Self-funding has been used as a tool to maintain the cost of health-related employee benefits for many years.
Historically, this approach has been utilized by groups of 100 or more employees.
However, due to the Affordable Care Act (ACA), a new market is being created for smaller groups allowing them to take advantage of self-funding health care plans to save money and gain control over costs. As an employee benefits administration company, we’re here to help you understand the different approaches to health care.
Explanation of Health Care Funding Options
Level self-funding is a funding approach that falls between fully insured and self-funding. It allows small groups to take advantage of the self-funded health care approach without the risk.
Typically with self-funding, when employees have claims, the employer group is responsible for funding and paying for those claims each week, with stop-loss insurance to help cover catastrophic or higher claims.
In a level-funded or max-funded approach, an employer group pays a monthly premium to a third-party administrator (TPA) or health carrier. This premium amount is partially based on the maximum claims projected for the next plan year. The TPA or health carrier handles the health care portion of the employee benefits administration, which allows the employer to focus on running the business. And if the group has a good medical loss ratio, a surplus could be refunded.
Changes with the Affordable Care Act
The ACA will be implementing community-rated underwriting for all fully insured small groups in 2016. (Originally slated to start in 2014, transitional relief delayed the effect for the majority of small groups.) A small group currently consists of two to 50 members, but that expands all the way up to 99 by 2016. With community rating, only age and tobacco use factor into premium rates. That means gender, the health of an employer group and its claims experience and SIC code will no longer be considered in health insurance underwriting. Along with mandated essential employee benefits, this new underwriting will increase costs.
By moving to a community-rated health care plan, small group employers could see a substantial increase in premiums within their employee benefits. Level self-funded plans are medically underwritten and may not be an option for certain groups.
Written by: Guy Link, Consultant, Cornerstone Insurance Group
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