Different Employer Health Funding Arrangements
Article by Ty Franklin ASA, MAAA; Consulting Actuary; Telos’ Employer Group Health expert
For most employers, offering health insurance is a needed and primary benefit to their employees; but how is it paid for and what are employers’ options?
There are various funding arrangements and new emerging solutions for organizations north of 50 employees. The most common solutions are self-funded or fully-insured. Other options growing in prevalence or newer to the market are level-funding and Individual Coverage Health Reimbursement Arrangements (ICHRA).
Below we explain the different types of funding arrangements and provide pros and cons to help us better understand the options employers may use to offer health insurance.
Self-Funding
Definition: Employer funds and is responsible for health insurance costs; typically purchasing individual high claimant and aggregate claims protection to mitigate top-end risk exposure.
Pros: Arrangement provides employer most flexibility in choice/control, such as plan designs, provider networks, collaborative partners, and additional benefits/programs. This funding arrangement also allows employers to reap the benefits of having ‘good’ health outcomes and lower paid claims, instead of losing all paid premium to a carrier (insurer).
Cons: Risk exposure; of the four mentioned options, this solution exposes companies to the most risk. However, as stated above, with the proper individual high claimant and aggregate claims protections, organizations can lower this exposure.
Fully-Insured
Definition: Organization pays premium to insurer and has no liability for claims experience. This arrangement can be beneficial to smaller sized group (less than 150) or companies with low risk appetite.
Pros: No exposure to risk/claims incurred under contract; provides stability to financial budgeting for each 12-month benefit period.
Cons: This is typically the most expensive funding arrangement among the four discussed in this writing; because the carrier is covering all risk and building in margin/conservatism, premium costs tend to be higher. Additionally, in ‘good’ health outcome years, the company doesn’t receive any of the benefit. Last, these funding arrangements have less flexibility and choice, from plan design offerings to budget/planning for upcoming years.
Level-Funding
Definition: Hybrid solution between self-funding and fully-insuring; where company pays a lower premium than fully-insured arrangement, has a claims attachment point where the company pays up to a certain amount monthly, and ‘shares’ in risk/claim volatility, benefiting from ‘good’ health outcomes and gaining protection from ‘poor’ health outcomes. These funding arrangements typically include individual high claimant coverage as well.
**Key Point**: The premium cost and setting of the claims attachment point is vital to this funding arrangement’s value. For example, if the attachment point is set too high, the likelihood of claims exceeding the threshold is low, rendering little protection or value unless the premium is also low. Inversely, if the attachment point is set too low, you may be getting more protection and paying more premium than you desire. Navigating the nuances of this dynamic is essential.
Pros: Funding solution provides opportunity for higher degree of risk protection than self-insuring, while offering company reward of ‘good’ health outcomes.
Cons: The costs of this arrangement will be higher than self-insured solutions. Additionally, as described above the nuances of level-funding premium and attachment point can be more complicated.
ICHRAs
Definition: An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a funding solution where the organization seeds accounts for employees to choose their own health care coverage.
Pros: Organization has no risk exposure to claims volatility and known budget with greater control of future health care cost planning. Additionally, employees gain greater degree of choice in selecting health plan (can have adverse implication as well, see next section).
Cons: From a company perspective, the ICHRA solution provides simplicity, seed an account and choose future budgets. However, from an employee perspective, the arrangement can create additional complexity. Specifically around health care literacy/education and annual open enrollment decisions. Some employees may not be equipped to enter the healthcare marketplace and make individual decisions. Also, each year employees have to go back to the marketplace and either renew current plan, if available, or select a new plan. Under a more traditional funding arrangement, employees’ decisions are guided by the company’s offerings.
Conclusion
Organizations have several options when it comes to providing health insurance solutions for their employees. Company size, underlying population health, risk appetite, and benefit strategy are a few, but not exhaustive list, of drivers that impact health funding arrangement decisions. Having a well-rounded team and industry experts can aid navigating these decisions.
Disclaimer: the above content is meant to be informative and educational, not necessarily comprehensive to all of the needs or considerations an organization would need in making final health funding arrangement decisions. Telos Actuarial advises working with industry professionals when making any final decisions.
