With the rising cost of health insurance, many small businesses in Maryland are opting for a higher risk health insurance option called a “level-funded health plan.” This type of group health plan may offer lower premiums that appear more affordable. However, it is important for employers to know that level-funded health plans are a type of self-insured arrangement and bring other duties and obligations for the employer. It is also important to know that level-funded health plans lack many of the protections fully insured plans have under Maryland law.
In a level-funded plan, the employer typically pays a monthly amount that includes:
- Premium for a health stop-loss insurance policy;
- Administrative expenses for use of a provider network and claims processing, paid to a Third Party Administrator (TPA); and
- Estimated costs of claims.
The employer may receive some of the claims funding back at the end of the year; however, in a level-funded plan, the cost of serious illness or injury of one or more employees could lead a small business into financial peril or even bankruptcy because, unlike traditional health insurance, certain types of medical claims are excluded from coverage that you may not expect.
The stop-loss insurance kicks-in to pay claims only after the employer’s medical costs reach a certain dollar amount, either for an individual or for the group as a whole. If a claim is excluded by the stop-loss policy, the employer is responsible for the claims payment in full. Which is why it is critically important for the employer to completely understand the terms of the stop-loss policy.
Employers will have the responsibility to file tax and reporting forms for the health plan – as participation in a level-funded product is essentially taking on responsibilities for self-insurance, paired with a stop-loss policy. A federal law called ERISA governs the employer’s responsibilities, and employers should consult with an ERISA attorney to understand what they are required to do when self-funding their employee benefits plan.
Example of How a Level-Funded Health Plan Works
- Based on the employees’ current health status, an insurance company estimates a group's annual health care costs (ex: $300,000/per year)
- Stop-loss amount is set (ex: $500,000)
- The employer makes a monthly payment to cover estimated health costs, stop-loss insurance, and TPA administration costs.
- At the end of the year, actual health care costs are higher or lower than what was estimated.
- The employer is responsible for the difference if the annual claims are higher than the estimate. If annual claims are lower, a refund or rebate may be available, depending on the contract language.
- Result at renewal: rates will depend on the previous year’s experience and could increase substantially for the employer.
Level-funded plans may have relatively low premiums when employees are healthy. However, if claim amounts increase for any reason, rates may rise quickly.
Because level-funded plans are not fully insured, they do not have to cover state-required mandated benefits, and they are exempt from state regulation. However, they must comply with certain federal laws, including reporting under the Affordable Care Act.
A level-funded health plan administration is often more complex than a fully insured health plan, as the small business with a level-funded plan must meet reporting requirements from the federal Department Labor, the IRS, and CMS in the Department of Health and Human Services.
Regardless of which kind of health insurance coverage suits your small business needs, it is important to fully understand the health insurance plans you purchase for your employees. Many Maryland small businesses choose to purchase fully-insured health insurance for many reasons, such as the predictability of costs and the minimal administrative burden. A small employer can buy fully-insured health coverage for their employees by working with a trusted agent or broker, or purchasing it directly through the state insurance marketplace, the Maryland Health Connection.
For more information on level-funded plans:
Recorded Webinar:
Lunch with MIA: Navigating Health Insurance for Small Businesses in MarylandVideo: Level-Funded Plans Public Meeting
Maryland Health Connection offers group coverage, and small businesses may qualify for a health insurance tax credit:
https://www.marylandhealthconnection.gov/smallbusiness 