Three funding models; three very different relationships with risk. Here's how to tell which one belongs in your benefits strategy.

Every employer offering group health coverage is making a funding decision, whether they realize it or not. Most employers default to the model their broker put in front of them years ago and simply renew it on an annual basis without giving it any thought, which can be a very expensive habit. As healthcare costs climb faster than general inflation, the funding mechanism that you choose for your plan has a greater impact on your long-term spend than almost any other decision that you will make.

There are three ways a group health plan can be funded: fully insured, self-funded, and level-funded. Each type looks nearly identical to your employees: they are given the same kind of ID card and use the same or similar network of providers. However, behind the scenes, they are built on completely different assumptions about who assumes the risk, who has access to medical data, and who benefits when claims are less than expected, all of which can have a huge impact on the employer’s cost.

Fully Insured: Predictability at a Premium

A fully insured plan is what most people picture when they hear the term “health insurance”. The employer pays a fixed monthly premium to an insurance carrier, and in return, the insurance carrier assumes the obligation of paying covered claims. If your workforce has a catastrophic year, that's the carrier's problem. Your total cost is limited to the premiums paid, irrespective of the medical costs incurred by your employees.

In a fully insured plan, the premium that you pay is based on a number of factors: anticipated claims, administrative fees, applicable state taxes, insurance carrier risk charges, and profit margin. For small groups with fewer than 50 employees, premiums are community-rated, which means that premiums are based on the collective experience of every similar-sized employer in your geographic area. You have the same premium as every other employer, regardless of how healthy your team is. Mid-sized and larger groups get some credit for their own claims experience, but the pooling principle still applies.

There are tradeoffs to a fully-insured plan. On the positive side, an employer has cost certainty. You know what your healthcare costs will be for the year because your cost is limited to the premiums that you pay, irrespective of the medical claims of your workforce. On the other hand, you have limited control over plan design, almost no visibility into what's driving premium costs, and you do not share in the upside. If your workforce is healthy with lower than expected claims during the year, the insurance company keeps the profit. You do not benefit from your good claims experience. In addition, when you renew your policy the next year, you are almost guaranteed to see your premiums rise, with little explanation for the increase.

A fully insured plan works well for employers who value simplicity and cost certainty, for groups with a high-risk workforce, and for companies without the internal bandwidth to engage with claims data.

Self-Funded Health Plans: Control, Transparency, and Real Risk

At the other end of the spectrum is the self-funded health plan. In a self-funded health plan, the employer is responsible for paying claims as they come in. While the employer generally buys stop-loss insurance to protect against catastrophic claims, the employer assumes the risk of its employees’ healthcare costs. Unlike a fully-insured plan, with a self-funded plan, there is no cost certainty. The employer’s ultimate cost depends upon the overall health of its workforce.

A self-funded plan can have significant advantages. An employer does not have to pay for the insurance company’s profit margin, risk charges, and in many cases, state premium taxes, so there is a potential for real savings. You have access to your claims data, which lets you identify cost drivers and act on them. You can design benefits to help your workforce stay healthy and reduce expenses. Because self-funded plans are governed by ERISA, the regulatory picture is often simpler, though HIPAA obligations still apply and should not be underestimated.

While the upside can be great, there is a downside to self-funded health plans. Claims depend upon the health of your workforce, and in a bad year, your costs can exceed expectations. This is why stop-loss insurance is a must. Stop-loss insurance protects the employer from catastrophic costs. It pays when claims exceed a certain threshold. There are two types of stop-loss insurance. Specific stop-loss steps in to pay claims once an individual employee has incurred costs in excess of a certain amount. Aggregate stop-loss steps in once the employer has paid a certain amount cumulatively. Stop-loss premiums will depend upon how high these thresholds are set – the higher the thresholds, the lower the premiums. An employer will generally rely on the advice of a professional to set its thresholds.

Self-funded health plans are more commonly used by larger employers who can afford to pay claims out of cash flow and to absorb month-to-month volatility in claims. However, more mid-sized companies are beginning to adopt self-funded plans as well.

Level-Funded Health Plans: The Middle Path

Level-funded health plans are a middle ground between fully insured and self-funded health plans. The employer pays a flat monthly amount to an insurance company or third-party administrator. That monthly payment covers three things: claims, administrative fees, and stop-loss insurance premium. Claims are paid by the insurance company or the TPA from the employer’s monthly payments. If a large claim hits, the excess over the amount of the employer’s monthly payments is paid by stop-loss insurance. The employer’s monthly payment stays the same regardless of claims.

At the end of the plan year, the numbers are reconciled. If your claims were less than projected, the surplus will either be refunded or credited against the next year's cost. If your claims exceeded projections, you benefited from having stop-loss insurance. However, you should expect that experience to result in increased costs for the following year.

There are two features that make level-funded plans attractive to smaller employers. First, you get budget certainty like a fully insured health plan. Second, level-funded pricing is based on your group's claims experience, not a community-rated pool. That way, if you have a healthy workforce, you aren’t subsidizing higher-risk groups in the same region.

Level-funded health plans are not for everyone. They require medical underwriting, so not every group will qualify. They aren't available in every state because of stop-loss regulations. And groups with older demographics, high-cost specialty medications, or known serious conditions should be evaluated carefully before moving off a fully-insured plan. In the long run, a fully insured plan may be more cost effective.

What They Share

There are similarities among the three plan designs. All three can offer the same provider networks and and the same member experience. All three rely on some form of risk transfer, whether that's a full transfer of risk to an insurance company or or a transfer of excess risk to a stop-loss insurer. All three require compliance work, employee communication, and annual evaluation. And in all three, the employer that engages with its own data and cost drivers will outperform the employer that doesn't.

The real difference is where you sit on the spectrum between certainty and control.

How RMC Group Approaches the Decision

Our Health and Benefits team doesn't start with a product. We start with your census, claims history (where it's available), cash flow tolerance, and growth trajectory. From there we model what each design would look like for your business, including a year where things go wrong.

For employers staying fully insured, we focus on plan design, contribution strategy, and renewal negotiation. For level-funded health plan candidates, we handle underwriting submission, evaluate carrier and TPA options, and set realistic expectations about surplus and renewal behavior. For self-funded health plan groups, we structure stop-loss appropriately, coordinate TPA selection, and build the cost containment and data review process that makes self-funding work rather than simply shifting risk onto your balance sheet.

We also don't treat the decision as permanent. Groups move between these models as they grow, as demographics shift, and as claims experience develops. Part of our job is knowing when it's time to move and when it's time to stay put.

Healthcare is likely one of your largest expenses. It deserves more than an annual renewal signature.

Ready to find out which structure fits best for your company? Contact RMC Group's Health and Benefits team for a funding analysis built on your actual numbers at 239-298-8210 or schedule a quick discovery call here to learn more.