Top 10 Disadvantages of Level-Funded Health Plans

1. Inability to Benefit from Pharmacy Rebates
2. Lack of Plan Design Flexibility
3. High Fixed Costs
4. Need to Fund to Max Every Year
5. Loss of Claims Surplus
6. Hefty Renewal Increases
7. Paying for Unneeded Runout
8. No Risk Protection
9. The Hidden Cost of Unchecked Claims
10. Lack of Claims Transparency

While traveling around the country promoting the advantages of self-insurance in a group captive, Roundstone’s Regional Practice Leaders meet a lot of employers who are frustrated with their fully insured health plans. Huge increases at renewal, no transparency, and little flexibility top the list of issues. Health insurance continues to get more expensive, and employers find themselves trapped between a rock and a hard place.

Roundstone’s self-insured group medical captive solution is a great alternative. It’s a financially efficient model that offers low fixed costs and an open platform to give employers control over their healthcare spend while providing high-quality employee benefits. The advantages of self-funding in a group captive plan include flexible plan design and 100% transparency in healthcare costs.

Our innovative approach to self-funded health insurance is often compared to a level-funded solution, a funding strategy that attempts to bridge fully insured and self-funding. The employer funds to maximum with one monthly premium payment like a fully insured plan, and gets back some of the savings their group generates at the end of the year, again, like a self-funded plan.

Proponents of level-funded plans call this the “best of both worlds,” giving employers limited control and allowing them to share in the savings.

To that, we say, “Why not gain total control over healthcare spend and retain all of the savings?”

Because that’s exactly what you get with a self-funded insurance plan based on the captive model. If you’re going to eat cake, eat the whole cake and enjoy it.

The Disadvantages of Level-Funded Health Plans

When evaluating level funding vs fully insured, it’s clear that level-funded plans offer limited control similar to fully insured models but with an illusion of savings. If you’re considering a level-funded plan, do your homework to make sure it’s in your favor and will actually save you money. Because most of the time, it won’t — or at least, the savings pale in comparison to what you could save in a self-funded plan under a group stop-loss captive.

The truth is, you might gain better advantages with a self-funded insurance plan based on a group stop-loss captive. Self-insured plans not only provide critical data, but give you the tools to implement cost containment strategies to further lower costs and improve the savings you gain through self-insurance.

Exploring the disadvantages of level funding reveals why many employers are switching to self-funding. Our sales team has broken down some common misconceptions and weaknesses of a level-funded plan.

Here are the top 10 reasons why we say no to level funding.

1. Inability to Benefit from Pharmacy Rebates

Does the plan offer 100% of Rx rebates back in your pocket, or are they keeping them for themselves? Most level-funded plans don’t give you 100% of your Rx rebate savings. Pharmacy costs are approaching 30% of a company’s healthcare spend. Those savings add up!

With a self-funded insurance plan, you can choose a Pharmacy Benefits Manager who can let you keep all of your Rx rebate savings. This drives down your costs and helps you save more money through a self-insured model.

2. Lack of Plan Design Flexibility

Level-funded plans make you choose from their canned plan design options, just like a fully insured plan. But your group has unique needs that can be fully considered when you use an open platform to build your own custom bundle. Level-funded plans don’t offer you that choice. Your plan options are limited — and your employees often suffer as a result.

Self-funded insurance plans are completely customizable. You can design the plan to best suit the needs of your employees, driving down costs while simultaneously improving care quality.

3. High Fixed Costs

Understanding level-funded health insurance costs is important because closer examination reveals that most of these plans have high fixed costs. Even though level-funded plans often claim to split costs evenly between fixed and variable costs, the reality is that fixed costs — like plan administration fees and stop-loss insurance — can make up more than 75% of total costs. These fixed costs don’t change, no matter how much or how little healthcare employees use.

This “split cost” setup can be misleading, making it seem like employers have more control over costs than they actually do and revealing the hidden cost of level funding. In reality, variable costs, such as money spent on employee medical claims, offer some flexibility but are harder to control in a level-funded plan.

Our self-insured model flips this, with only 15% fixed costs and 85% variable costs that employers can control. This means you can save more by managing healthcare usage and implementing cost containment strategies, giving you real power over your healthcare spending.

4. The Need to Fund to Max Every Year

Level-funded plans use max funding. That means you pre-pay your worst-case scenario in advance.

While max funding is a good option for some groups, this approach highlights one of the key level-funded insurance risks: pre-paying for worst-case scenarios without real cost savings.

With a self-funded plan, you have options when it comes to budgeting for your benefits. You can choose to pay as you go, fund to your expected costs, or fund to max. When you fund to max, you can build a claims surplus as your cost containment strategy generates savings.

Under self-funded insurance plans, we recommend funding to max the first year or two in order to build up a surplus. Once you have a nice cushion, you can confidently fund to expected costs — rather than the much more expensive worst-case scenario — in order to lower healthcare costs and increase savings.

5. Loss of Claims Surplus

Do you get to retain your claims surplus if you leave your carrier? Typically, in a level-funded plan, the answer is no. Some level-funded plans will split your claims surplus 50/50, but that’s only if you renew your plan. Your savings should stay with you, not hold you hostage at renewal time.

Roundstone’s self-funded insurance plans don’t have handcuffs — you are eligible for a pro-rata refund on unused captive regardless of whether or not you decide to renew. It’s your money. You should keep all of it.

That said, we have a 90% to 95% retention rate. Those who choose not to renew their self-funded plans tend to be part of an acquisition into a larger company where self-insurance under a captive no longer fits. Our high renewal rates are another benefit for advisors. Renewals tend to be a non-issue, since clients are happy and saving a ton of money. You can instead focus on growing your book to expand your business.

In 2023, Roundstone distributed $11.2M in unspent captive premium pro rata. We issue our distributions in cash, paid six to seven months after the policy year concludes.

6. Hefty Renewal Increases

In 2023, Roundstone distributed $11.2M in unspent captive premium pro rata. We issue our distributions in cash, paid six to seven months after the policy year concludes.
But those under level funded plans are often eating more double-digit increases, just like they would on a fully insured plan. It’s a pretty raw deal.

Under Roundstone’s self-funded insurance captive solution, renewal increases are relative and rare. Because of the savings baked into the plan and the potential to lower costs through data-driven cost containment solutions, costs can be contained.

At Roundstone, we take our own medicine — our own employees are covered under a self-funded insurance solution. In the past eight years, we have not had to raise premiums a dime. This is a testament to the cost-effectiveness of the self-insured captive model. Read our case study to see how we did it.

7. The Cost of Unneeded Runout

Level-funded groups pay for runout “protection,” essentially covering claims that are incurred before the termination of a policy but are not filed or processed until after the policy ends.

While this may sound like a necessary safeguard, we challenge the value of paying termination costs upfront. Given that our renewal rate for our self-funded insurance plans is 90% to 95%, it raises the question: Why pay for something the overwhelming majority of our clients won’t need?

This perspective invites a reassessment of conventional insurance practices, aligning with our commitment to cost efficiency and transparency. It’s time to be smarter with your money.

8. No Risk Protection

One of the biggest concerns in moving away from a fully insured plan is additional risk. What happens if your group has a bad year? In a level-funded plan, you’re on your own.
In a Roundstone self-funded captive, your risk is shared with every other group in the captive and further protected with your stop-loss policy. In fact, you can still get money back, even if you had a bad claims year. Distributions are based on the performance of the captive, not a single group. And your costs are capped to safeguard you against catastrophic risk.

Fortune 500 companies use the law of large numbers to safeguard against risk while still generating savings. The captive bands small to midsize groups self-insuring together to play the same law of large numbers, so you’re not alone, and everyone shares in the leftover premium at the end of the year.

9. The Hidden Cost of Unchecked Claims

In both level-funded and fully insured plans, an unsettling reality emerges: the higher the claim costs, the more money insurance carriers can pocket to cover those expenses. Level-funded and fully insured plans have that in common — they have no incentive to manage high-cost claims, leaving businesses to face escalating costs without recourse.

In contrast, a self-funded insurance plan shifts the dynamics in your favor. You’re not just encouraged to implement cost containment strategies — you keep the savings. You and your employees directly benefit from the data-driven cost saving strategies you implement.

At Roundstone, we go a step further by guiding you toward selecting trusted partners tailored to your group’s unique needs. More importantly, we ensure that every dollar saved through efficient claims management is passed back to you, enhancing your control over healthcare spending and reinforcing our commitment to transparency and cost savings.

10. Lack of Claims Transparency

Some level-funded plans provide minimal reporting, but typically there is very little transparency involved. You do not get any Large Claim Prognosis or Claimant ID reports, and you do not get Case Management Notes.

Roundstone’s self-insured captive grants you access to reporting on every dollar spent under your healthcare plan, with national benchmark data available to easily compare your costs and see where there is room for improvement. You always have clear access to the data that can drive your cost saving strategy.

Level-Funding vs. Self-Funding: The Bottom Line

While level-funded plans may sound appealing from a distance, among the level-funded insurance problems are hidden costs and restrictions that significantly impact employers’ financial health and benefits flexibility. With level funding, you actually get the worst of both worlds — most of the risk, none of the reward.

When comparing level-funded vs. self-funded insurance, a self-funded plan is the clear winner. Self-funding through a group captive gives small to midsize businesses access to the same health insurance model that Fortune 500 companies have used for decades.

With a self-funded group captive plan, you have the flexibility and control you need to lower your healthcare expenses every year and provide your employees with accessible and affordable healthcare.

Find out how you can save thousands every year with a self-insured group captive plan from Roundstone.

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