Medical Funding Strategies

Benefits Strategy

Types of Funding Strategies

We work with different medical funding strategies allowing us to best manage a company’s tolerance for risk to meet their specific needs.
Find out more about our medical funding strategies below.

Fully Insured

Employers may offer either self-insured or fully insured plans to their employees. Under a fully insured plan, an employer pays a fixed monthly premium based on the number of employees enrolled each month to the insurance carrier for the plan year. The insurance carrier assumes the financial and legal risk of loss if claims exceed projections. Conversely, if the claims are lower than projections, the insurance carrier retains 100% of the claim surplus.

Types of Fully Insured Plans

Depending on the contracted insurance carrier, all types of  plans (conventional indemnity, PPO, EPO, HMO, POS, and PHOs) are viable options for the employer.

Claims Administration

Fully-insured employers contract with insurance carriers for insurance services such as enrollment, claims processing, and provider networks.

Plan Design

Employers are generally limited by insurance carriers’ stock plan design options. The plan design must comply with state regulations and healthcare reform laws.

Level Funding

If you desire the freedom of a self-funded insurance plan but need a little more certainty for your budgeting concerns, level funding might be an option for you. Weigh the advantages and disadvantages and decide what’s best for your company.

What is Level Funding?

Level funding is an option that can accompany a self-funded plan, aiding employers in their health coverage budgeting efforts. With level funded, employers pay a set amount each month to a carrier. This amount typically includes the cost of administrative and other fees and the maximum amount of expected claims based on underwriting projections, as well as embedded stop-loss insurance.

The carrier facilitating the level funding will pay your employees’ claims throughout the year. At the end of the year, if your payments exceeded claims, you will receive a refund from the excess you paid in monthly claim allotments. If the claims exceeded what you paid into the program, in most cases your stop-loss insurance will cover the overage amount.

Advantages of Level Funding

  1. Like other self-funded plans, you don’t have to pay premiums that are based on community rates, which might be higher than your employee group’s risk. Instead, you only pay the actual claims and an additional administrative fee.
  2. If all the money you set aside each month to cover claims is not used, you will receive a refund at the end of the year from the surplus, instead of paying expensive premiums for a fully insured plan and essentially using or losing that money.
  3. If you are already self-funded, then you will enjoy a more budget-friendly method of monthly claims payment, with stop-loss insurance to protect you from unexpected high costs.
  4. Generally, the monetary advantages of level funding are that you are better able to manage your budget and prepare for claims costs. You will benefit from a smoother cash flow and not worrying that a high claim near the beginning of the year will impact your business.
  5. Many level funding plans provide detailed reporting on utilization trends, giving you important information on where employees may be causing overspending (such as unnecessary use of emergency room visits instead of urgent care).
  6. Fewer governmental regulations than fully insured plans are subject to. Check with your legal counsel about regulatory benefits specific to your state and business.

Disadvantages of Level Funding

  1. One is that when you choose to self-fund you are likely looking to cut costs—and with level funding, part of your monthly payment is to cover administrative fees. Depending on the plan and your other options, these fees have the potential to cut into the savings you hope to gain from running a self-funded plan. You’ll need to weigh the cost effectiveness of administering your self-funded plan in-house, hiring a TPA or choosing a level funded option with the attached administrative fees.
  2. You still have to pay the claims. With level funding you’re paying for the convenience of having equal payments throughout the year and the security of stop-loss coverage.
  3. The terms of the contract; make sure you understand how the contract will impact a business of your size—companies with smaller numbers of employees may benefit differently than those with larger numbers.
  4. Many level funding plans restrict their offerings to companies with a certain minimum or maximum number of employees, which may affect your ability to contract with your desired carrier.

Self-Insured

Employers may offer both self-insured and fully-insured plans to their employees. A self-insured plan refers to a plan that is offered by an employer who directly assumes the major cost of health insurance for its employees.

Some self-insured plans bear the entire risk, while other self-insured employers insure against large claims by purchasing “stop-loss” coverage. Stop-loss coverage is a form of reinsurance for self insured employers that limits the amount the employers will have to pay for each person’s health care (individual limit) or for the total expenses of the employer (group limit).

Types of Self Insured Plans

All types of plans (conventional indemnity, PPO, EPO, HMO, POS, and PHOs) can be financed on a self insured basis.

Claims Administration

Self insuring employers can either contract with insurance carriers or third-party administrators for insurance services such as enrollment, claims processing, and provider networks, or they can choose to self-administer their plans.

Benefits of Self Insuring

The following are 5 common reasons why an employer may choose to self insure:

  1. Customization. Instead of buying a “one-size-fits-all” policy, the employer can tailor the plan to meet the specific health care needs of its employees.
  2. Financial Control. The employer controls the health plan reserves, which can maximize interest income (income that would be otherwise generated by an insurance carrier through the investment of premium dollars).
  3. Greater Savings. The employer does not have to pre-pay for coverage, which provides for improved cash flow. In addition, the employer is not subject to state health insurance premium taxes.
  4. State Laws Generally Do Not Apply. In most cases, state insurance laws do not apply to an employer’s self-insured health plan because the federal Employee Retirement Income Security Act (ERISA) pre-empts state law for self-insured plans.
  5. More Choice. The employer has flexibility to contract with the providers that can best meet the health care needs of its employees.

Reference-based Pricing

Health care costs continue to rise, which means employers need to take every opportunity to lower expenses. One strategy is to employ referenced-based pricing (RBP). RBP enables employers to set limits on certain medical services, shifting the cost-analysis burden onto employees.

How it Works

RBP works by setting spending limits on certain procedures or services—meaning an individual would only be covered up to the established limit for these services and would have to pay the cost difference out of pocket. However, limits should only be set on “shoppable” services. These are services where an individual can take time to make a decision based on price and quality, like for prescriptions, lab tests or joint replacements. In all of these examples, there are lower-cost options that are typically the same quality as the more expensive alternatives.

Employers typically work with a third-party vendor to establish the best limit for a procedure. The vendor will help conduct market research and negotiate the most appropriate deals with providers. Finding a reliable vendor that works well with your company is crucial for negotiating the best prices for your employees.

RBP is most effective when applied to procedures with fluctuating costs. For instance, colonoscopies may range from $400 to $6,000, depending on the physician. In this case, an employer using RBP might set the spending limit to the median price of the procedure, based on market findings. If an employee uses a health facility that charges above the spending limit for a specific procedure, he or she will need to cover the difference out of pocket.

Employer Value

Employers who use RBP have the potential for two main benefits:

  1. Lower total health care expenses
  2. Higher employee engagement in health care decisions.

Health coverage usually extends to any in-network procedure, regardless of cost. With RBP, employers do not risk paying exorbitant prices for services that could be done more inexpensively. By setting a limit on certain procedures, employers are empowering employees to take charge of their health care decisions.

Having established limits on specific services means employees must consider cost, in addition to quality, when choosing where to have a procedure. This requires research on the employee’s part, encouraging active participation in his or her health care. It is estimated that low health literacy costs the United States $106 billion to $238 billion annually. By promoting employee engagement in health care decision-making, you are helping to educate employees, while lowering overall health costs.

Potential Disadvantages

It is paramount you work with a vendor who is reliable and experienced in the RBP process. The vendor must be able to ensure a smooth transition into this model, otherwise you risk disrupting highly utilized providers. If you choose a vendor who is inexperienced, your RBP limits might be too low for the services your employees need, making the plans unaffordable. Moreover, not using a vendor (and its legal advocacy) could potentially leave you vulnerable to providers attempting to balance bill.

Consortiums

Through the consortium model, employers join together for economies of scale and cost efficiencies in a self-funded environment while maintaining their own benefit plan design, employee contribution structure and rates.

A consortium is a group of businesses or organizations that join together to provide employee benefits coverage.

See the “Self-Insured” tab to learn more about plan options and advantages of self-funding.

Captives

A captive is an independent insurance company that is created and owned by at least one non-insurance company for the purpose of insuring the employee benefits risks of its owner (or owners). In other words, captives are a form of self-insurance in which the insured owns the insurer. Employers might choose to form a captive as an alternative to traditional insurance in order to better control costs and manage the risks associated with providing employee benefits.

Advantages

A captive can offer significant savings and become a substantial long-term investment. By creating and owning its own captive insurance company, an employer is able to keep all of the savings and interest income it earns from the captive. This means that instead of spending money on insurance, an employer can actually earn money from its captive policy over time. This is particularly beneficial for large employers or companies that pay higher insurance premiums due to the large number of employees receiving benefits.

Disadvantages

Although captives may be a convenient and cost-effective alternative to traditional insurance for some employers, they may not provide the same benefits to every company. If an employer’s insurance premiums and claims costs are already relatively low, a captive may not provide a significant return on investment. In addition, smaller companies may find that the cost of obtaining traditional employee benefits insurance is lower than the cost of creating and maintaining a captive.

Additional Funding Tools

We also utilize the following tools in conjunction with the medical plan to lower the total medical spend while protecting the integrity of the plan and minimizing the potential out of pocket costs for a company’s employees.

Health Reimbursement Arrangement (HRA)

A Health Reimbursement Arrangement (HRA) is funding promised by employers to help plan members pay for qualified medical expenses, which may include but are not limited to, a plan members deductible, copay or coinsurance. An employer contributes a specified amount to each plan members HRA with the reimbursement usually becoming available to them at the beginning of the deductible period. HRA’s are fully funded by and are 100% tax-deductible to the employer. An advantage of utilizing an HRA is the premium charged for the health insurance plan is generally less since the employer is purchasing a higher deductible plan. Using some of the plan savings allows an employer to protect the integrity of the plan by reimbursing a portion of the higher deductible to their plan members. HRA plans do not pertain to all plan members, as 2% or more shareholders and their immediate family members are most often ineligible to participate. When a plan member terminates coverage through an employer the money in the account does not transfer to the departing member, as the employer is in control of the HRA funds.

In application, an example of a Health Reimbursement Arrangement is an employer “funds” $1,000 into the plan members account at the beginning of the deductible period. If they visit a doctor for an annual exam, which is 100% covered, no money from the HRA account is deducted. Over the course of a year costs of qualified medical expenses towards lab work, MRI, etc. are incurred totaling $450, leaving $550 left in the account. An employer may choose to allow all or a portion of the remaining $550 to rollover to the next deductible period, however most often the employer will choose to reset the next year at the same $1,000 funding level to maximize the potential plan savings from the members lower deductible utilization.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged medical savings account which allows plan members who are enrolled in a Qualified High Deductible Health Plan (QHDHP) to save for medical expenses and other eligible expenses. Many of the eligible expenses can be found by searching IRS Code Section 213(d). The money deposited into an HSA can be added by the plan member through payroll contributions or as a personal deposit from one of their other banking accounts. Employers are also eligible to deposit funds into a plan members individual HSA, however once deposited, 100% of the contribution is owned by the plan member now and in the future regardless of employment status. HSAs provide a few tax advantages—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, FICA tax and most state income taxes. Additionally, the account continues to grow tax-deferred over the year and any unused money in the account is not forfeited at the end of the year.

The disadvantages associated with Health Savings Accounts include fees, pressure to save, budgeting, and the requirement of a high deductible plan. Most HSA’s charge monthly maintenance or transaction fees and employers should be aware of the differences before selecting a vendor. The most challenging hurdle to overcome is the pressure to save for one’s HSA may force people to be inclined not to seek the proper medical care due improper funding.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA), is an employer-sponsored savings account that allows an employee to put aside money tax-free that can be used to pay for qualified medical expenses. Flexible Spending Accounts offer the opportunity for both the employer and employee to benefit from tax savings. Employee contributions to the account are deducted from their pay before taxes, and the employer saves by not paying wage taxes on the contributions made by the employee. An FSA also allows employees to withdraw health FSA funds at any time for qualified medical expenses, even if it’s only the beginning of the year and they haven’t contributed the entire yearly amount yet.

The negative aspects of FSA’s include an annual contribution limit, limited rollover (if any), and they are not portable. FSA’s are considered a “use it, or lose it” account, which means funds typically do not rollover into the following years balance. To help avoid this problem, the IRS allows health FSAs to implement either a grace period or carry-over feature. Health FSAs with a grace period allow employees to spenddown a positive balance remaining in an FSA at the end of the plan year to pay for expenses incurred during a grace period of up to two and a half months after the end of the plan year. Alternatively, health FSAs may allow employees to rollover up to $500 of unused funds remaining at the end of a plan year to be used for qualified medical expenses incurred during the following plan year. Lastly, FSA’s are not portable as they are tied to employment.

GAP Plans

A GAP plan supplements a healthcare insurance plan by helping pay for medical costs that accrue before a plan’s deductible level has been reached making it is essentially an insurance plan for your medical plan. As medical plan deductibles continue to rise, a GAP lessens the financial burden when an employee is faced with the unexpected need for medical care. Depending on the plan structure, a GAP plan can be utilized for prescription medication costs, medical bill payments, and coinsurance/copayment amounts.

A couple of negative aspects are the lack of regulation and the policy details. The regulation for GAP plans is different than major insurance plans, as they are not regulated by health care law, and carriers can deny consumers based on past medical history. More importantly, an employer must be mindful when choosing a GAP plan as the policy details could restrict coverage on certain items such as lab work or x-rays making employee education a must when implementing this solution.

Group Accident Insurance Plans

Though most people do not like to think about it, accidents can happen—and they can be devastating. They can occur without warning, and most individuals are not financially or emotionally prepared for them. However, offering a group accident insurance plan as part of your benefits package can help your employees in the event of an accident.

Accident Plan Benefits

Group accident insurance plans typically offer coverage for the following:

  • Inpatient expenses incurred at a hospital that are applied to the deductible, copayment or coinsurance for the plan
  • Outpatient expenses applied the same way as inpatient benefits. These charges are incurred at the outpatient center of a hospital, ambulatory surgical center, day surgery facility, MRI facility or emergency room.
  • Sickness inpatient expenses due to illness resulting from an accident
  • Complete dislocations of the hip, knee, shoulder, foot, ankle, hand, lower jaw, wrist, elbow, finger and toe
  • Complete fractures of the hip, thigh, vertebrae, vertebral process, pelvis, skull (simple and depressed), leg, forearm, hand, wrist, foot, ankle, kneecap, shoulder blade, collarbone, lower jaw, upper arm, upper jaw, facial bones (except teeth), coccyx, rib, finger and toe
  • Injuries requiring surgery to eyes, tendons, ligaments, ruptured discs and torn knee cartilage
  • Burns (generally second-degree burns of at least 25 percent of the body or third-degree burns covering at least several inches of the body)
  • Lacerations of varying lengths
  • Air ambulance, normal ambulatory service, and blood or plasma services
  • Hospital admissions and confinement
  • Medical fees, including X-rays, office visits and emergency room treatment
  • Accidental death and dismemberment

All of these services are covered at varying degrees and up to differing dollar amounts depending on the type of plan selected.

Limitations and Exclusions

The following instances are typically not covered under a group accident insurance plan:

  • Participation in war or any act of war (declared or not)
  • Committing or attempting to commit suicide
  • Self-inflicted injuries
  • Injuries that occurred while traveling outside of the United States, Canada, Mexico and/or Puerto Rico
  • Injuries sustained while driving a motor vehicle in a race, stunt show or speed test
  • Injuries sustained while operating, learning to operate or serving as a crew member on an aircraft or jumping from or falling out of an aircraft. This does not apply to fare-paying passengers.
  • Participation in an illegal activity
  • Participation in a professional or semi-professional organized sport
  • Injuries sustained while intoxicated or under the influence of a narcotic, unless prescribed by a physician
  • Costs related to diseases or bodily or mental illness

Group accident insurance can be a financial lifesaver for your employees. Consider adding this benefit to your package this enrollment season.

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