Small Business: Get the Financial Benefits of a Level / Self-funded Health Insurance Plan

We have all experienced the frustration of unexpected business expenses.

Despite budgeting, many unforeseen circumstances seem to take over.

This is especially true with healthcare!

Think about the possibility of an unexpected premature birth for an employee or their dependent which costs $400,000.

Normally, your claims fund would not have enough money to cover that unexpected event, in addition to the expenses of other employees.

Thankfully, there are ways to navigate the potential financial risks associated with high-cost claims.

One way to safeguard your business from these risks is through reinsurance, which acts as a safety net for your company's claims fund.

Here’s how it works:

What is Reinsurance?

In a level / self-funded health insurance plan, your company typically purchases reinsurance through a Third-Party Administrator (TPA).

Reinsurance provides protection in cases where a significant claim could deplete your claims fund.

Reinsurance steps in to ensure all claims are paid, even if they exceed your maximum expected claims funding.

Components of Reinsurance

A reinsurance contract generally includes three main components:

1. Shock Claims Stop Loss Coverage: This kicks in when a single claim exceeds a predetermined amount, known as the stop loss threshold. For example, if your stop loss is set at $45,000 per individual claim, your claims fund would cover up to $45,000, and the reinsurance would take over for any costs beyond $45,000. Note: Stop loss can be low, maybe $10,000 to $15,000. The recommendation will be made based on the size of your company.
2. Aggregate Stop Loss: This protects your business when the total claims from all employees exceed the maximum funding of your claims fund. It ensures that your company isn’t left vulnerable if overall claims are higher than anticipated.
3. Aggerate Accommodation: When using a level funded plan, this assures there is money to pay a claim even if there is not money in your claims fund.

Choosing the Right Funding Level

When setting up your reinsurance, you'll need to decide how much to fund your claims account.

For example, on the shock claims stop loss insurance, you and your agent and TPA will determine what deductible you will use. Depending on the size of your company, levels such as $15,000, $30,000, and $45,000 may be used.

This is to cover that one large claim and will be paid from your claims fund before the stop-loss insurance will begin to pay. Think of it as a deductible.

Shock Claims Stop-loss, aggerate stop-loss and aggerate accommodation insurances are in place to protect you from unforeseen claims.

A word of caution: You must decide how much you want to cover. You can choose to fund to the maximum, expected, or minimum claims levels.

If you don’t fund to the expected maximum, and claims exceed what you’ve put into the claims fund, you’ll need to make additional payments until the reinsurance deductible is met. Any surplus funds remaining after the all claims are paid will be returned to you.

Monthly Accommodation: Ensuring Cash Flow for Claims

To ensure your business is protected, it’s critical to confirm that your TPA has monthly accommodation coverage.

Here is some background as to why monthly accommodation is important.

Before the advent of level-funded contracts, self-funded health plans required businesses to pay administrative fees and then cover claims as they occurred. For larger companies, this wasn't a problem because cash flow was less of an issue.

However, for smaller businesses, this model presented challenges, especially when claims costs fluctuated throughout the year.

Level-funded plans were developed to help smaller businesses manage these cash flow challenges by stabilizing monthly expenses.

However, because claims don’t occur evenly over the year, there may be times when your claims fund is temporarily insufficient to cover ongoing claims.

This is where monthly accommodation becomes essential.

Monthly accommodation provides the necessary cash flow to pay claims even when your fund is low.

The insurance company temporarily covers the shortfall, and once your claims fund is replenished, the accommodation amount is repaid. This process continues throughout your contract and reconciles at the end of the plan year.

Risks of Inadequate Accommodation Coverage

Unfortunately, not all TPAs handle this process correctly.

We've seen cases where TPAs try to manage cash flow internally without purchasing adequate accommodation stop-loss coverage. When this happens, claims may go unpaid, leading to serious financial and legal repercussions.

In extreme cases, TPAs have even resorted to borrowing funds from one client to cover another's claims, which is illegal and can lead to intervention by the U.S. Department of Labor.

Protecting Your Business

This is not meant to frighten or overwhelm you.

Make sure you have a competent insurance agent who can guide you through this process.

Your agent will help you hire a Third-Party Administrator (TPA) to manage your claims payments, provide data as to the claims that have occurred and the amount paid, and process the reinsurance.

Ultimately, the level / self-funded is a good option because it gives you more control over your plan. ?It usually saves you a great deal of money while not having to pay for a large health insurance company.

Braden Benefit Strategies, Inc. is a group health insurance agency based in the Atlanta Metro area, specializing in small businesses with 20 to 300 employees. Our mission is to provide expert advice to help you manage one of the largest expenses on your P&L while ensuring your employees have access to quality, affordable healthcare. We would be honored to become your trusted agent. Call us today to find out how we can help you at 770-447-9843.