Level funding is a way to properly budget and fund your self-funded health insurance plan for your employees. A self-funded health insurance plan is an often used benefits strategy that provides your employees with healthcare funded through your organization rather than through a third-party health insurance company. This can lower costs for your employees and reduce the financial obligations of your organization as it relates to funding employee benefits.
Self Funded vs. Level Funding
A self-funded insurance plan is a great way to provide your employees with reliable, low-cost health insurance coverage. The idea is simple: claims are covered by your organization instead of a third-party employee health insurance provider. However, many employers find it challenging to properly budget for the self-funded insurance plan they have for employees. Mismanagement of the self-funded plan could lead to a substantial loss of money for your organization or a lack of adequate coverage for your employees.
Level funding is a reliable way to budget and fund your self-funded insurance plan. This option involves paying set monthly premiums to an insurance carrier or third party administrator (TPA). Level funding also includes paying out the claims made by your employees, according to their needs and their coverage by your self-funded insurance plan.
The Basics of Level Funding Insurance
Every level funding insurance plan is personalized, and each may look slightly different. However, there are some basics of level funding insurance that you can expect with your plan to help you budget and manage the finances for your self-funded insurance plan.
Employer Pays Fixed Amount
With level funding, the carrier or TPA holds the money for claims. This money is not allowed to be spent for any other reason or taken by the carrier. Instead, it is specifically set aside to pay employee claims that are related to injury or illness. The way it works is simple. The employer makes periodic payments to the carrier. The fixed amount for each payment is pre-determined based on various factors, including the number of employees and the extensiveness of the health insurance coverage. The payments generally occur once a month, although some employers choose to make payments more or less often depending on their specific situation.
Rates Are Set on History of Claims
The difficult process for many employers as it relates to self-funded health insurance is determining the costs associated with setting up this type of health plan. With level funding, the rates are based on the previous claims made by employees. By studying the claims history, your organization can get a clear idea of the average cost for paying out claims each year. Based on this information, you can set your rates and know how much you should deposit each month to always have enough to cover the claims made by your employees.
Helps to Manage Risk
One of the main purposes of level funding is to mitigate risk for the employer. Self-funded insurance plans are great in many ways, but they require more involvement and risk for the employer. Level funding simply makes the organization process easier. It reduces the chance of paying large sums of money for claims that you do not have the funds to pay. This is because level funding involves consistent contributions to the self-funded insurance plan and strategic calculation of how much each deposit into the level fund should be.
Provides Greater Certainty for Budgeting
Perhaps the main reason self-funded insurance plans fail is that the employer has not properly budgeted for the payout of claims. This leads to substantial loss when a large claim must be fulfilled, and there is a shortage in the budget. Level funding allows the employer to place money periodically, so there is never one large sum due.
Offers Greater Predictability
Besides the detailed analysis of claims history that goes into deciding the amount your organization puts into level funding each month, employers also have greater predictability financially as they know their self-funded plan is properly budgeted for and funded.
How Does It Benefit Employers?
Level funding benefits the employer by allowing them to make regular contributions for the self-funded plan, rather than pulling money directly away from the profits when a claim must be fulfilled. This allows for reduced costs, more effective record keeping and peace of mind as they know the insurance s being appropriately handled.
Reach Out to Our Level Funding Insurance Agents
At New City Insurance, we take pride in helping our clients maintain an organized and cost-efficient self-funded insurance plan for their employees. Reach out to our experts today with any questions or concerns and let’s see if self-funded insurance is right for your business.