The funding structure of health plans is a major concern for employers, who look at risk, cost control, predictability, employee satisfaction, and other factors to track the performance of their current plans. Despite having fully insured, level-funded, and self-funded health plan options, 63% of employees have self-funded health plans as of KFF’s 2024 survey. In large firms, this number increases to 79%. Employers don’t have to follow this statistic, but they should know why it exists, how to find high-value propositions in insurance, and which makes the most sense.
The article reviews the three types of health plan funding models for employers, how to choose the right model for their business, and how to make healthcare benefits a competitive advantage, rather than merely an obligation.
How Each Funding Model Works
To recognize the use case of each insurance funding model, consider these brief descriptions:
- Fully Insured: In fully insured plans, employers pay providers for administrative and insurance duties, including claims, member support, and premiums, in exchange for a monthly premium.
- Level-Funded: Level-funded plans are hybrids of fully insured and self-funded plans. The employer’s premium pays the administrative fees, stop-loss insurance, and claims.
- Self-Funded: In self-funded plans, employers pay the costs of health claims, often with aid from a third party. Using stop-loss coverage and data transparency tools, employers can strategically manage the risks of self-funded plans and reduce overall costs compared to other plans.
Each funding model has its own advantages and disadvantages based on four traits:
1. Flexibility
Health plan funding must be flexible to meet the organization’s changing needs. Each funding model offers different versions of flexibility. For fully insured plans, the insurance company is responsible for claims, but the employer has less power over the margins. In self-funded plans, employers design their own benefit models, including cost-sharing, providing maximum flexibility. Level-funded plans are hybrids, and as such, they offer a mix of flexibility in terms of benefits from claim trends while providing more cost predictability than self-funded plans.
2. Cost Predictability
Cost predictability defines how easily employers can budget for their policy premiums. For fully insured plans, cost predictability is high since the rates are set for the contract year. Self-funded plans are more variable, depending on the coverage limits set by the employer and the claims being filed. Level-funded plans involve fixed monthly costs, including admin fees and stop-loss insurance, with potential refunds to balance costs.
3. Risk Exposure
Risk exposure differs between policy types. Fully insured plans pass the risk to the insurance company, providing stability, often in exchange for higher long-term costs. By contrast, self-funded plans offer employers more direct control over claims, increasing the importance of claim monitoring tools and stop-loss coverage to manage cost volatility. When well-equipped, self-funded employers can reduce their overall risk by more closely aligning their plan’s costs with the real-world health needs of their employees.
4. Regulations
Each plan type is regulated differently. Fully insured plans are subject to insurance laws (state and federal), which mandate their benefits and taxes. Federal law primarily governs self-insured plans. Employers should learn more about ERISA (Employee Retirement Income Security Act) or speak with an experienced broker to learn which regulations apply in their situation.
How Should Employers Choose a Policy Type?
With pros and cons to affordability, risk, predictability, and compliance, many employers struggle to choose an insurance plan. These questions can narrow the decision-making process:
- What is the organization’s size?
- What is the extent of its financial reserves?
- What are the employees’ demographics and health status?
- What are the business’s cash flow needs?
- What balance between flexibility and predictability does it need?
- What is the state’s regulatory environment?
A skilled benefits broker or insurance consultant can help employers model, benchmark, and analyze their insurance choices. Fully insured, level-funded, and self-funded options differ in their advantages and challenges. For example, although 63% of covered worker healthcare plans are self-funded, only 18% of workers at small firms have a self-funded plan. This suggests that smaller firms prioritize more predictable insurance workflows while larger firms prioritize flexibility by smartly using self-funded plans to save on long-term costs.
A local broker can help determine where your organization fits on that spectrum. The type of funding is essential, but so is the amount and timing of coverage to meet each organization’s needs. These needs are not a static or set quantity; they change over time as markets, expectations, objectives, and needs change. Insurance must be responsive to need and adaptive to change, which is where local, experienced brokers come in.
Find Proven Solutions for Employer Health Plans
While traditional health plan providers benefit from rising costs, custom employee health plans built by local insurance brokers help individuals get the most benefit from their plans. Choosing the level and type of funding can be difficult without professional guidance, as can conducting annual reviews to determine whether fully insured, level-funded, or self-funded plans are still effective for your business year-on-year.
At New City Insurance, our team of vendors helps employers personalize, refine, and update plans for themselves and their staff. Contact us today to learn how to save on benefits while increasing coverage with a professional broker’s help.