Level Funded Group Health
The Level Funded approach has been referred to as a hybrid method of Self Funding for group health insurance. This option opens the discussion for Self Funding to a broader range of employers, including smaller organizations. The Level Funded approach creates a systematic or “level” budgeting method while self-funding a portion of health insurance claims. In addition, it opens up the opportunity for an employer to benefit from their own claims performance.
By utilizing a Level Funded strategy employers begin to gain greater access to their data and can create specific strategies based on that data to improve care and further control cost. This method typically does not “un-bundle” all the services of an insurance company. The insurance company remains involved to provide stop loss insurance, manage claims and administer the policy.
How does Level Funded work?
Premium dollars are divided into three buckets.
- The Claims Bucket – variable annual expense
- The Administrative Bucket – fixed annual expense
- The Stop Loss Insurance Bucket – fixed annual expense
The Claims Bucket
Health claims within a group vary in severity and frequency from year to year. Costs for these claims can vary even further based on where treatment is received, the types of treatments received, and the costs for prescriptions. Some types of health insurance claims are ongoing and can be estimated year over year. These types of claims include long term management of disabilities or diseases such as diabetes, hyper-tension or thyroid issues. But other types of claims are difficult to predict. Broken bones, car accidents, cancer and even pregnancy can’t be forecasted with any true specificity. Instead, insurance companies employ large teams of data scientists who estimate the probability for sudden, severe and catastrophic claims within a given demographic.
Anticipated claims for the specific group are estimated. And a “level” portion of the monthly insurance premium is earmarked to pay claims. This amount does not vary from month to month, regardless of the monthly claim amount incurred. A level amount is contributed to the claims bucket each month throughout the policy term. The insurance company manages these funds and pays the claims as needed. If there is a surplus of funds in the claims bucket at the end of the policy term, a portion of it is refunded to the employer. If there is a deficit, the insurance company pays for the additional claims.
The Administrative Bucket
The costs to administer an insurance policy are fixed. They do not vary throughout the policy term. Administering an insurance policy includes tasks such as issuing insurance cards, providing copies of policies, reviewing and paying claims. In addition, this bucket includes the fixed costs of state and federal taxes, commissions and insurance company profits. A portion of the monthly insurance premium is allocated to the administration bucket to cover these costs. And the insurance company fulfills each of these tasks on behalf of the employer.
The Stop Loss Insurance Bucket
When claims exceed the estimated amount of funds in the claims bucket, the insurance company steps in to pay the additional claims. A portion of monthly premiums are allocated to pay for this insurance coverage. This is a fixed cost for the year, divided between the monthly installments. This is the back-stop. The safety mechanism. If a catastrophic claim were to occur, the employer is not faced with an outrageous medical bill that far exceeds the funds available in the claims bucket. The claims bucket pays up to a specific threshold amount. And then the stop-loss insurance steps in and pays the rest of the claim.
Risk and Reward
A Level Funded policy provides smaller groups with the ability to self-fund a portion of their health claims, while maintaining the safety net of an insurance company to pay larger claims and provide administrative services. It is often a lower-risk first step towards a long term healthcare strategy. By self insuring a portion of the claims, employers receive data and insight into the claims experience of their group. This data can often be used to reduce future claims. In addition, if there is a surplus in the claims fund at the end of the policy term, a portion of that surplus is returned to the employer. The risk of high claims is mitigated by the Stop-Loss Insurance. For many small to medium sized employers Level Funded can be a first step into building a long term Healthcare strategy.
The Benefit of Claims Data
Why is Claims Data Important?
With any other type of insurance policy, when you ask for your claim data, the insurance company will send it to you. This document is called a Loss Run. Loss Runs provide a list of claims with descriptions, dates and costs incurred. Claims affect the cost of the policy. Most of us have experienced this. One car accident may be “forgiven” by your insurance company, but two car accidents will cause your insurance premiums to increase the following year. The insurance company is recouping their losses.
Group health insurance is handled differently in the traditional market. Large groups may have access to some of their claim data. But small groups do not.
Level-Funded insurance policies are different. They give small groups the ability to receive the same types of claim data as their large group counterparts. The data is anonymized for patient privacy. But the general categories of information provided can give insight into the healthcare spending patterns of your group. This may include the type of treatments received, where treatment is received and prescription drug costs. In addition, you may receive greater clarity regarding non-repeating claims such as a broken arm or a car accident injury, compared to ongoing claims such as diabetes or asthma management.
Managing Claims
These data points give you the ability to discern where change is possible. This in turn gives you the ability to incentivize change within your group that can lower healthcare costs and thereby lower insurance premiums.
For example, seeking treatment for the flu at the emergency room is much more expensive than seeking treatment at a doctor’s office or urgent care. The type of facility where treatment is received is a large contributor to the cost of that claim. Similarly, the same exact prescription can vary wildly in price from one pharmacy to another – even with the same insurance.
Over time, you can begin to educate employees regarding how and where they spend their healthcare dollars. You can build a win-win healthcare utilization campaign. Your employees will feel the positive impact of their decisions in their own wallet. And you as an organization will reap the benefits of lowering your healthcare spend. Change takes time. But it is possible.