Interview with Branden Campbell: Breaking Down Self-Funded vs. Level-Funded Health Plans for Small Businesses

As we prepare for this Friday’s episode of Get Morganized, we’re excited to have Branden Campbell joining us. He’s a benefits consultant specializing in group health plans for small businesses. Ahead of the show, Branden gave us a preview of a critical topic we’ll be discussing: the difference between self-funded and level-funded health plans. Here’s what he had to say:

Q: Branden, what’s the main difference between truly self-funded and level-funded health plans for business owners exploring healthcare options?

Branden Campbell: It’s an important distinction to make. A self-funded plan is where the employer takes full responsibility for paying out employee healthcare claims directly. It’s a true form of self-insurance, where you cover the costs of healthcare claims as they happen, and the risk is entirely on the employer. On the other hand, level-funded plans are a hybrid. They combine aspects of self-funding but shift a significant portion of the risk to the insurance carrier. This means there’s much less risk for the employer because stop-loss insurance kicks in to protect them from big claims—often the same amount as the total claims fund for the year.

Q: How are the costs structured in both of these plans?

Branden: Both plans break down costs into three categories:

Claims account fund: This is what you expect your group to spend on healthcare claims throughout the year.

Admin costs: The insurance company or TPA (third-party administrator's) “profit margin” covers the plan's administration, such as processing claims and providing support.

Stop-loss insurance: This provides protection by setting a ceiling on the amount of exposure if claims exceed a certain threshold.

For self-funded plans, the employer has more exposure to risk and more control over the claims process. With level-funded plans, you’re essentially paying the claims fund as a premium, but you’ll get money back if claims are lower than expected.

Q: What are some critical features of level-funded plans that business owners should consider?

Branden: There are a few standout features with level-funded plans that make them attractive:

Negotiation power: Unlike fully insured plans, which have fixed rates based on large risk pools, level-funded plans allow you to negotiate based on the actual performance of your group. If claims are low, you can push back on rate increases.

Performance-based refunds: If your claims fund performs well, you can get a refund for the difference between expected and actual claims. That’s a massive incentive for businesses with healthy workforces.

No risk: If your claims exceed the fund, stop-loss insurance covers the excess, so there’s no risk of paying more than you’ve budgeted.

It’s all about striking a balance between having enough protection and saving on costs.

Q: Are there downsides to level-funded plans that business owners should know?

Branden: Level-funded plans can be a great option, but there are a few potential downsides. If you have fewer than 25 employees, everyone must complete a comprehensive health application to set accurate rates. For over 25 employees, a census is usually enough. Some carriers, like Allstate, offer plans without traditional networks, so your employees can see any doctor or facility. However, that might require educating your staff and their providers on how the plan works.

It’s also important to know that these plans require more administrative effort than fully insured plans, and some employees may resist the change. So, if your company isn’t open to minor disruptions, level funding might not be the right fit.

Q: So, who would benefit most from self-funded and level-funded plans?

Branden: If your group is generally healthy and you’re looking to save money, level-funded plans can be an excellent fit. They give you more control over your healthcare costs, with the added benefit of protection from big claims. It’s a good way for small groups to take on some of the advantages of self-funding without the full risk. Self-funded plans work better for businesses that want complete control and are comfortable managing more risk—usually larger businesses or those with low expected claims.

Q: And who wouldn’t be a good fit for these plans?

Branden: If you’re a small group with some high claimants or not ready to manage a more complex plan structure, then level funding may not be for you. It also doesn’t work well if your employees are resistant to change. For example, out of the 10+ groups I’ve implemented, only one ran into problems because the employees weren’t willing to complete the simple tasks asked by the carrier to keep the plan running smoothly.

Be sure to tune in this Friday to hear Branden break down these healthcare options in even more detail! If you’re a small business owner, understanding the difference between self-funded and level-funded plans could help you make smarter decisions about employee healthcare. Don’t miss it!

Donald F. Morgan is a full-time financial advisor, serial entrepreneur, lifelong amateur economist, and political scientist. He is often seen on television news and quoted in publications as diverse as The Financial Times, US News and World Report, and Spokane Journal of Business. He and his wife Violet produced and directed a local television talk show, and he has had a column in the Coeur d’Alene Press. His views are his own.