Sixty-five percent of all workers with employer-sponsored health coverage are in self-insured plans, which generally means that the employer, not an independent insurance company, is responsible for the cost of paying out claims from the pool of funds collected in the forms of premiums. Among that population, however, a significant portion are in so-called level-funded plans, which have been described by the Kaiser Family Foundation as “a nominally self-insured option for small or mid-sized employers that incorporates stop loss insurance with relatively low attachment points.”
In 2022, 36 percent of covered workers at small firms reported enrollment in a level-funded plan. Despite their popularity, level-funded plans have historically received little attention from policymakers, analysts, and academics. Although that may be changing: On July 12th, the Department of Health and Human Services issued a request for information (RFI) on level-funded health insurance plans, and in June, the House of Representatives passed legislation clarifying the legal status of self-insured arrangements.
In this Forefront article, we describe the distinctive features of level-funded plans, clarify how they operate, explore their potential in creating value for employers and workers, and suggest directions for policymakers to consider.
Features Of Level-Funded Plans
1. Stop Loss Coverage
Level-funded plans typically include stop loss coverage. In fact, almost all but the very largest self-insured plans include stop loss coverage to mitigate the employer’s risk exposure to excessive claims. Stop-loss insurance kicks in once claims reach a predetermined amount, thus limiting the employer's financial liability. Stop loss coverage, and the carrier offering it, is invisible to the plan’s beneficiaries, who never interact with the stop loss coverage because beneficiaries hit their maximum out-of-pocket limit long before a stop loss claim would be triggered. If a claim triggers the stop loss coverage, the plan usually pays the claims first and then files the claim to the stop loss carrier.
Stop loss coverage can be based on a per-person or plan aggregate basis, or both. The per-person stop loss deductible for a self-insured plan can be as low as $40,000, far exceeding any beneficiary’s maximum out-of-pocket limit. It is the plan, not the beneficiary, that is responsible for paying for the claims up to the per-person stop loss deductible. The other type of stop loss coverage is based on the plan’s aggregated claims. Stop loss coverage kicks in only if the aggregated claims exceed a limit (known as the attachment point) determined by actuaries who underwrite the group’s risk on behalf of the stop loss carrier.
2. Predictable Monthly Payments
Most self-insured plans, including level-funded plans, pay fixed plan administration fees to their plan administrator and stop loss premiums to their stop loss carrier on a monthly basis. Level-funded plans differ from non-level-funded plans only in how they pay medical and pharmacy claims. Non-level-funded plans pay claims (through the plan administrator) as they are incurred, usually approving them in batches once a week. In contrast, level-funded plans prepay claims on a monthly basis. The plan’s maximum annual liability (i.e., attachment point) is divided by twelve, and the plan pays that amount each month to the plan administrator, who uses it to pay claims as they are incurred. If actual claims exceed those prepayments, then the administrator files stop loss claims. If actual claims are lower than the pre-payments, then the employer receives the unspent funds back (or as a credit) at the end of the year.
Therefore, level-funded plans provide employers with certainty through predictable monthly payments. Unlike fully-insured plans where premiums are fixed, level-funded plans' monthly payments can be adjusted downward based on the actual claims experience—if claims are lower than expected, the employer may receive a refund or credit. Additionally, level-funded plans, similar to other self-insured plans, have the flexibility to unbundle, organize, and negotiate services separately, and thus are less likely to suffer the disadvantages of fully-insured plans, such as bloated costs.
3. Flexible Benefit Design
Like all self-insured plans, level-funded plans enjoy the flexibility in plan design, such as vendor selection (including using independent plan administrators), concierge navigation to preferred sites of care, and waiving cost-sharing for beneficiaries who seek care from high-quality clinicians and facilities. Level-funded plans can also use independent pharmacy solutions to reduce their members’ prescription drug costs and include direct primary care, a comprehensive, value-based delivery model that focuses on prevention and overall health. The flexibility in plan design allows level-funded plans to adopt ever-evolving, innovative features that can save money, improve quality of care, and align the interests among providers, patients, and employers.
These advantages make innovative benefit design and affordable coverage more accessible to smaller employers and employers with small profit margins when offered through a level-funded structure. In 2020, 47.2 percent of small businesses offered health coverage to their employees. Today, just 31 percent do so. Rising health costs are one reason, and the primary cause of the small group market decline. Level-funded plans are one solution to help reverse this trend by making coverage more affordable for small employers.
Urgent Clarifications
Some elements of the Biden Administration’s RFI suggested that it may have been drafted by officials who lack a precise understanding of level-funded plans. Such confusion is common among policy makers and the public.
With the intention of making the RFI as productive and useful as possible, we offer clarifications as follows.
1. Service Coverage And Consumer Protection
The RFI mentions concerns from “interested parties” about whether stop loss policies on level-funded plans have the same benefits and consumer protections as those described in the plan document given to workers to explain the benefit. They believe there is a risk of inconsistency between what the coverage is, and what is described to workers, and that this risk may be greater for smaller level-funded plans.
As a fundamental element of due diligence for all self-insured plans, the stop loss coverage should mirror the plan document. In fact, there is neither a legal difference in the required diligence nor an empirical difference in the likelihood of failure in diligence between level-funded plans and other self-insured plans. Beneficiaries in all self-insured plans have the same rights and can equally seek recourse under existing law if the plan trustees violate their fiduciary obligations in this regard. Furthermore, no evidence suggests that smaller groups are less competent in understanding the Employee Retirement Income Security Act of 1974 (ERISA) or less informed about their fiduciary obligation to ensure that the policies match.
2. Multiple-Employer Welfare Arrangements
The RFI also discusses whether level-funded plans are potentially un-declared multi-employer welfare arrangements (MEWAs) -- a grouping of similarly situated employers who buy coverage together.
But level funded plans are not MEWAs. In fact, level funded arrangements segregate the funds and the risk of each group in their book of business to avoid becoming a MEWA. Specifically, each group is underwritten and rated on the basis of its own risk -- and receives its own stop loss policy on that basis. These clear safeguards protect level-funded plans from running afoul of MEWA rules, which the government has been robustly enforcing.
3. Self-Selection Of Low-Risk Groups
Another concern expressed in the RFI is whether level-funded plans are primarily attractive to low-risk small groups, thus pulling them away from the fully-insured small group market. It is important to note that, compared with the self-insured market, the fully-insured market is more profitable for insurance carriers. It also suffers from more severe misalignments of interest between carriers and employers, resulting in greater price growth. No one should expect employers to forgo more attractive insurance options – including self-insured plans, such as level-funded plans -- for the sake of improving fully-insured plans’ risk pool . In fact, employers owe a fiduciary duty to their workers and shareholders to seek the best possible insurance plan at the lowest price.
As more and more employers are priced out of the fully-insured market and look for more affordable options, level-funded plans are proliferating to meet this need, creating a dynamic insurance market that would save money for small employers while benefitting taxpayers and the economy. Even so, it should be noted that this direction conflicts with the interests of some stakeholders that might otherwise benefit from expanding one-size-fits-some models that limit choice.
Focus On Fostering Level-Funded Plans To Create Value For Employers And Workers
The self-insured market is the primary source of health insurance innovation, quality improvements, and savings creation for patients and employers and other plan sponsors. Level-funded plans reduce risk and streamline administration by offering a fixed monthly price that covers the cost of administration and stop-loss, and fully funds the claims risk for the year. Employers have flexibility to design their plans, and they can shop for the best deals based on attachment points that make sense to them. These features are especially important for small employers, who face tough market conditions, and often cannot compete with larger firms that provide a range of benefits to attract and retain talent. Many employers have deployed the flexible structure and attractive features of level-funded plans, thus creating value for themselves, their workers and families, and taxpayers.
However, some states have started limiting small employers’ ability to offer self-insured plans. While states lack jurisdiction over self-insured plans directly (which fall under ERISA and outside of state law in most circumstances), some states have effectively eliminated small employer access by banning the sale of level-funded plans to certain size groups or making the sale of low attachment point plans illegal. This has been done or attempted, for example, in New Jersey, Nevada, New York, and Texas among other states. A common refrain from some lawmakers and regulators is that, while consumers want choices, they are incapable of understanding different plans. However, there is no evidence to suggest smaller groups are less competent in understanding plan options. We believe there are other more well-established challenges that the federal government should focus on addressing.
In 2022, 103 million individuals received health coverage through a self-insured health plan. That is an enormous population that could benefit if policy makers make the most of level-funded plans, by allowing innovative options to compete freely with existing options.
To that end, Congress should protect access to level-funded plans and reinsurance (including low attachment point reinsurance) policies by ensuring they remain available for sale and purchase in all states. This would involve clarifying ERISA preemption with respect to self-insured arrangements for small businesses. The Self Insurance Protection Act would do exactly that, preempting state laws that prohibit group health plans from obtaining stop-loss policies. The legislation passed the House on June 22, 2023 as part of a broader small business health package (H.R. 3799). The Senate should act now to pass the legislation and send it to President Biden for his signature.
Most self-insured plans, including level-funded plans, are administered by large insurance conglomerates that are known to have undisclosed conflicts of interest and hidden compensation streams from stop-loss carriers, pharmacy benefit managers, and even navigation vendors that negatively impact employers and workers through higher premiums and out-of-pocket costs. Even when new regulations, such as the Transparency in Coverage Rule, introduce sunlight to a market, many incumbent players find ways to remain in the shadows: So far the quality of data disclosure and the absence of attestation from insurance companies have thwarted both the letter and spirit of the rule.
One antidote to such efforts aimed at stymieing change: Protect the power of new market entrants to bring the kind of competitive pressure that inspires both new and old entities to innovate, create value, and improve consumers’ experience. When it comes to level-funded plans, federal policy makers should be focused on transparency and education, not restricting choices, especially for more affordable options.
https://www.healthaffairs.org/content/forefront/its-misunderstanding-level-funded-health-insurance-plans-administration-missing
