By Ralph Weber, President Route Three Insurance and Financial Services

Small businesses can reduce the cost of employee benefits. Small employers (especially those with fewer than 50 employees) face complex challenges in setting up affordable healthcare benefits for their employees. While the Affordable Care Act (ACA) made healthcare for individuals with chronic conditions more attainable, it made healthcare for healthy employees more restrictive, and in most cases much more expensive. The average cost to insure a family increased from $13,770 in 2010 (before the ACA) to $21,342 according to the Kaiser Family Foundation.

As a result, many small employers have stopped offering coverage to their employees. Small businesses are the backbone of the US economy, with 98.1% of US businesses having fewer than 100 employees. The number of businesses with fewer than 50 employees offering an employer sponsored health plan dropped from 57% of employers in 2012 to 39% in 2023, most businesses citing the cost as the number one reason.

The majority of large businesses offer self-insured plans to their employees. Within small firms, however, the number offering self-insured plans is much lower, yet it has been increasing over the last 20 years.

Regulatory Background: The McCarran-Ferguson Act, ERISA, and the ACA: Level-funded plans operate within a complex regulatory framework influenced by both state and federal laws. The McCarran-Ferguson Act of 1945 granted states the authority to regulate the business of insurance. However, self-insured plans, which include level-funded plans, are regulated at the federal level under the Employee Retirement Income Security Act (ERISA) of 1974. This federal oversight preempts state regulation in many respects, providing a uniform regulatory framework for self-insured employers but also exempting them from some state insurance mandates that apply to fully insured plans.

Affordable Care Act (ACA): Introduced in 2010, the ACA required states to set essential health benefits (EHB) requirements for health plans. However, self-insured plans, including level-funded plans, are not required to cover all of these essential health benefits, offering them more flexibility compared to fully insured plans which must comply with these state-determined benefits.

The ACA also had a requirement called the Medical Loss Ratio (MLR), which said that individual and small group health plans may not spend more than 20% of their premium on administration, marketing, state taxes and profit. Since every insurance company has certain expenses it needs to cover, the MLR requirement increased the cost of healthcare, since the ACA changed the landscape so that their profit is now based on topline volume.

Level Funding for Small Businesses: An Overview

Introduction Level funding is a hybrid health insurance model that combines elements of both fully insured and self-insured plans. It offers an alternative way for small businesses, typically with fewer than 50 employees, to manage their health benefits. This article explores the pros and cons of adopting a level-funded insurance plan for small businesses.

What is Level Funding? Level funding is structured so that a small business pays a fixed monthly premium to a third-party administrator or an insurance provider. This premium covers the cost of claims up to a certain insurance stop-loss limit, administrative fees, and any other reinsurance costs. If the total claims at the end of the year are lower than expected, the business may receive a refund. Conversely, if claims exceed the projected amount, stop-loss insurance covers the excess, preventing unexpected financial burdens.

Pros of Level Funding

1. Cost Predictability: Like fully insured plans, level funding offers predictable monthly payments, which helps small businesses manage their budgets effectively.
2. Potential Cost Savings: If claims are lower than the funded amount, the surplus can either be refunded or credited, offering potential savings compared to traditional insurance models.
3. Customization: Businesses have more control over their plans compared to fully insured models, allowing them to tailor benefits that meet specific employee needs.
4. Regulatory Benefits: Level-funded plans are often exempt from certain state health insurance regulations, potentially reducing costs further. For example, since Essential Health Benefits are not required to be covered, many healthcare categories which do not provide great value to a particular group, may be eliminated, further reducing cost.

Cons of Level Funding

1. Risk Rating Based on Health Status: While the Affordable Care Act (ACA) prohibits fully insured plans from underwriting risk based on pre-existing conditions, self-insured plans, including level-funded ones, can still assess risk and set costs based on the health status of the workforce. This means that premiums can vary significantly, potentially higher if the assessed risk is greater. In some cases, a small business might even be declined coverage due to high risk.
2. Increased Financial Liability with Unhealthy Workforce: For small businesses with an unhealthy workforce, the financial implications can be more severe under a level-funded plan compared to a fully insured plan. While large companies can spread the risk of high-cost medical claims across a large employee base, small businesses have a smaller pool, which means that the financial impact of even a few high-cost claims can be substantial, making level funding less advantageous in such scenarios.

These cons highlight the need for careful assessment and possibly more robust risk management strategies when considering a level-funded health insurance model.

Conclusion

Level funding can be a viable option for small businesses looking to balance the control over their health care benefits with the stability of predictable costs. However, it requires a good understanding of the business’s health claims history. For businesses interested in exploring level funding, it is advisable to consult with insurance professionals fully versed in the nuances of self-insuring to fully understand the implications and set up a plan that best suits their needs.