November 30, 2023

Health Insurance

Follow Your Health Insurance

How Level-Funded Health Insurance Can Help Startups Provide Better Care While Reducing Expenses

By Will Young, Sana cofounder and CEO.

Risk: It’s a hot topic in the startup space.

Some believe risk-taking is the secret to entrepreneurial success; with great risk comes great reward. Others argue the way huge risks are glamorized in entrepreneurship is a recipe for disaster, discouraging founders from minimizing unnecessary risk through due diligence.

Given the current economic downturn, even risk lovers are looking for ways to tighten belts. With venture capital drying up, interest rates rising and valuations falling, funds for risk-taking simply aren’t there.

The last thing startup founders want to receive in an uncertain economic climate is a huge, unexpected bill—which is one reason they often hesitate to self-fund employee health insurance. Self-funded insurance, or self-insurance, is a health plan in which the employer pays employees’ health claims as they occur. Typically, an insurance company issues the plan and manages payments, but the employer—not the insurer—adopts financial risk.

If some employees need costly care, self-insurance can decimate a startup’s budget. But level-funded insurance eliminates the risk of exorbitant bills.

Level-Funded Versus Fully-Funded Insurance

Level-funded insurance is a type of self-insurance that places a cap on healthcare costs so monthly payments remain consistent, making it optimal for startups operating on a strict monthly budget. Of companies employing under 200 people, 13% reported having a level-funded health insurance plan in 2020. That total has been on the rise since, according to KFF’s 2022 Employer Health Benefits annual survey.

Startups often emphasize optimizing expenditures in other areas, such as SaaS contracts and overhead. But health insurance is usually their second-largest expense after payroll, so it merits close scrutiny. For startups whose healthcare costs are not expected to be higher than the average group’s, adopting a level-funded health plan is the best way to contain employee health benefit costs.

With level-funded insurance, an employer pays a fixed monthly sum which funds the payment of claims and pays for stop-loss insurance, administration and other fees. Stop-loss insurance kicks in to cover the excess if claims are higher than expected. If claims are lower, the employer can get unused funds back as a refund or credit.

There is no possibility of a refund for unused dollars on a traditional, fully-funded plan, in which the employer pays the insurance company a fixed monthly premium in exchange for taking on the financial risk of their employees’ healthcare. In addition to heavily inflating premiums to account for worst-case claims scenarios and subsidizing the discounts they give to enterprise clients, insurance carriers tend to excessively raise premiums for fully-funded plans every year. Average premiums are up 47% from 2011.

Even worse, the Affordable Care Act’s “80/20 Rule” actually prevents fully-funded plans from making more than 20% of collected premiums in profits—which means that as the cost of customers’ claims goes down, so does the insurer’s potential bottom line. Therefore, insurers have far less incentive to try to reduce the cost of claims on fully-funded plans than employers do on self-insured ones.

Most startups still choose fully-funded arrangements, enduring extreme premium hikes to avoid the risk of self-funding. However, level-funding offers entrepreneurs much of the savings of traditional self-insurance alongside the predictability of fully-funded insurance. It also puts employers in the driver’s seat to reduce their healthcare costs over time, which can revolutionize how they think about employee health insurance: Instead of an expense, it becomes an opportunity.

Employers are incentivized to invest in an array of value-creating practices: maternity care, virtual care, mental health offerings, employee assistance programs and flexible working arrangements, to name a few. Giving employees ample, low-cost resources to attend to their wellness is a hedge against high healthcare claims. It also boosts employee retention and engagement, which further saves money.

Learning From Apple

Level-funded health plans can draw inspiration from strategies used by some of the country’s largest self-funded employers to contain healthcare costs and keep employees healthy. Take Apple, for instance. In 2018, the company launched two onsite medical clinics to provide Apple employees in Santa Clara County, California, with free primary care and health coaching.

By offering employees convenient, comprehensive care and promoting healthy behavior—while using its technological prowess to pioneer innovative care models—the company is able to optimize employee health, thus driving down medical costs over time. Mercer’s Worksite Health Centers 2021 Survey Report confirmed that onsite medical clinics are a good investment: The majority of organizations with employer-sponsored clinics that have been able to measure return on investment (ROI) reported positive ROI, while 43% reported ROI of 1.5:1 or greater.

Self-funding can result in year-over-year healthcare cost savings of 15% or more compared to fully-funded plans. Through level-funded health plans, startups can enjoy some of those savings while also choosing an insurer that includes cost-saving programs mimicking Apple’s—that is, programs that give health plan members access to free primary care (even if not onsite), health coaching and chronic condition management. While fully-funded plans could technically include such programs, they don’t have the same incentives to do so.

How To Find Level-Funded Plans

There are two ways startups can access level-funded plans. Some legacy insurance carriers, like Aetna and Blue Cross Blue Shield (BCBS), offer level-funded offerings alongside their traditional plans. There are also newer insurers that offer level-funded plans exclusively (one of which is my company, Sana). But wherever you’re sourcing a level-funded plan, it’s critical to ensure they are offering high-value, easy-to-access healthcare services for your employees to help you reduce claims in the long term.

Founding a startup is risky and expensive. But employer-sponsored health insurance doesn’t have to be, thanks to level-funding’s ability to curb premium costs while also transforming attitudes toward workplace wellness, which creates a healthier workforce over time.

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