If fully insured plans feel too rigid and self-funding seems too risky, then level funded health insurance might be just right. It offers a balance of predictability and potential savings, as it combines the best of both worlds. But what exactly is level funding, and could it be the secret missing ingredient of your funding strategy?

What is a level funded health plan?

Level funding is self-funding with training wheels. It serves as an intermediate step between fully insured and self-funded healthcare plans. Here’s how it works:

• Your company pays a set monthly amount to the insurance carrier, similar to a fully insured plan.
• This payment typically includes the expected cost of claims, administrative fees, and stop-loss insurance premiums.
• If actual claims are lower than expected, you get money back at the end of the year.
• If claims are higher, your stop-loss insurance kicks in to protect you from excessive losses.

For example, let’s say your company has 100 employees. You opt for a level-funded plan from a reputable insurance company — let’s call it BalancedCare Insurance. Based on your employee demographics and past claims history, BalancedCare estimates your annual healthcare costs, including claims, administrative fees, and stop-loss insurance, to be $1 million.

Based on their calculations, you’ll pay $83,333 monthly ($1 million / 12 months). This includes:

• Estimated claims: $70,000. This is the expected cost of your employees’ healthcare services, coming out to a yearly total of $840,000.
• Administrative fees: $8,333. This covers the insurer’s costs for processing claims and managing the plan.
• Stop-loss premium: $5,000. This is insurance that protects you from excessive claims. If an individual’s claim exceeds a certain threshold (say, $150,000) or if total claims exceed your annual estimate, this kicks in to cover expenses.

At year’s end, if your actual expenses were only $800,000, then you’d get a $40,000 refund, which is the difference between estimated and actual claims. On the other hand, if claims hit $1.2 million, then your stop-loss insurance would cover the $360,000 excess.

Pretty great, right? But like all health care plans, level funding health insurance comes with its unique set of challenges and drawbacks.

The pros of level funded health insurance

Some of the biggest advantages of level funding include:

• Potential savings: If your workforce is healthier than average, then you could see significant refunds at the end of the year.
• Predictable budgeting: Your monthly payments are fixed, making financial planning easier.
• Insight into health data: You get more detailed claims information, helping you make informed decisions about your health plan design.

The cons of level funded health insurance

However, level funding plans aren’t perfect. Here are some drawbacks to consider:

• Financial risk: While more limited than a self-funded health plan, there’s still some risk if claims are higher than expected, depending on the stop-loss insurance. You’re also not guaranteed to get back 100% of the surplus at the end of the year.
• Complexity: It requires more understanding and management than a fully insured plan.
• Potential for rate increases: If you have a high claim year, your rates could increase significantly the following year.
• Size limitations: Level funded health plans are typically only available for groups of 25 or more employees.

Are there certain types of companies for which level funding works best?

Level funded health insurance can be a great fit for:

• Mid-sized companies: Level funding can work great for companies with 25 to 250 employees. These companies are generally large enough to benefit from something more risky than fully insured plans. These are also companies that might not be large enough—or have the capital—to justify the administrative burden of self-funding.
• Companies with a relatively healthy workforce: The healthier your team, the more you stand to save.
• Organizations looking for more control: If you want more say in your plan design without full self-funding risk, then level funding could be your sweet spot.
• Businesses ready to graduate from fully insured: Level funding is a good stepping stone if you’re considering eventually moving to a self-funded health plan.

Time to talk funding strategy with your broker

Level funding could be what your employee health plan needs, but it’s often overlooked if funding strategy isn’t a focus in your renewal discussions. A proactive benefits advisor should be exploring all funding options with you, including level funding, to help you align the full scope of your benefits strategy with your company’s goals and workforce needs.

At Nava, we’re committed to giving HR leaders the full picture, empowering you to make decisions that balance cost control with employee care. Curious if level funding could be the solution for your benefits plan? Let us help you find out.

Next Steps

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