3 Types of Funding for Employer-Sponsored Health Plan Claims

April 08, 2021 - Employers have three primary options to choose from when they are deciding how to fund their employer-sponsored health plan claims: the self-insured, level-funded, or fully-insured health plan models.

Both employers and insurers can be payers, covering medical claims for the employees. But each model presents unique ways to distribute risk and to provide funding for medical claims.

Various factors will dictate which model an employer chooses. However, employers and insurers alike should be aware that there are slight differences in how employers and insurers engage with one another in each format.

Thus, it is worthwhile to review which entity bears the most risk for covering medical claims in each funding model and how that affects the relationship between insurers and employers.

Administrative services only (ASO) self-insured plans

Employers take on the most risk in self-insured or administrative services only plans.

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HealthCare.gov defines a self-funded plan as a “type of plan usually present in larger companies where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims.”

Self-insured plans are especially attractive to large employers that have to deal with a higher healthcare spending due to a greater volume of medical claims. Upon switching to a self-insured format, private employers are exempt from many of the fees and taxes imposed upon private health plans in fully-insured models, Kaiser Family Foundation (KFF) points out in a report.

Employers that pursue the self-insured model can leverage the same plan types that fully-insured plans do, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), and high-deductible health plans (HDHPs).

While it is true that employers take on all or nearly all of the risk in self-insured plans, that does not mean that insurers are completely obsolete within this structure. They may simply change roles in the insurer-employer relationship.

In self-insured plans, insurers are considered third party administrators (TPAs).

READ MORE: Verily Launches Tech-Focused Payer for Self-Funded Employers

TPAs process and adjudicate claims. Moreover, insurers may offer additional services, such as utilization review and contracting with preferred provider organizations on behalf of the employer, the Health Care Administrators Association notes.

For example, Health Care Service Corporation (HCSC) offered an additional resource to employers that aimed to streamline all of the employers’ health benefits information and third-party contracts. The insurer partnered with a vendor to equip employers with a digital platform that would complement the insurer’s typical self-insured plan offerings.

Through the digital platform, employers could access information on the processes that HCSC normally executes for its employer clients, including adjudication, billing, payments, and analytics.

Payers may also engage with self-insured plans in a more significant way through stop-loss insurance. This form of insurance covers high-cost medical claims when they cross a certain threshold to prevent these expensive claims from obliterating employers financially.

Some disruptive insurers, such as Verily, were formed specifically to offer stop-loss insurance.

READ MORE: Employer-Sponsored Health Plans See Strong Member Satisfaction

Attracted to the customizable format and potential for cost-savings, this model's popularity has increased quickly. As a result, the number of employees enrolled in a self-insured plan is growing, the KFF report says.

In 2019, 61 percent of employees had their claims covered by their employers under a self-insured plan. Only a year later, 67 percent of employees were in self-insured plans. This population of employees grew nearly 20 percent over the course of the past decade.

Level-funded plans

Employers and insurers share risk in level-funded health plans. While employers take on risk in level-funded health plans, the risks are reduced by the insurer.

These plans are technically a type of self-insured plan. However, there are some key differences.

In the level-funded model, the employer pays the insurer each month to cover expected healthcare expenditures, the Society for Human Resource Management (SHRM) website explains. The funds go towards claim payments, stop-loss insurance premiums, and administrative costs.

If this sounds familiar that is because this model borrows from both the fully-insured and self-insured models.

However, the distinction is that in a level-funded health plan, the insurer will return to the employer any funds that remain at the end of the year, if the volume of medical claims is not as high as anticipated. Alternatively, if the volume of medical claims exceeds the projected cost, employers will face a higher stop-loss insurance premium.

Although this is the general template for a level-funded plan, contracts may include various specifications, the SHRM site says. For example, some insurers may require that their company retain a certain percentage of the savings or that these funds roll over to be spent on medical claims in the subsequent year.

In this model, insurers—specifically larger insurers—may have cemented their level-funded plan offerings or they may work with employers to tailor the funding plan to fit the business’s needs.

Level-funded plans cater to smaller firms that want a self-insured health plan but may not be able to afford the high cost of medical claims and stop-loss insurance.

Among small companies, 13 percent of employers offered a level-funded health plan in 2020, according to the KFF report. And of the small firms that employed 50 to 199 workers, 31 percent were either self-insured or level-funded.

Fully-insured plans

Payers take on the most risk in fully-insured plans.

“Fully-insured” or “fully-funded” plans were the traditional form of employer-sponsored health insurance. HealthCare.gov defines fully-insured plans very simply as “a health plan purchased by an employer from an insurance company.”

In these plans, insurers have the most influence over the health benefits that employers will offer and what medical claims their health plans will cover.

The differences in employer-insurer dynamics between self-insured plans and fully-insured plans are best displayed when organizations seek to evoke change across the payer industry.

For example, when the Human Rights Campaign (HRC) sought to improve transgender healthcare coverage across the payer industry, the organization did not find success directly influencing insurers to expand transgender healthcare coverage in fully-insured health plans.

According to Beck Bailey, director of HRC’s workplace equality program, insurers did not want to have to cover transgender healthcare services.

“In fully-insured plans, you—as an employer—are limited to what you buy, and what you buy is limited by what Cigna or Aetna or whoever chooses to offer,”  Bailey told HealthPayerIntelligence.

“And there are some regulations on that: there are some federal things that they have to offer, there are some state-regulated things that they have to offer. But I can have a Cigna plan that covers a little or I can have a Cigna plan that covers a lot and it just depends on what I've bought.”

In brief, if insurers did not want to support transgender healthcare coverage, then fully-insured health plans would not offer it.

HRC realized that the key to expanding healthcare coverage for the transgender community was to convince self-insured employers that these healthcare benefits were essential.

“When you were talking about a self-insured plan on the employer side, an employer can put anything in that plan that they want to. Because they're insuring themselves, they can include transgender health care to the most minimum or fullest extreme that they would like to,” said Bailey.

“That's why HRC focused on larger employers with self-insured plans in the Corporate Equality Index (CEI) to create that change. Health insurance companies didn't want to insure trans folks and didn't want to provide that coverage. But if we could get employers to want to do it, then they could be able to do it within the confines of their plans, regardless of what the health insurance companies wanted. And that's what really changed the market.”

Although fully-insured health plans were once the traditional form of health insurance, companies are turning increasingly towards self-insured health plans due to the kind of flexibility that Bailey described.

In 2002, the self-insured model officially superseded the fully-insured model in the US by covering a slight majority of employees (52 percent), KFF reports. The subsequent years have only solidified the self-insurance model’s lead in the employer-sponsored health insurance space.