Types of health plans - Blue Ridge Risk Partners

Types of health plans

August 10, 2021


When it comes to group health insurance there are three types: fully insured, self-funded, and level funded.   A fully insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  n a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan’s needs (administration, claims and stop loss coverage).  A level-funded plan is when the employer makes a set payment each month that goes into a reserve account for claims, admin costs, and premiums for stop-loss coverage. If claims are lower than expected the remaining payments may be refunded at the end of the policy contract. 

With average premiums for families increasing by 22% in the last 5 years, employers look for ways to control group health insurance costs. Understanding what it means to be “fully insured” vs self-funded or level-funded is imperative to ensuring that employers offer the best health insurance packages to their employees and control costs. 

When it comes to group health insurance there are three types: fully insured, self-funded, and level funded.  

In a nutshell:

  • A fully insured plan removes the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  
  • A self-funded plan puts most of the risk on the employer. It offers a higher chance of savings. In some cases, the possibility of a credit at the end of the plan year based on the claims of the group.
  • Level-funded is a combination of the two.  Think of a self-funded plan with training wheels. The employer will not have the financial risk at the end of the plan year, but may or may not receive a credit.

We will take a deeper look at each of these options. 

Fully insured

A fully insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.  

When you think of “insurance” you are thinking of “fully insured.” The individual or employer pays a premium to the insurance carrier and in return, the insurance carrier is responsible for paying future medical claims that are covered by the policy and beyond a certain annual “out-of-pocket maximum.”  

For instance, a family’s out of pocket maximum may be $5,000. A dependent has his tonsils removed with a claims cost of $10,000. The father has open heart surgery for $500,000. The family is responsible for $5,000. The insurance carrier covers the remaining $505,000 without increasing the monthly premium during the contract period.  

If the medical costs are more than the premium or claims are trending higher than the premium community rating or risk pooling comes into play.   

Think of your community pool and all the people out for a swim. While your son just had his tonsils out, and your husband had heart surgery, the family next to you might be having a healthy year with minimal claims.  The family across the way has had a few sinus infections but no other major claims.  These claims’ factors are ‘pooled’ together to create a community rating. This spreads the risk equally amongst all enrolled with a carrier in a specified region. 

 

Self-funded

Take fully insured and do the opposite. In a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan’s needs (administration, claims and stop loss coverage). 

The employer will typically buy stop-loss coverage from an insurer to protect themselves from large claims. The employer will pay a premium for protection in case the actual claims exceed the predicted expenses. For example, if the actual claims exceed by 25% then this protection would cover the remaining costs.  

Self-funded plans are often not an option for smaller employers. The fewer the employees the harder it is to predict the costs of claims.  And in many cases, small employers are not prepared to have funds readily available to cover large claims. 

Level-funded

A level-funded plan is when the employer makes a set payment each month that goes into a reserve account for claims, admin costs, and premiums for stop-loss coverage. If claims are lower than expected the remaining payments may be refunded at the end of the policy contract. 

An employer with a level-funded plan pays a fixed monthly amount for each employee. If claims are low, you will get money back or credit for next year’s policy. If claims are high, the carrier’s stop-loss insurance will cover the rest.  Or in some cases, shared with the issuing carrier, as they are at risk for excessive claim payments when trend is higher than expected. 

Level-funded plans are a good option for smaller organizations.  The plans act like traditional fully insured plans, but offer rate relief and the possibility of a credit at the end of the plan year. 

Ready to review your options? Reach out to Rebecca Wilson and get started. rebecca.wilson@blueridgeriskpartners.com