Level Funding: An Alternative to the ACA for Small Groups

Question 1

Self-Funding Basics

1. Definition
2. Multiple Form
3. Advantages
4. Disadvantages

Answer 1

1. Definition: Self-funding refers to a spectrum of funding methods in which the group bears the financial risk of its members’ coverage rather than having a third party (insurance company or health plan) bear the risk

2. Multiple forms: Administrative Services Only (ASO), ASO with stop loss, minimum premium arrangements, and others

3. Advantages for groups
a. Will avoid premium taxes, state health coverage mandates and certain ACA related fees
b. Will directly benefit from its favorable claims experience
c. Will forgo paying insurance company risk charges

4. Disadvantages for groups
a. Less predictable cashflows
b. The bearing of financial responsibility for unfavorable claims experience
c. The group needs to obtain and pay for the advice of insurance professionals to help manage their plan
d. The potential need for the group to buy stop-loss insurance

Question 2

Level-Funding Basics

Answer 2

**1. Definition: ** Level funding is an ASO product with integrated stop-loss coverage offered by insurance companies, brokers and TPAs
a. Level funding allows the group to benefit from the advantages of self-funding, while limiting the disadvantages

b. Groups with a level funding product will have fixed or level monthly costs associated with the funding of their members’ health coverage

c. For lower-risk groups, the monthly premium equivalents with a level funding product are often lower than the premium the group would pay under the ACA’s community rating rules

2. Level funding products have five cost components
(1) ASO fee to cover the admin and selling expenses associated with a group’s health plan

(2) Aggregate stop-loss coverage (ASL)

(3) Specific stop-loss coverage (SSL)

(4) Paid claims fund held by the level funding issuer to cover the costs of the group’s expected claims costs (non-stop loss)
▪ Calculated as (ASL corridor) X (Group’s projected paid claims below any SSL deductible)
▪ Example: 120% ASL corridor, $176.91 projected PMPM below SSL
▪ Paid claims fund maximum liability = 120% X 176.91 = $212.29 PMPM
▪ Projected claims fund surplus = (120% - 100%) X 176.91 = $35.38 PMPM
▪ Later if actual claims below SSL are $123.84, then actual claims fund surplus = $212.29 - $123.84 = $88.46
▪ If the group’s actual paid claims for the coverage period are below the ASL corridor, the group will receive some portion of the paid claims fund’s surplus as a refund

(5) IBNR fund to cover claims incurred during the projection period, but paid afterward

(6) Incurred claims cost projection (sixth, unofficial component) is necessary to develop several cost components and assign financial responsibility for the group’s expected costs

Question 3

Level-Funding and ACA Pricing Comparison

Answer 3

1. The ACA’s community rating rules provide few pricing levers to differentiate the cost of small groups and explicitly restrict pricing small groups based on risk
2. Level funding products do not have these restrictions, as stop-loss pricing is not subject to the ACA’s community rating rules, and the rest of the group’s claims costs are the group’s responsibility
3. High-risk groups are likely better off under the ACA community rating, as level funding would lead to the most expensive option

Question 4

Considerations with Offering a Level-Funding Product

Answer 4

1. An insurer may not want to offer a level funding plan to a good risk group that would choose an ACA plan otherwise because doing so could cannibalize the insurer’s small group ACA block

2. Level funding does not yet offer good-risk groups with their lowest-cost option
a. While transitional relief is available to small groups, small group transitional plans will offer the lowest-cost option for these groups

b. Once transitional relief goes away, level funding products become a viable option for better-risk
small groups

3. Level funding products are not necessarily easy to price, sell and administer
a. Insurers offering a level funding product must properly project the expected claims costs of individual small groups

b. Risk rating requires the use of small group underwriting techniques such as medical underwriting, risk scoring, and detailed examination of potential high claimants

c. A significant number of insurers do not currently offer stop-loss coverage or have very little experience offering stop-loss coverage to smaller groups
▪ May have to develop a stop-loss rating model and hire actuaries and underwriters familiar with pricing stop-loss insurance
▪ It is necessary that an insurance company retain legal expertise to understand the aggregate stop-loss corridor regulations in its specific state(s)
▪ The selling of stop-loss policies, which includes level funding products, often requires the filing of rates and forms with the department of insurance in many states

d. Insurers should also price the product in such a way that the expected profit is similar to what they would have received from a fully insured group

e. Profit (or contributions to surplus or margins) can be built into every component of level funding cost

4. Important that insurers train their sales staff and develop marketing efforts to help small groups understand level funding