level funded 2

Level funded health plans, a type of self-insured health plan, have been growing in popularity. Unlike fully insured plans, level funded plans allow insurance companies to charge less for healthy groups and offer flexibility in coverage. They also provide the opportunity for a refund of unused claims funding at the end of the year, which can help reduce future costs. Level funded plans promote a different mindset of stewardship of money and can lead to decreased costs over time. They also offer more visibility into how money is being spent, allowing for cost control measures. Overall, level funded plans are beneficial for small businesses. Today's topic is a relatively cut. I'd like to talk to you today about level funded health plans which have been growing in popularity over the last few years since the Affordable Care Act passed. A level funded health plan is a form of a self-insured or self-funded health plan generally for employers with fewer than 100 employees. Now there are two main kinds of health plans for the purposes of this discussion. The first one is a fully insured health plan. The fully insured health plan you pay a fixed premium every month and the insurance company pays for your claims. Fully insured health plans are regulated by the Department of Insurance in your state. Fully insured health plans have to cover the 10 essential health benefits here to state. Your state decides how much of each of the 10 essential health benefits have to be covered. Fully insured plans are guaranteed issue, meaning you can't charge more or less based on the health of the group and you have to issue the coverage. You can't have pre-existing conditions that you exclude for the first three or six months. You have to cover everything right from day one. Now because of these restrictions, the insurance companies have priced those considering that they're going to get a lot of groups with people with high claims. The other kinds of health plans are self-insured, also known as self-funded health plans. Within self-insured health plan, there is a product called a level funded health plan. A better term for it would be maximum funded health plan because just like a fully insured health plan, you pay a level amount every month, you never pay more, you never pay less unless you add or terminate employees. A level funded health plan has a lot of benefits that a fully insured health plan doesn't. Number one, the insurance company or third party administrator is allowed to ask health questions, which means they're allowed to charge less if you're a healthy group. And it's the healthy groups, which quite frankly are the majority of groups, tend to be healthier than the average group on a fully insured health plan. So most of those groups benefit by lower costs. The other thing about a level funded health plan is you are entitled to a refund of unused claims funding at the end of the year. One of the biggest benefits about a level funded or any self-insured health plan is other than offering the bare minimum, which is called minimum essential coverage or preventive care, you can add as many or as few as the essential health benefits that you want. And you can carve out anything that you don't want to cover under your health plan. You have a lot of flexibility and that can greatly reduce the cost. That can reduce your cost by up to 90% versus a fully insured health plan. The costs on a fully insured health plan consist of three major categories. The first one is the administrative and management costs and premium taxes. The second one is the stop loss insurance premium and the stop loss insurance covers catastrophic claims, really large claims that you don't want to come out of your claims funding. So it protects your plan. Really large employers don't need stop loss and if your plan is skinny enough, in other words, if it doesn't cover a lot of stuff, you may not need stop loss either. When you add together the administration and the stop loss premium and the claims funding, you have what's called your premium equivalent and that's the amount that you pay every month. Now once a group is underwritten, which is the process of asking health questions, assessing risk and charging more or less than the standard and let's face it, if you're applying for life insurance and you're super fit and active, you're going to pay less than somebody who is not fit and not active, perhaps hypertensive, high cholesterol, smoker, etc. That's only fair. It's like when you buy car insurance. If you have a bad driving history or you're young and you don't have a long driving history or you have a lot of accidents, you're going to pay more and we all think that that's fair and reasonable and it makes sense but in fully insured health plans, that doesn't exist. In level funded or self-insured health plans, it does. Now there are more benefits to level funded health plans. For one, a very big benefit is that at the end of the plan year, you get to see how high your claims were or how low the claims were and in many cases and by many, I mean usually much more than half of the time, you're going to be entitled to a refund. Now the best thing to do with that refund is to pay it forward to reduce your future costs. It's just like dividends that help to offset the future costs so every year, your level funded premium health plan can actually go down in costs which is a very, very good feature. The claims funding goes into a pool and it can only be used for claims funding. There are very strict rules under ERISA which allows you to spend those on certain things. There are some administrators that will want to keep a portion of those claims funds at the end of the plan year, however that is under ERISA, that is a prohibited use of plan assets. So in reality, nobody should be keeping your plan assets, not even a portion of them. One of the things that I like most about any kind of a self-insured health plan boils down to what Milton Friedman used to say. Milton Friedman always said, there are two kinds of money, there's your money and there's my money and there are four ways to spend money. There's me spending my own money on myself, there's you spending your own money on yourself, then there's me spending your money and then finally there's you spending my money. When you buy a fully insured health plan because you generally don't know how high or how low your claims are, people don't tend to have the same diligence or stewardship of somebody else's money, especially when it comes close to the end of the year where they're through their deductible and they say, hey look, it's not going to cost us anything more, what do we need to have done? And often people will consume health care services that they might not necessarily need but because their deductible is through, they will make those purchases, if you will, that year. With a level funded health plan, it's a different mindset because if you as the employer tell your people, hey guys, this is our money, okay, it's not insurance company money, we're all putting it into a pot together and whatever out of that money is not used is going to decrease our costs next year. Now it is health insurance, so if you need it, it's there for you just like any other plan, but if you don't need it and you leave it in the pot, your costs in the future could be lower. It creates a totally different mindset and it creates totally different behaviors and that's another one of the beauties of level funded health plans is that they tend to often go down in cost from year to year because as your dividends are paid forward and used them to pay future costs, it saves everybody money. The other thing that most CFOs or managers will tell me is that you can't control what you can't see and a fully insured health plan, you can't see where your people are spending money. Are they spending it wastefully? For example, getting main brand drugs when a generic might do, getting a high tech imaging study in a high cost facility versus a storefront facility. Now sometimes you need them in the hospital, don't get me wrong, but if you don't, you can often save a lot of money by doing it in a retail facility. So having a level funded plan, you can see all that and you can talk with your employees about it and tell them how they are helping to control the cost because they are in essence, I guess a good way to say it would be a shareholder in your health plan and they're doing their part to reduce your future costs. So getting a level funded plan is probably the best thing to do for most small businesses.