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What is the difference between level funded and self-funded health plans
Linda Buchmann • February 23, 2024
What is the difference between, level funded and self-funded health plans? What are the pros and cons of each?
1. Self-funded Health Plans:
- In a self-funded health plan, the employer assumes the financial risk for providing healthcare benefits to employees. This means the employer directly pays for employees' medical claims, rather than paying fixed premiums to an insurance company.
- Employers often purchase stop-loss insurance to protect against catastrophic claims that exceed a certain threshold.
- Self-funded plans offer greater control over plan design, costs, and data, allowing employers to tailor benefits to their employees' needs.
- Employers have access to detailed claims data, which can help identify trends, manage costs, and implement targeted wellness programs.
- Self-funded plans are subject to federal regulations under the Employee Retirement Income Security Act (ERISA), but they are exempt from state insurance regulations, offering potential cost savings and fewer administrative burdens.
- The main risk of self-funded plans is the potential for large, unexpected claims that can significantly impact the employer's finances.
2. Level Funded Health Plans:
- Level funded plans are a hybrid of self-funding and fully insured plans. Employers pay a fixed premium each month to a third-party administrator (TPA), which manages the plan on their behalf.
- The TPA pools premiums from multiple employers to cover medical claims, and stop-loss insurance is typically included to protect against high claim costs.
- Level funded plans offer the same benefits of self-funded plans, including cost control, plan flexibility, and access to claims data, but with less financial risk for employers.
- Employers benefit from predictable monthly premiums, as they are not responsible for funding claims directly.
- Level funded plans may be more attractive to smaller employers or those with limited cash flow, as they provide the advantages of self-funding without the same level of financial risk.
Pros and cons of each:
- Self-funded plans:
- Pros: Greater flexibility, potential cost savings, access to claims data for cost management.
- Cons: Higher financial risk due to direct responsibility for claims funding, potential for large, unexpected claims.
- Level funded plans:
- Pros: Cost control, plan flexibility, access to claims data, predictable monthly premiums.
- Cons: Less control over plan design compared to self-funded plans, still subject to some financial risk despite fixed premiums.
Understanding the basics of health insurance is crucial for making informed decisions about your healthcare coverage. Buchmann Benefits , based in O’Fallon, MO , provides small businesses with options regarding Health Insurance plans. Let’s take a look at some things to understand, then give us a call at ( 314)931-6448 , to discuss a detailed plan that works for you and your employees. Types of Health Insurance Plans: Health Maintenance Organization (HMO): Requires you to choose a primary care physician (PCP) and typically limits coverage to care from doctors who work for or contract with the HMO. Preferred Provider Organization (PPO): Offers more flexibility in choosing healthcare providers, both in-network and out-of-network, without requiring referrals to see specialists. Exclusive Provider Organization (EPO): Similar to PPOs but usually does not cover any out-of-network care except in emergencies. Point of Service (POS): Combines features of HMOs and PPOs, requiring you to choose a primary care doctor and providing coverage for both in-network and out-of-network care. Key Terminology: Premium: The amount you pay for your insurance plan, usually monthly. Deductible: The amount you must pay out of pocket for healthcare services before your insurance plan starts to pay. Copayment (Copay): A fixed amount you pay for covered healthcare services after you've paid your deductible. Coinsurance: Your share of the costs of a covered healthcare service, calculated as a percentage (e.g., 20% coinsurance means you pay 20% of the cost, and the insurance pays the rest). Coverage and Benefits: Preventive Care: Services like vaccinations and screenings that are often covered without cost sharing. Emergency Services: Coverage for emergency room visits. Prescription Drugs: Coverage for medications prescribed by your doctor. Mental Health Services: Coverage for counseling and therapy. Maternity and Newborn Care: Coverage for prenatal care and childbirth. Networks: In-Network: Healthcare providers and facilities that have contracted with your insurance company to provide services at negotiated rates. Out-of-Network: Healthcare providers and facilities that do not have agreements with your insurance company, which may result in higher out-of-pocket costs. Enrollment and Eligibility: Typically, you can enroll in or change health insurance plans during the annual Open Enrollment Period or if you experience a qualifying life event (e.g., marriage, birth of a child, loss of other coverage). Understanding Costs: Besides premiums, deductibles, copays, and coinsurance, consider out-of-pocket maximums, which limit how much you have to pay for covered services in a plan year. Additional Considerations: Flexibility: How much choice do you need in selecting healthcare providers? Affordability: Balance premiums with potential out-of-pocket costs. Coverage Needs: Consider your health status, any ongoing treatments, and the needs of family members covered under the plan
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