Self Funding vs. Level Funding vs. Fully Insured: Breaking Down the Myths

Understanding the differences between these health plans can make a difference between controlling costs on your plan or potentially (maybe even likely) watching your premiums skyrocket

Even with that said, there are still plenty of misconceptions out there between the three that unfortunately lead businesses to stick with the status quo, whether they like it or not. Staying status quo can often come at a steep price.

I will break down the differences, bust some myths (kind of like that old Discovery Channel show), and look at what makes the most sense for your company.

Fully Insured: The Traditional Route

A fully insured plan is the default option. The plan is predictable and many times it's because that may be the only option they are aware exists. Here is what makes it so predictable: you pay a fixed premium to the insurance carrier and they take on the financial risk of paying claims. Pretty simple, right? Why would you want to do anything different?

What This Means In Simple Terms

Imagine you are renting an apartment. You pay the landlord a set rent every month. This doesn't matter whether you use any of the amenities or not. Similarly, with a fully insured health plan, you pay a fixed premium each month. It doesn't matter how often your employees are actually using the healthcare services. The insurance company assumes all the risk, but there is a possibility that you end up pay for more than you actually use.

Self Funding: The Control Play

If your company self funds, you are paying for healthcare claims directly. This will come with Stop-Loss insurance for protection against the highest dollar catastrophic claims. Using the self funded model will provide more transparency (we hear this word being used a lot lately in all areas of our lives) into where your healthcare dollars are going.

What this means in simple terms

While fully insured can be viewed as renting a home, look at self-funding in terms of owning a home. You're responsible for the all maintenance costs, but you will have complete control over decisions and can see exactly where your money is going. In this setup, your pay for healthcare services as employees use them. This can lead to savings if your claims are low. Or lower than expected. To be able to protect against unexpected high dollar claims, you would purchase stop-loss insurance. This can be similar to homeowners insurance as it relates to major repairs.

Level Funding: The Middle Ground

Level funded is a structured version of self funding that has been designed for smaller business but can really be used at any segment. You will pay a fixed monthly amount (like a fully insured plan) but if claims are lower than expected, you can earn money back, many times in the form of a credit after the runout period.

What This Means in Simple Terms

Consider level funding as leasing a car that comes with a mileage cap. You make regular payments, and if you drive fewer miles than the cap, you have the ability to get it back or it can be credited. Similarly, with level funding, you pay a consistent monthly fee and if the claims for your employees on healthcare is less than you anticipated, you can receive part of it back; likely as a credit. It offers the predictability but will allow you to reap the benefits of savings when the time comes.

So, What's the Best Choice?

There is no one-size-fits all answer. Let me say that again. THERE IS NO ONE-SIZE-FITS ALL ANSWER. I don't care what you read or what someone told you, it doesn't exist. It all comes back to your tolerance for risk or comfortable of complete predictability. But there must be a break even point. When does it make most sense for your company?

Some companies will thrive in a self funded model. Others won't and will prefer the stability. For some, a fully insured plan might still make sense. However, fewer businesses are finding it to be the best financial move because when their Medical Loss Ratio (MLR) is really good, they find that they are being provided with a "no stop renewal" only to find out that was because they were profitable to the insurance company and didn't want to lose them. So they make a good offer (less than the "trend") in order to keep them. This is an entirely new and different topic of conversation for another day.

What This Means in Simple Terms

Choosing the right health plan can be like deciding between renting, buying, or leasing

• Fully Insured = Renting: Predictable costs but less control
• Self Funding = Buying: More control and potential savings but with greater responsibility
• Level Funding = Leasing: A balance between predictability and potential savings

The best choice comes down to your company's needs, financial health and overall appetite for risk

Is Self Funding or Level Funding Right for your Company?

Let's find out. Book a call to review your current setup. Let's see what you are really paying for and explore the options to see what makes the most sense

Stephen Snyder

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