Self-Funding vs. Level-Funding: Making Informed Choices
Exploring Employee Health Benefits
Many employers today are on the hunt for a cost-effective solution to their employee health benefits. Navigating through various health plan options can be daunting, especially when aiming to strike a balance between flexibility, risk tolerance, and cost predictability. Understanding the distinction between self-funded and level-funded health plans is crucial in making informed decisions.
Self-Funded Plans
Self-funded health plans offer employers full control over their health plan design and the selection of vendors. Under this model, employers pay for claims directly as they occur, which can be an attractive option for companies seeking maximum plan customization. However, the unpredictability of costs is a significant factor to consider, with the potential for high-cost claims looming over businesses. To mitigate such risks, many employers opt for stop-loss insurance. Additionally, self-funded plans are subject to federal law under the Employee Retirement Income Security Act (ERISA), rather than state insurance regulations, offering a different layer of regulatory oversight.
Level-Funded Plans
Level-funded plans come with a more predictable cost structure, featuring a fixed monthly payment. This payment typically includes bundled claims estimates, administrative fees, and stop-loss coverage. These plans not only cap potential financial risks but also often provide financial protections such as a claims cap or even refunds and credits if claims fall below the estimated budget. This structure can simplify budgeting for employers and is especially appealing for those looking to reduce the financial uncertainties associated with health benefits.
Key Differences
The primary difference between self-funded and level-funded plans lies in risk tolerance and cost predictability. Self-funded plans place the full financial risk on the employer, whereas level-funded plans cap that risk, making them more predictable. While self-funded plans may offer higher long-term savings if claims are low, level-funded plans balance customization with additional third-party support and may offer partial refunds, enhancing their appeal for small to midsized businesses.
Recommendations
When choosing between self-funded and level-funded plans, employers should evaluate their company's financial stability, appetite for risk, and desired level of plan control. Larger or more financially stable companies might lean toward self-funding, whereas the predictability of level-funding could be more suitable for smaller to midsize businesses. Both models provide meaningful advantages over traditional insurance, depending on specific business needs.
If you’re exploring the best-fit option for your employee health coverage, consider consulting with an expert. A professional can offer insights tailored to your business, ensuring a balanced approach to designing your health benefits strategy.