Exploring employee benefit options: Self-funded vs fully-insured vs level-funded

A recent article in the Wall Street Journal sited hospital cost rising at 7.7%. And, according to the International Foundation of Employee Benefits Plans (IFEBP), employers project a seven percent increase in health insurance costs for 2024. With health insurance becoming more expensive, employers may be exploring all their employee benefit options, including self-funded vs. fully-insured vs. level-funded plans and also captives.

There can be significant differences between these plan types, potentially impacting costs, risks and coverage. To help simplify these options, let’s dive into a breakdown of how the plans work and the pros and cons of each one.

Fully-Insured Health Plan

A fully-insured plan is a traditional health insurance plan. The employer buys a group health plan through an employee benefits broker or from a health insurance company. The employer, employees or both pay the premium. The insurance company is the party to take on the risk and cover claims that arise.

Learn More About Group Health Insurance

Self-Funded Health Plan

Also called a self-insured plan, a self-funded health plan is funded by the employer. The employer assumes the risk and pays the medical claims that arise. Employee premiums may help fund the plan. In this setup, the employer typically budgets a fixed monthly amount for administration fees and stop-loss insurance coverage, but the monthly claims costs are variable.

Some companies may choose to self-administer, but many companies contract with insurance service providers to handle claims processes, provider networks and other aspects of insurance. Employers may work with insurance companies to offer self-funded plans, which employees may see reflected on their health insurance cards and statements. Employers may also hire third-party administrators.

Self-insured plans are particularly popular with large employers. According to KFF, 65 percent of covered workers are enrolled in self-funded health plans. In large firms, 83 percent of covered workers are in self-funded health plans, whereas only 18 percent are in small firms.

Level-Funded Health Plan

A level-funded health plan (also called level-funded self-insurance) is a hybrid of self-funded and fully-funded options. In this setup, the employer pays a set monthly fee to cover administrative costs, stop-loss coverage and claims. Regardless of the actual costs of claims, the employer will not pay more than the fixed monthly amount. If the claims costs are lower than the fixed monthly amount, the employer may be eligible for a refund.

Since level-funding provides some of the flexibility and opportunities of self-funding while reducing risk, these plans may be particularly appealing to small businesses. According to KFF, 34 percent of small firms that provided health benefits in 2023 offered a level-funded plan.

Pros and Cons of Fully-Insured Health Plans

At first glance, fully-insured health plans may appear to be the easiest option. However, they do have their share of disadvantages. Here are some key considerations when it comes to fully-insured plans.

• Pro: The monthly costs are predictable. The employer pays set premiums, making it easy to budget for the year, even if claims are higher than expected.
• Pro: These plans may require minimal administrative work on the part of the employer. Other than open enrollment and premium deductions, the insurance provider or benefits broker may handle the work of administering the plan.
• Con: Employers don’t have much control over plan design. Since the insurance company decides on the plan design, employers may be unable to offer coverage that caters to the needs of their workers.
• Con: If claims are lower than expected, the insurance company might benefit, but the employer will not receive any money back.

Pros and Cons of Self-Funded and Level-Funded Plans

Many employers turn to self-insurance because it means they could save money while exercising greater control over their employee benefits. Just like fully-funded health plans, self-funded and level-funded health plans have both pros and cons.

• Pro: Employers may have more control over plans and are more easily able to design coverage that meets the needs of their workers.
• Pro: If employers succeed in managing costs by achieving lower-than-expected claims, they may receive a refund from the surplus of funds.
• Pro: Employers may have access to data, which they can use to identify loss drivers and improve risk management.
• Pro: Self-funded plans may not be subject to the state health insurance regulations that govern fully-funded plans. This may decrease the regulatory burden and contribute to cost savings.
• Con: Self-funded employers must typically comply with HIPAA regulations, which may add a layer of regulatory burden.
• Con: Employers may need to take on more work. Although a benefits broker or third-party provider can assist in handling administration, the employer may still need to be more involved due to the responsibility of paying claims.
• Con: Employers may take on more risk. With a self-funded health plan, monthly costs are variable and may end up being higher than anticipated.

Controlling Financial Risk with Self-Funded Plans

Cancer, pregnancy, musculoskeletal disorders and other health conditions could all lead to major costs for both the employee and the employer. If a higher-than-average number of covered individuals have health conditions in one year or a single individual has an extremely expensive condition, claims costs may spike. Even routine costs can add up when they involve expensive tests and prescriptions.

When employers opt for self-insurance, they take on this risk themselves and may be motivated to keep costs down. Companies that use level-funding may also be motivated to keep claims costs low in order to receive a refund.

It may be possible to control financial risk with the use of stop-loss coverage. This excess insurance can help to cover claims that exceed a pre-determined level. Since both individual catastrophic claims and numerous lower-value claims may cause a financial burden, catastrophic and aggregate stop-loss coverage can provide important protection.

In addition to stop-loss insurance, employers could leverage various cost containment measures, such as:

• Implementing prior authorization and similar controls to potentially avoid unnecessary costs
• Educating employees on how to shop around for medical services and prescriptions
• Offering low-cost telehealth options
• Working with an employee benefits broker to get year-round, comprehensive support

Which option is right for your company?

While plenty of companies choose self-funding, it may not be the right option for everyone. If you’re thinking about an alternative to fully-funded plans, consider the following:

• How big is your company? Bigger companies have more resources and may be equipped to handle more variation in month-to-month costs. This is one reason why self-funding is more popular with large companies. If your company is small, self-funding may not match your needs and risk appetite. However, level-funding may be a viable alternative.
• How effectively can you control costs? Self-funded health plans may provide employers with access to data, which they can leverage to identify losses and then work alongside benefits professionals to implement changes to control costs. If this sounds like something your company could do successfully, self-funding or level-funding may be a good option.
• Are other options a better fit? For example, small businesses might consider an individual coverage health reimbursement arrangement (ICHRA) or Small Business Health Options Program (SHOP).

Since the health plan a company offers can impact both its expenses and employee satisfaction, making the right choice is critical. Let me know how I can help you explore your options, including self-funded, fully-funded and level-funded health plans or maybe a captive arrangement.