The Most Common Types of Employer Health Plans
In general, any health plan offered by an employer as a benefit falls under the broad category of “group health plans”. There are a variety of ways that employers can offer and structure health coverage to employees.
Fully Insured Plans
Traditional fully insured plans are what most people think of when they think of “health insurance”. In a fully-insured plan the employer pays a fee, called a premium, to an insurance carrier and in return the carrier manages the claims for the employees and assumes all of the risk. These monthly premiums come from an estimate using a “community rating” of all covered employees in your entire geographical area.
The fixed monthly premium allows for consistent cash flow and budgeting. If claims exceed the premium during the plan year, the premium will not change until renewal, but ultimately results in an increase. On the other hand, if employees are healthy and have few claims all over-paid premium is gone.
Fully funded plans are relatively expensive and the carrier controls costs and claim data completely. The lack of transparency can make it difficult to implement strategies to reduce costs.
Self Insured Plans
A self-insured plan is one in which the employer sponsors the plan instead of an insurance carrier. The employer pays directly for the claims of the employees. Typically, the employer sponsoring the plan will contract with a Third-Party Administrator (TPA) to manage the plan and the employees’ claims.
Employers offering a self-insured plan usually save significantly on premiums, because they are only paying for the healthcare that is used. However, this can make it practically impossible to predict and budget for healthcare costs. Claims can be volatile throughout the year and there is the risk of a catastrophic claim that the employer cannot pay.
Most companies with over 1000 employees self-insure, but smaller companies have often found the risks to outweigh the benefits. However, level-funding is an option that removes these cons and makes self-insuring possible for smaller groups.
Level-funded Plans
Level-funding is a way to pay for a self-insured plan, but with a stable monthly payment and coverage on the risk of catastrophic claims. Monthly payments are an even distribution of an estimated annual spend of the employer group, not the whole community. If actual claims are higher than estimated, stop-loss insurance kicks in to pay for the overage. If claims are lower than estimated, the employer receives a refund of the unused claims dollars at the end of the year either directly to them or as a credit toward the next years’ claims.
The employer still contracts with a TPA to administer the plan, but has access to transparent data about spending to plan and budget for coming years.
Level-funded plans can offer big savings with less risk than fully self-insuring.