A Guide to Alternative Health Plan Strategies

This is where most small to mid-sized groups are today. You may work with a broker, or you may have gone directly to an insurance company and purchased a plan that met your basic need to offer coverage. You might offer two options, typically it’s a low cost HSA option that an insurer offers plus one richer plan with better copays and a lower deductible or out-of-pocket limit.

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In this model, the insurance company bears the risk, since it's the one paying claims. These plans are regulated by state and federal insurance laws. Premiums typically rise every year, often landing anywhere from the high single digits to more than 20%. Small groups with 50 or fewer employees in particular are priced on community factors like geography and age rather than the health of your specific population.

Fully-insured is the most common model for small to mid-sized groups especially if they are based in mostly one state. and it still makes sense for a lot of employer groups. It also means you get none of the upside so a healthy year for your team doesn't lower your renewal.

With a level-funded plan, you start to take on some of the risk, and in exchange you get to share in the reward if claims come in lower than expected. A few things change, and a few things stay the same. You pay a fixed monthly cost that includes an administrative fee, a claims fund to pay claims as they come in, and stop-loss insurance to cap your exposure on high-cost claims. This model offers a stepping-stone to the self-funded or captive models. These plans are mostly governed by the federal law under ERISA which preempts state laws.

The upside: if you don't spend down the claims fund, you typically get back a meaningful share of what wasn't spent often around half. That's the appeal for a company with a relatively healthy population. The downside: you're now on the hook for claims as they happen, so if claims run higher than what you funded, you have to add money to cover the gap.

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This model tends to be a good fit for a small or mid-sized group with a relatively healthy population that's willing to take on some added risk for a shot at savings.

The premium for a level-funded plan breaks down into three pieces:

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Claims fund + stop-loss insurance + administrative fee

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Underwriters build the claims fund using either your actual medical and pharmacy claims data or, if that's not available, an employee health survey. Stop-loss insurance limits your exposure to any one high-cost claim. The administrative fee covers the cost of running the plan.

Self-funding is the next step up in risk, though it's most common among mid-sized to large groups rather than small ones. Here, you take on the risk directly, but in exchange you get far more flexibility in plan design, coverage, and point solutions to manage cost and the health of your population. Self-funded plans are governed by ERISA which is a federal law that supercedes state laws.

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Self-funding requires real engagement. You're the one funding claims, and you're often the last stop in the appeals process. Think about it this way: you fund claims payments, you pay a third-party administrator to process those claims, and you carry stop-loss insurance to cap your exposure on high-dollar claimants. It gives you flexibility and more control over cost, but it only works if you stay engaged with the data and partner with a broker who can help you find real ways to manage spend.

A group captive is worth considering as a step between level-funding and going fully self-funded. It works by pooling stop-loss risk with other similar employers. On the risk spectrum, it offers more control and upside than level-funding, with less risk than self-funding alone. It tends to fit a fully-insured or level-funded group that's ready for the next step but isn't quite big enough for self-funding or simply wants less risk than going it alone or if you have a multi-state employee mix. Captives are also governed by ERISA.

A few things to consider: most captive programs have size requirements and expect a stable claims history before accepting a new group. You're also pooling risk with other members, which means a high-cost claimant elsewhere in the captive can affect your results too. The tradeoff of risk pooling is that the upside is shared, but so is some of the exposure.

Individual Coverage Health Reimbursement Arrangements (ICHRA) are gaining real traction right now. The model flips the structure from a defined benefit to a defined contribution: instead of choosing a group plan for everyone, the employer sets a contribution amount, and employees use it to shop for their own coverage on the individual market.

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This tends to work best in a few situations: where the individual market is priced lower than the small group market, for a small company that wants to offer insurance without taking on the administrative weight of running a group plan. This solution has become more popular for larger self-funded or fully-insured as well.

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There's a real list of factors to weigh before deciding which employee populations, if any, make sense for ICHRA. Things like age mix, geography, and how the individual market prices relative to your current group plan. Because there's a lot to weigh, most employers phase it in gradually, moving one class of employees first to see how it performs before expanding further.

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Two things worth keeping in mind: each employee needs a good individual market agent to help them choose the right plan, and the employer group gives up some data visibility and plan design control by moving away from a traditional group plan.

Professional Employer Organizations (PEOs) offer small to mid-sized groups more than just health insurance. On the health insurance side, a PEO functions largely through risk pooling. But it typically also covers payroll, compliance, and ongoing HR support. These are resources most small teams don't have the bandwidth to build in-house.

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In most cases, your payroll needs to move to the PEO; the rest of what you take on depends on your company's needs. It's also worth knowing that a PEO uses a co-employment model, meaning the PEO becomes your employees' employer of record for certain purposes. That's a real structural change, and it's worth understanding fully including how it affects things like your workers' comp policy and state registrations before you sign on.

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is built for employer groups under 50 employees. It lets you offer a defined contribution amount that employees can use to purchase their own health insurance or pay for care.