LEVEL SELF FUNDED HEALTH INSURANCE Explanation and definition of terms
How Does Level-Funding Work?
The first thing that’s important to know is that your employees will not notice any difference between how their traditional health plan worked and what they’ll experience under your level self-funded plan. They will still have a PPO plan with a deductible, a maximum out-of-pocket limit, copays for office visits and prescriptions if this is the plan design you select. Or if a HSA (Health Savings Account) is preferred, those options are also available under a level self-funded format. As the employer, you’ll have the ability to offer more than one plan for your employees to choose from.
The employer’s role in self-funding is to work with a consultant that will set up a plan administrator that will collect a set amount every month with a portion going to pay the claims of your group. This is your cash reserve. This is one of the features that make self-funded plans more affordable because you only pay your own claims expenses. It is also the majority of where your premium dollars go every month whether in a traditional plan, or a self-funded plan. The difference in a self-funded plan is that instead of GIVING the money to the insurance carrier if you have few claims within a year, that money is refunded to you.
Your exposure, as an employer, is safeguarded at both the individual employee level (individual catastrophic claims) as well as your total overall risk/expenditure, when reinsurance step in and pays all claims. “Stop loss insurance” or “Reinsurance” is just like the insurance that carriers themselves purchase to limit their exposure in case of high claims. It is the second portion of three that your premium is divided into.
We have videos and articles on this site explaining reinsurance in-depth.
The third (smaller) portion of your funds goes to administration such as paying claims, negotiating down costs with care providers, etc.
Here’s some self funded health insurance terminology that is helpful to learn:
SPECIFIC DEDUCTIBLE – This is the maximum claims amount per employee that an employer is responsible to pay. For instance, if your group has a $15,000 specific deductible that means that your employer claims reserve will pay up to $15,000 of an employee’s claims expenses.
If you’re thinking, “What a minute…I’ve got 20 employees! That would mean I’d have to come up with $300,000 in a worst case scenario if every employee had large claims next year, that’s where your Aggregate Deductible comes in.
AGGREGATE DEDUCTIBLE – This is the maximum limit the employer is expected to pay from their claims reserve during a policy period. This amount is calculated by the reinsurance company’s underwriters based on the medical conditions of the group. The amount that they set as the aggregate deductible will be a fraction of what the maximum exposure risk would have been if it were based on a ‘per employee’ scale. The amount set to reinsure the aggregate deductible becomes a part of the monthly amount paid to the insurance company, and it is deposited into your own group’s claims reserve account.
There are added protections for the employer…let’s say you’ve been on the plan for two months and someone has a large claim. At that point, there isn’t enough in your claims reserve account to cover your portion of those expenses. Now what? With self-funded plans, the insurer will advance the funds necessary to pay your portion of those claims. You always pay the same level amount (hence the term ‘level funding’) each month. It cannot change regardless of claims activity. In this scenario, a portion of your subsequent monthly payments would serve to reimburse the insurance company for the money they advanced to “pre-pay” your claims.
RUN OUT PERIOD – Self funded plans operate on a one year contract period. In the event that an employee experiences a claim late in the contract period or a provider doesn’t submit their claims in a timely manner, a “run out period” is provided. The length of that period can vary from plan to plan, but let’s use a six month run out period to illustrate this concept. When you see self-funded proposals, the run out period will often be expressed as “12/18”, as an example. What this means is that any medical expenses incurred during the 12 month contract period will be paid if submitted six months beyond the end of that period, through the 18th month. This insures that enough time is provided to process all claims.
RE-INSURANCE – One of three portions of your monthly payment you make each month. Reinsurnce (also called “stop loss insurance”) is a fee paid to insure that portion of risk beyond what you determine to pay out maximum for claims each year. Self-funded plans use a “re-insurance company” who is a third party in line behind the employee and the employer when it comes to paying claims. Re-insurance comes into play when a large claim occurs that exceeds either the specific amount set for one employee’s medical needs, or for the group on a whole, if many employees have claims in any given year. Reinsurance pays whatever is left over to cover those expenses. Once you hit your Aggregate or Specific Deductible, the re-insurer pays all the claims for the remainder of the contract and run out periods.
REFUND OF REMAINDER – Each year that you do not make use of all the money in your claims reserve account, that money is available as a refund to reduce next year’s costs, or to enhance the cashflow of your business.
The important thing to remember is that you do not need to become an insurance expert in order to save money on your employer health insurance. Let us know a little more about your situation and let us get to work for you. >>