The Rise of Alternative Funding
The more things change, the more they stay the same. This concept certainly resonates with employers, according to recent survey results about healthcare benefits. The pandemic has only added to the uncertainty and perpetual growth in costs that many employers are facing. As if return-to-work strategies and efforts to ramp up production were not enough, surveys suggest no end on the horizon to healthcare costs exceeding both the general rate of inflation and wage increases. While the storm clouds linger, there appears to be a glimmer of hope.
Thinking Outside of the Box
Emerging strategies that have until recently been unknown or unavailable to small and mid-sized employers will be examined closely in the coming years. Employers are thinking outside of the box. Not coincidentally, the marketplace has continued to position itself to meet the increasing demand for alternative methods of financing healthcare benefits. Two specific strategies have gained traction: level funding and benefit captives.
Both level funding and captives have the potential to provide employers with a pathway to escape the vicious cycle of fully insured increases, lack of alternatives and minimal transparency. Furthermore, each presents an opportunity for employers to truly regain control of healthcare spend and even bend the cost curve. In part one of a two-part series, we’ll review the advantages and considerations of level funding.
Advantages of Level Funding
Employers that are interested in the advantages of self-insurance but unwilling to completely step away from the “comforts” of insurance may be suitable candidates for level funding. Think of level funding as being self-insured with training wheels. A level-funded plan is subject to ERISA (not state regulations or mandates) and affords an employer with a higher degree of flexibility. Additional advantages include –
- Gaining access to data
- Avoiding adjusted community rating
- No state premium taxes
- Built-in “run-out” protection
- A chance to reap a financial return
The financing throughout the plan year is set up to operate as it does when insured. The carrier sets a fixed premium and the employer pays a static monthly rate based on coverage level. The amount in the premium set aside to fund eligible claims is based on a maximum cost projection for the plan year. If claims come in below the projected maximum, the employer will receive a percentage of or the entire balance. On the other hand, if claims exceed the maximum, stop-loss coverage (also paid from the employer’s premium dollars) reimburses the carrier, leaving the employer without obligation for additional financing. Looking for a good analogy? Consider a dividend arrangement tied to a worker’s compensation premium. If the year performs well, the employer – not the carrier – wins!
What about disadvantages? No strategy is a perfect fit for every employer, and savings are not guaranteed. With level funding, an employer is betting on itself and the covered members. The maximum funding aspect does potentially come with sticker shock once the premiums are determined. Incoming claims over the year are the great unknown. Also, level-funded plans are subject to more extensive initial underwriting without guarantee issue by a carrier.
Explore What’s Right for Your Company
If an employer wants to eventually be self-funded in the traditional way, exploring level funding may be a good starting point. To learn more about whether level funding is right for you, reach out to your Johnson Financial Group advisor to discuss alternative funding strategies.
In part two of the series, we’ll review the advantages and considerations of benefit captives.