If you’ve ever been caught between the predictability of fully insured plans and the potential savings of self-funding, gap funding might be the perfect solution. It’s a funding strategy that helps you reap some of the benefits of self-funding without its high risks — and oftentimes, you can move to gap funding without having to change insurance carriers or policies.But what is gap funding, and how do you know if it’s the right choice for your company? Let’s explore.

What does gap funding mean?

Gap funding is a hybrid approach that combines different aspects of fully insured and self-funded plans.

Here’s how it works:

1. Your company pays a fixed premium to an insurance carrier, similar to a fully insured plan.
2. You also take on the financial responsibility for a specific “gap” of claims.
3. The insurance carrier covers claims below the lower limit and above the upper limit. You’re responsible for anything in between — the “gap.”

For example, let’s say your company has 100 employees. You opt for a gap-funded employee health plan with an insurance company. Here’s how it might look:

• You pay a fixed premium of $50,000 per month to your insurance company.
• Your insurance company covers all claims up to $500 per employee per month.
• You’re responsible for claims between $500 and $5,000 per employee per month.
• Your insurance company covers all claims above $5,000 per employee per month.

So if employee A has $300 in claims in one month, then the insurance company covers it all. If employee B has $3,000 in claims, you’d be responsible for $2,500 ($3,000 minus $500 paid by the insurance company). If employee C has a major medical event costing $40,000 in one month, then you’d be responsible for $4,500 ($5,000 minus $500) while the insurance company covers the rest.

The pros of being gap-funded

Gap funding is one of the most popular healthcare funding strategies right now, and for good reason. These are some of its biggest advantages:

• Potential for savings: If your workforce is generally healthy, then you could pay less than you would with a fully insured plan.
• Predictable budgeting: The fixed premium and defined gap make the costs more predictable than with self-funding.
• Protection from catastrophic claims: The insurance carrier covers high-cost claims, reducing your financial risk. Also, gap funded plans include aggregate stop-loss insurance, which sets an upper limit — or aggregate deductible — on the total claims an employer would be responsible for.
• Increased flexibility: Gap funding often allows for more customization in plan design than fully insured options.
• Access to claims data: Unlike with fully insured plans, you typically get more insight into your claims data. This can help you make informed decisions about your plan and tailor it to your employees’ needs.

The cons of being gap-funded

With that said, gap funding plans have some downsides that all HR leaders should consider:

• Financial risk: While it's limited, you’re still taking on more risk than with a fully insured plan.
• Complexity: Gap funding is more complex to understand and manage than a fully insured plan. However, there are many vendors that can help you manage the ins and outs of administering a gap funded plan.
• Cash flow considerations: You need to be prepared to cover claims within your gap, which can fluctuate considerably from month to month.
• Potential for rate increases: If you have a high-claim year, your rate could increase significantly the following year.
• Administrative burden: Gap funding requires a more hands-on approach than fully insured plans, which can be burdensome on small HR teams.

Who could benefit most from a gap funded employee health plan?

Gap funding works well for many companies, but it’s not for everyone. Organizations that might want to look into gap funding include:

• Small to midsize companies: Those that have 50 to 250 employees and want some of the benefits of self-funding without the financial risk may appreciate a gap funded plan.
• Companies with a relatively healthy workforce: If your employees generally have low healthcare utilization, then you stand to save more with gap funding.
• Organizations looking into self-funding: Gap funding can be a good stepping stone between fully insured and self-funded plans.
• Businesses with a stable cash flow: Since you need to be prepared to cover claims within your gap, having a reliable cash flow is important.
• Companies in industries with predictable healthcare costs: If you can reasonably forecast your healthcare spending, gap funding can be less risky.
• Organizations with an appetite for some financial risk: While less risky than full self-funding, gap funding still requires a willingness to take on some financial uncertainty.

Is your benefits strategy bridging the gap?

Gap funding could be the bridge your employee health plan needs. If your benefits broker hasn’t brought it up as an option, then you might be missing out on a strategy that could save your company money while providing comprehensive coverage for your team.

A proactive benefits partner like Nava can help you explore all of your funding options, including gap funding. We’ll help you find a funding strategy that aligns with your objectives and meets your unique needs and risk tolerance. Let’s explore your options together.

Next Steps

To continue learning about gap funding, watch our benefits funding masterclass.

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