening in the level-funded world, because you have more flexibility to do things you are not able to sell under the mantle of a traditional, fully insured plan,” Soman says. “So, you might as well differentiate around something like a real personal primary care experience.”

The Alliance, a health insurance agency that works with self-funded employers, works to help clients save money in the level-funded environment through tiered network access.

The Alliance offers tiers of providers— preferred, secondary, or out-of-network—with deductibles, coinsurance, and out-of-pocket limits increasing from one to the next. Employers can direct employees to lower-cost providers, but those plan participants still choose where they seek care. When employees seek care through high-value providers, employers pay less for claims and retain more in the bucket to be returned at the end of the year.

If employers are able to get some money back at the end of the year through these plans, saving on healthcare spend is an important component of that, says Mike Roche, director of business development at the Wisconsin-based company.

“What most networks won’t tell you is there is a provider within 20 minutes that can give you an MRI for $3,000, but another in the same area will only cost $350,” he adds. “If I’m on a level-funded plan, and I know that I have an opportunity at the end of the year [to] get some of my claims dollars back, I want my employees to know where that value is. And we feel like it’s our responsibility to share that information with the consultant and the employer and the employees.”

Roche says The Alliance works with a TPA that allows employers to get access to claims data to better manage their healthcare spend. In Wisconsin, he says, he sees fully insured employers having difficulties in obtaining actionable claims data.

“No one wants to hear, ‘You have a 20% increase in premiums, and we won’t give you any data as to why that is happening,’” Roche says. “If you have 20 or more employees on your plan this is worth exploring as an option.”

If an employer is interested in switching to level funding, he suggests asking a few specific questions. First, ask how a TPA can help find value and what fees it charges. Second, if the surplus is paid back at the end of the year, employers should make sure they get at least part of that back and it doesn’t go toward other things like fees.

Finally, if an employer is moving from fully insured to level funding, he recommends asking for a comparison between their current plan and the new plan. Employers, Roche says, should make sure the plans are as similar as possible, and there won’t be a lot of hoops to jump through, particularly on the pharmaceutical side.

Some areas where he sees differences are in the formulary around coverage of biosimilars (biologic medications that are affordable alternatives to biologic drugs already on the market), new and emerging medications, and more onerous preauthorization rules. To reduce costs, some level-funded plans don’t provide the same level of coverage for these medications as fully funded plans and have more stringent preauthorization rules. If a consultant offers an inexpensive plan, employers should make sure it doesn’t cut costs by throwing up barriers to care.

“I would encourage employers to ask their brokers about these plans,” Roche says. “It may not be right for you today, but understanding all the options that are out there as you try to control that expensive line item on your budget can’t be a bad thing.”