As businesses strive to offer competitive employee health benefits, they often find themselves at a crossroads. Many employers understand the difficulty of navigating through various insurance options while seeking the most cost-effective solution. Two major options that stand out are self-funding and level-funding health plans. Understanding the distinctions between these models is essential for making informed decisions that align with a company's financial goals and risk tolerance.
Self-Funded Plans
A self-funded health plan is one where employers pay for claims directly as they occur. This approach offers complete control over the plan design and the choice of various vendors. However, the unpredictability of costs can be a significant challenge as high-cost claims may arise unexpectedly. To mitigate this financial risk, many companies invest in stop-loss insurance to cover potentially catastrophic claims. It's also noteworthy that self-funded plans are regulated under federal law, specifically the Employee Retirement Income Security Act (ERISA), rather than state insurance regulations.
Level-Funded Plans
Conversely, level-funded plans integrate a fixed monthly payment structure that includes bundled claims estimates, administrative fees, and stop-loss coverage. This approach provides financial protection through a claims cap, ensuring that companies are shielded from excessive claim costs. Should the company's claims fall below budget, there may even be opportunities for refunds or credits, adding a layer of potential savings.
Key Differences
When examining risk tolerance, self-funded plans place the entirety of financial risk on the employer, which can introduce significant unpredictability. Level-funded plans, on the other hand, offer capped risk which simplifies budgeting through consistent monthly payments. The opportunity for potential savings also varies: while self-funded plans might lead to greater long-term savings if claims remain low, level-funded plans can provide partial refunds if claims are under the anticipated budget.
Furthermore, self-funded plans allow for the maximum level of customization and control, which can be appealing to larger, financially stable companies. Meanwhile, level-funded plans offer a balanced mix of customization with third-party administrative support, often making them more suitable for small to midsize businesses seeking predictability and peace of mind.
Ultimately, the decision between self-funding and level-funding a health plan should be informed by assessing a company’s financial stability, willingness to take on financial risk, and desired level of control over plan specifics. Both models present significant advantages over traditional insurance, contingent upon a business’s individual needs and circumstances.
We encourage businesses to thoroughly assess these variables and to consider consulting with a health benefits expert to discern the best-fit option for employee health coverage.