Using level-funded health care plans to fuel small business cash flow

Cash flow is king for small businesses. It’s one of the most important indicators of financial health yet also is a source of anxiety. In fact, 7 in 10 small business owners say cash flow concerns keep them up at night.1

Providing employee benefits is a top expense for small companies, and business owners are seeking ways to provide their employees with the best possible care while controlling costs at the same time. For many, looking to level-funded health care plans is becoming a more widely used vehicle for achieving both objectives.

“Many fully insured, small group plans don’t offer the control, predictability or transparency that level-funded plans do,” says James Guemple, Regional Vice President, Key Accounts, for UnitedHealthcare’s West region. “These plans allow business owners to maximize their health care spend, feel more confident about what they’re buying and, based on performance, the results that they’re getting.”

3 Key Takeaways

  1. Considering the level of investment required for health care benefits, cash flow and predicting costs are always top of mind for business owners.
  2. Similar to fully insured plans, level-funded plans call for employers to make the same monthly payment throughout the plan year, regardless of actual claims.
  3. One of the key differences, though, between level funded and fully insured plans is the potential savings on the back end in the form of a surplus when claims are lower than expected.

For businesses considering level-funded plans — like All Savers® Alternate Funding from UnitedHealthcare — it’s important to understand:

  1. Potential cost savings of level-funded plans compared to fully insured plans, including the opportunity for a surplus — primarily for companies with more than 50 employees.
  2. Key differences between level funding and administrative services only (ASO) plans — a self-funding structure that typically brings more risk and more cash flow concerns than level funding.
  3. How access to data can help employers better understand the health of their employee population and make more informed benefits decisions at renewal.

Improving cash flow and savings through level funding

Considering the level of investment required each year for health care benefits, cash flow and predicting costs are always top of mind for business owners. That predictability is especially helpful in an environment of increasing costs, as 69% of business owners say their health plan costs have increased in the last 4 years, with one-third seeing annual increases of 10% or more.2

“One of the biggest obstacles for small business employers is the transparency of the cost drivers,” Guemple says. “When a small business owner doesn’t have access to what their large claims look like or even their overall claims utilization, it creates a real lack of predictability at renewal.”

From a cash flow perspective for level-funded plans, predictability comes in the form of a fixed monthly payment that includes the maximum claims liability, administrative fees and stop-loss insurance to protect against unexpectedly large claims, as well as high utilization. Similar to fully insured plans, level-funded plans call for employers to make the same monthly payment throughout the plan year, regardless of actual claims.

 

Image compares monthly costs, both fixed and variable, between traditional fully insured plans and All Savers® Alternate Funding plans.

One of the key differences, though, between level-funded and fully insured plans — especially for businesses with at least 50 employees — is the potential savings on the back end in the form of a surplus when claims are lower than expected. While the experience for each employer varies, more than 1 in 3 small businesses with All Savers plans receive a surplus at the end of the year.3 Of employers that receive a surplus, the amount on average is about 7% of the total annual cost of the plan — fixed and variable costs.4

“It’s realistic for employers to see a surplus 3 out of every 5 years they have the plan,” Guemple says.

Regardless of a surplus, level funding can bring baseline savings compared to fully insured plans. For example, UnitedHealthcare’s fully insured plans can cost a business with 2–50 employees an average per-member-per-month (PMPM) premium of $547, where All Savers averages PMPM premium equivalents of $407, or 34% less.5

Says Guemple: “From an overall cost perspective — both on the front and back end — plans like All Savers can be a strong cost-management story for small businesses.”

Key differences between ASO and level-funded

There’s a common misconception that level-funded plans are similar to a traditional ASO model, but that’s not the case. It’s true that level-funded plans fall under the “self-funding” umbrella, but the level-funded model is designed to mitigate the risks that turn many smaller companies away from ASO plans.

Risk mitigation comes in the form of stop-loss insurance, which protects the viability of smaller companies from suffering significant financial burden associated with unexpectedly large claims and high utilization. There are 2 types of stop-loss insurance: individual, which protects against large claims, and aggregate, which protects against high claims utilization.

"Claims that go over that stop-loss level do not impact the surplus opportunity or renewals,” Guemple says. “These protections are what make level-funding plans distinct from traditional ASO plans.”

Using data to inform health care decision-making

For business owners looking to dive deeper into their claims utilization and encourage member wellness, level-funded plans offer transparency into their employee populations that fully insured plans do not. With access to claims data, companies can better understand how their plans perform, gain insight into their costs and, as a result, have more predictability around renewals. The amount of reporting is determined by the business, whether it’s receiving only high-level reports or taking more detailed looks at segments of the employee population.

Access to data can open employers’ eyes to the opportunity to reduce claims costs and potentially get a surplus return by encouraging engagement with wellness programs, Guemple says.

“Since employers who opt for these plans have more ownership over their costs, they’re more engaged in wellness than those who have fully insured plans,” he adds.

Lastly, data helps inform the renewal process and how employers design their plans. For example, owners may see that they have low utilization of generic drugs or high utilization of the ER. They can then make appropriate customized plan design changes to improve utilization but not necessarily affect the entire group.

“A lot of times you have small employers that have to continually cut benefits to create affordability, but if they can do it based on the utilization of their group, there can be less of an impact on their employees,” Guemple says.

For more information on level funding or All Savers, reach out to your broker or UnitedHealthcare representative.

Footnotes

  1. Intuit’s State of Small Business Cash Flow report, Feb. 2019.
  2. Small-Business Owners” Views on Health Care Coverage and Costs. Commonwealth Fund, Sept. 2019.
  3. Based on 2019 UnitedHealthcare All Savers national surplus data.
  4. Data from more than 1,500 groups that received a surplus from March 2019 —February 2020.
  5. 2020 All Savers data.

Administrative services provided by United HealthCare Services, Inc. or their affiliates. Stop-loss insurance is underwritten by All Savers Insurance Company (except MA, MN, and NJ), UnitedHealthcare Insurance Company in MA and MN, and UnitedHealthcare Life Insurance Company in NJ. 3100 AMS Blvd., Green Bay, WI 54313 (800) 291-2634.