How does Alternate Funding work?
Alternate funding plans or level funded plans, are a form of self-funded plans tailored for small businesses. With alternate funding plans the employer sets up a medical plan, which pays for employees’ medical benefits directly, and employers just have to cover their monthly bill. Part of the risk for medical expenses is taken on by the plan rather than by an insurance company. The rest of the risk for medical expenses is covered by stop-loss insurance, underwritten by a third party insurance company.
Stop-loss insurance puts a cap on the plan’s medical claims payment risk. This cap is based on the amount the plan must pay for an individual’s medical claims (called the “specific deductible”), as well as the combined amount of all eligible medical claims the plan must pay in a given period (called the “aggregate attachment point”). With stop-loss insurance, the plan is protected from high individual medical claims and high overall claims expenses.
Specific Stop-Loss Coverage protects the plan from unexpected large medical claims incurred by covered individuals in the group.
Specific Stop-Loss Deductible is the amount of eligible medical claims the plan pays for any individual member before the stop-loss insurance begins to reimburse the plan (within the contract period). For example, if an Alternate Funding plan had a specific deductible of $20,000 per member, and a member has medical claims of $30,000, then the plan covers $20,000 of those expenses and the stop-loss insurance covers the other $10,000.
Aggregate Stop-Loss Coverage provides protection by limiting the plan’s risk for the sum of the group’s total eligible medical claims.
Aggregate Attachment Point is the total amount of eligible medical claims in the contract year that the medical plan pays before stop-loss insurance begins to reimburse the plan. If the eligible medical claims exceed the plan’s maximum claims liability for that contract year, stop-loss insurance reimburses the plan. Although stop-loss insurance is purchased for the entire year, the policy provides immediate reimbursement to employers throughout the year.
For example, if an Alternate Funding plan has an aggregate attachment point of $4,000 per month and the number of members does not change, the aggregate accumulates each month to an annual aggregate deductible of $48,000 ($4,000 x 12 months). The aggregate stop-loss coverage pays for high aggregate claims expenses throughout the year. So if claims total $40,000 by month four, the plan will have paid up to the aggregate attachment point of $16,000 ($4,000 x 4 months) and the stop loss insurance will have covered the remaining $24,000. If, at the end of the contract period, eligible claims under the medical plan exceed the plan’s aggregate stop-loss deductible, the stop-loss insurance will reimburse the medical plan for the amounts over the aggregate stop-loss deductible. If total eligible claims are less than the aggregate stop-loss deductible, a portion of the surplus claims dollars may be refunded to the plan. Where required by law, the entire surplus will be refunded to the plan.