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For most full-time, non-exempt employees in the United States, health insurance is a non-negotiable part of their benefits package. However, as highlighted in the “Cost Drivers” section of this discussion, the rising cost of health insurance and healthcare services has reached unsustainable levels for many employers. Despite these challenges, employers are not powerless. The key takeaway here is that employers can significantly reduce the cost of their health plans by critically evaluating the pros and cons of available funding models and selecting the one that best suits their organization’s needs.

To better understand cost reduction strategies, we’ll examine two key areas:

1. The three primary funding models available to employers for providing health insurance.
2. The balance between protection and control that employers must consider when designing their health plans.

Fully Funded Plans: Outsourcing Risk for Stability

Fully funded plans are a popular choice for mid-sized employers, though recent trends show a shift toward alternative funding arrangements due to escalating costs. In this model, employers transfer all financial risk for health claims to a third-party insurance provider. Employers pay a fixed annual premium per enrolled employee, and the insurance provider assumes responsibility for covering healthcare claims, offering a predictable level of protection.

This structure minimizes financial risk for employers. For example, if an employer’s workforce incurs high healthcare costs, the insurer absorbs these expenses. However, this can lead to significant premium increases in subsequent years. Conversely, if claims are low, the employer still pays the fixed premium, allowing the insurer to retain the excess funds.

A notable downside of fully funded plans is their lack of transparency and limited employer control. Employers often have little input over plan design, provider networks, or how their health dollars are spent. While fully funded plans may be suitable for smaller organizations, they can leave larger employers feeling constrained.

Level-Funded Plans: A Hybrid Approach

Level-funded plans bridge the gap between fully funded and self-funded models. In this arrangement, employers share the financial risk and administrative responsibilities with an insurance provider, making it a flexible option for those seeking a middle ground.

Employers pay a set monthly fee to the insurer, covering claims, administrative costs, and risk mitigation measures like stop-loss insurance. At the end of the plan year, the insurer reconciles the premiums collected against actual plan costs. If claims are lower than expected, the employer may receive a refund. If costs exceed premiums, the employer may need to cover the difference.

This model suits organizations wary of fully funded plans but hesitant to take on the full risk of self-funding. It offers some cost-saving potential while maintaining a degree of financial predictability.

Self-Funded Plans: Maximizing Control and Savings

In self-funded plans, employers take on the financial responsibility for employee health claims. Instead of paying premiums to an insurer, employers collect contributions from employees and directly cover claims expenses.

While this model demands more administrative effort and exposes employers to financial risk, it also offers significant benefits. Employers can save money during years of low claims utilization and gain near-complete transparency into health spending. This visibility enables organizations to identify inefficiencies and make informed adjustments to their plans.

Self-funded plans can include strategies like stop-loss insurance to mitigate catastrophic claims or carve-outs for expensive treatments, offering flexibility and control over plan design.

Bundled vs. Unbundled Self-Funded Plans

Within the self-funded model, employers can choose between bundled and unbundled approaches:

1. Bundled Plans: A single carrier manages all aspects of the plan, including administration and risk mitigation. While convenient, this limits employer control over vendors and plan components.
2. Unbundled Plans: Different vendors manage specific plan components, such as pharmacy benefits or stop-loss coverage. This allows employers to shop for the best services and customize their plans for maximum efficiency.

Weighing Protection Against Control

When selecting a health plan, employers must navigate the trade-off between protection and control.

• Protection: Plans with high protection levels shield employers from financial risks associated with unpredictable claims. These plans often come with higher premiums, stable costs, and less transparency.
• Control: High-control plans enable employers to customize benefits, manage vendor selection, and access detailed spending data. While offering cost-saving potential, they also expose employers to greater financial risk, which can be mitigated through strategies like stop-loss insurance.