One aspect of the Affordable Care Act, or ACA, that will impact mid-sized businesses the most in 2016 is the “reclassification” of small employers to include not only businesses with less than 50 employees, but also those with 51 to 100 employees. Where companies of the latter size used to be able to take advantage of insurance carriers’ large group, composite rates, they will no longer be eligible after January 1, 2016. Some of the issues companies with fewer than 100 employees face when moving to the Affordable Care Act (“ACA”) small group plans are the possible increase in rates, limited plan options, and the health insurance provider fee.
And while the most obvious solution is to move to an ACA small group plan on the marketplace and bear the burden of the problems above, there are a couple of options that on first glance may seem extreme, but could offer a viable solution: fully self-insured plans and level-funded plans.
Self-Insured Plans – High Risk for High Rewards
Self-funded plans differ from traditional fully insured plans in that the employer assumes the risk of all incurred healthcare costs. Traditionally, medical insurance companies assign an annual fixed cost that does not fluctuate with the increase or decrease in claims costs. Self-funded plans offer the employer lower monthly premiums in exchange for assuming the costs of all incurred claims. Lower utilization means less money spent on employees’ health benefits. Self-funded plans also provide employers with greater flexibility in plan designs in order to meet the needs of its employee population.
Of course, assuming all costs of claims comes with great uncertainty, as costs can vary dramatically on a monthly basis and has the potential to become very expensive if utilization runs high. To protect against catastrophic medical bills, stop-loss insurance kicks in after a set amount has been paid to cover claims.
If you are a small to mid-sized business and the thought of paying claims makes your finance team quiver, the following alternative may be easier to manage for your budget.
Level-Funded Plans – Some Middle Ground
Level-funded plans look and operate similarly to fully insured plans in that employers pay equal monthly premiums in the form of composite rates and do not take on the risk of paying out high claims utilization. However, under level-funded arrangements, premiums are paid to only cover the employer’s claims based on actuarial formulas on projected utilization. If actual utilization runs low and claims costs come in under those actuarial assumptions, some of the payments, usually 50% of the unused projected claims costs, are applied to the group’s plan for the following year.
This type of arrangement can be advantageous to the employer in a number of ways, including:
- Access to more robust claims data
- Renewal rates that are based solely off of your utilization data
- Flexibility with plan designs
- A credit on future premiums with low utilization
One important note for level-funded arrangements: the insurance carrier will only take the specific group’s utilization into consideration when calculating initial and renewal rates, meaning the group will not have the benefit of a larger pool for purposes of actuarial assumptions. If the group’s actual utilization runs high, the extra claims costs will be reflected in the following year’s renewal, and the credit will be forfeited. Still, the employer will not have to pay anything beyond the set monthly premiums.
With these ACA changes looming and an all-but-guarantee that it will take effect in 2016, it is important for mid-sized businesses to not only understand the impact of this legislation, but also know what options they have to minimize disruption, including alternate funding arrangements like the above.
Consultants at Sequoia can provide more detailed information tailored to individual groups’ situations. Click on the bright blue “Let’s Talk” button in the upper-right corner to start a conversation!
P.S. If you missed our previous post highlighting some of the ACA’s key changes, head on over and give it a quick read.