Lower Healthcare Costs & More Control for Small Businesses: The Magic of Level Funding
First it was the pandemic. Then the great resignation. Now it is supply chain issues and inflation. Small businesses are getting bombarded by challenges on all sides and facing difficult financial decisions – how to lower the cost of healthcare premiums being a big one as carriers warn of looming pandemic-driven cost increases. But, a decades-old solution, self-funding, traditionally utilized by large companies, is not out of reach for the rest of us. Especially when you factor in the magic that level funding brings to the table.
How does it work?
Self-funding of healthcare costs has always been thought to be reserved for larger businesses because they a) have a larger pool of employees to stretch their risk across and b) they typically just have a bigger budget to allocate. Small businesses have shied away for fear that, in a pay-as-you-go system, one huge cancer claim could sink the whole program. That’s where a mix of level funding and stop-loss comes in.
Level funding is just what it sounds like – you pay the same amount every month in healthcare “premiums.” That money is allocated to various buckets: a prefunded account to pay future claims, third-party administration fees and stop-loss insurance. Sounds a lot like how you pay your insurance company now, the same amount every month, right?
Continually funding the claims account means you will have money on hand to pay most claims as they arise. The stop-loss insurance kicks in when that fund runs out or, or you can set a level where it will pay for claims that exceed a certain dollar amount.
Do I need a TPA? What do they do?
Technically, you don’t have to have a TPA, but you want one. Trust me. Just like your current group health plan, your self-funded plan will need a plan document and all that goes with that. Your TPA will handle that. But even beyond the SPDs and all the rest, the real reason for a TPA is to adjudicate the claims. They are the ones determining if a claim is eligible and for making sure those eligible claims get paid. They are an independent 3rdparty keeping you out of your employee’s private business.
The amount you pay your TPA will depend on the size of your company and the structure of your plan, as well as the services you want them to provide. Other things you might hire them to do are handle any stop-loss claims, contract with PPO networks on your behalf, etc. Some TPAs will also function as your stop-loss carrier.
How does stop-loss work?
The concept is pretty simple. As I said before, stop-loss is there when either your prefunded account runs out – called aggregate stop-loss coverage, or a claim exceeds a certain amount called specific stop-loss coverage.
Your stop-loss coverage may also provide advance funding to your pre funded claims account – like a loan. It is repaid over time by your monthly contributions.
How does a level-funded program lower costs for my business and my employees?
Over the past few years, the efforts to reduce employer healthcare costs with traditional insurance plans have shifted the burden to employees, often times with high deductibles or narrower networks.
A self-funded plan puts you back in control. Through your TPA you can get more visibility into how your plan is being utilized. You can adjust benefits as they suit your employee demographic – not just a pre-packaged option. In essence, you can tailor-make a program where you can actually understand where and how your “premium” dollars are being spent.
But wait, there’s more!
1) Surplus! In addition to the ability to customize your benefits offering and structure the plan to meet your budget, if your employees are super healthy and don’t need all the money you’ve set aside to pay for claims, you get the money back – either as a refund or you can use it to pay future expenses. Imagine that! You get the excess and not the insurance company!
2) Transparency! You get to know how and where your money is being spent. You can get monthly reporting that summarizes utilization! Say goodbye to smoke and mirrors.
3) Less taxation & regulation! Say goodbye to state health insurance premium taxes. And self-funded plans are subject to far less regulation under the ACA – that can save you $$$.
You also can still provide benefits that your employees have come to count on – FSAs, HSAs (with certain restrictions) and HRAs.
Clearly, a self-funded plan isn’t the best option for every company – if it was, everyone would do it! But, if you are looking to gain more control of your benefits and healthcare costs, a level-funded self-funded plan is worth consideration. We can sit down and outline what a customized program could look like and what the potential costs could be. If it pencils out, it could be a win/win for you and your employees. Before renewals kick into gear is the perfect time to explore your options. Let’s talk!
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