Beware of Fixed Cost Creep (Level Funded Plans)

The Affordable Care Act put level-funded benefits program on the map. Since ACA, many employers have turned to level funded benefits programs to save money while still providing quality benefits to their employees. Level funded is self-funded on training wheels and has helped to overcome some of the community rating challenges associated with small group ACA plans. The self-funded component allows carriers to use a more traditional underwriting approach to risk and rate groups.

Brokers that have primarily worked in the fully insured space have flocked to carrier provided level funded (Blue Cross, Cigna, Aetna, UHC) since it “looks and feels” like fully insured plan, gives the employer upside and provides more claims transparency.

The challenge as employers mature in these programs is they are still wired into the “max cost” side of the equation. The two main components of a level-funded program are fixed costs and claims. The risk, as shown below, is that the carriers will move more costs into the fixed side of the equation.

For employers that are 100+ enrolled employees, level-funded should be just a short stint as they get more comfortable with the underlying insurance components as they move towards a more flexible self-funded environment. A traditional self-funded plan gives the flexibility to independently shop all the components of your employee benefits program such as stop-loss, network, pharmacy, etc.

Last year I was working with a prospective client, and they were on a level funded program I was very familiar with. I reviewed their renewal to see if what they were being offered was fair. Total cost increase was right at 7%, with no plan design changes or foundational changes to the architecture (ISL, Agg Attachment Point, Network, Etc). Without much else to work with besides the renewal work up a few things stood out.

????????????????????????????????????????????????????????????????????????????????????????

1. They were tracking for a decent surplus and would have to surrender that is they made a carrier change. The carrier had leverage.
2. The broker was "stoked" they got the surplus return moved up from 50% to 67%! in the new contract year. (I'll break that down further)
3. Of the renewal components, the majority of the 7% on the total max cost went towards fixed costs.?The carrier locked in their upside and the employer wagered theirs.

The carrier locked in a $206,445 increase

4.????? ?50% Return vs 67% Return - As a baseline, I like to do my analysis on expected costs. In this scenario, instead of taking the 67% in exchange for the higher fixed cost the better scenario would have been to move the increase into the claims cost and keep the 50%. In my experience, the employer could have negotiated both.

5.????? A new waterline on the fixed costs.

?

In summary, Fixed cost creep is a significant risk to level funded benefits programs. Employers and brokers who take proactive steps to monitor expenses, choose the right carrier, and set realistic goals will enhance their level of control of the expense categories that can creep up on them. By doing so employers can strike an effective balance between savings and providing quality care, which may lead to higher employee satisfaction and retention.