Funding Is Only the Beginning: Why More Employers Are Exploring Level-Funded Health Plans
Funding Is Only the Beginning: Why More Employers Are Exploring Level-Funded Health Plans. When it comes to healthcare, most companies are renting their plans. They pay a fixed monthly premium to a traditional carrier in exchange for a plan they have almost no control over. When the "rent" goes up at the end of the year, they pay the invoice and hope for a better renewal next time.
For the few companies large enough to handle it, self-funding is an option. But, while “owning” a plan offers greater control, it introduces a level of complexity and financial risk that many organizations are hesitant to commit to.
This is why more organizations are looking at level-funded plans. They are designed to bridge the gap between renting and owning. To understand why, it helps to look at the three primary ways employers handle the financial risk of healthcare.
Three ways to fund benefits.
Fully Insured
With a fully insured plan, the insurance carrier assumes the financial risk for employee claims, while the employer pays a fixed monthly premium. If claims are lower than anticipated, the carrier retains the surplus. If claims are higher, the carrier absorbs the additional costs but will typically recover those losses through higher premiums at renewal.
A fully insured plan provides predictable monthly costs, but little visibility into how healthcare dollars are actually spent. Think of it like renting a house. You have a place to live, but you have very little control over how your money is being invested.
Traditional Self-Funded
Instead of paying fixed premiums, the employer pays claims as they are incurred and purchases stop-loss insurance to protect against catastrophic or unexpectedly high claims. This approach offers greater transparency and flexibility, but it also introduces variability in monthly cash flow. For this reason, self-funded plans have traditionally been best suited to larger organizations with the financial capacity to absorb fluctuations in claim costs.
It's much like owning a home: you have greater control and benefit directly from the decisions you make, but you're also responsible for routine and unexpected expenses. Stop-loss insurance helps protect against the financial equivalent of a major home repair, limiting the impact of unusually large claims.
Level-Funded
Level funding acts as the bridge. The employer makes one predictable monthly payment, but that money is split into three buckets: administrative costs, stop-loss insurance, and expected medical claims. If claims are lower than expected, the employer may receive a refund or credit, depending on the contract.
It provides the budgeting stability of a fully insured plan with the financial upside of self-funding. For many organizations, it is the ideal entry point into a more strategic approach to benefits.
But here is the critical distinction: changing how you fund your plan is not the same thing as changing your healthcare strategy.
Level funding can provide employers with more visibility, flexibility, and financial opportunity, but the funding model is only the starting point. The real question is how the rest of the plan is designed and whether employers have the ability to choose the solutions that best fit their workforce.
Many carrier-sponsored level-funded plans come as bundled solutions, where the provider network, pharmacy benefit manager (PBM), clinical programs, and care navigation are all packaged together. While this can simplify administration, it may also limit flexibility.
Similar to how owning a home gives you the freedom to choose your own contractor, your own appliances, and your own renovations. However, if the builder requires you to use their preferred vendors for everything, your options become much more limited. Some level-funded plans work the same way. Your people might need to use a hospital for procedures that are significantly more expensive than a facility down the street because that hospital is the carrier's 'preferred vendor' in the bundle.
The unbundled approach
An unbundled health plan takes that concept of ownership one step further. Instead of accepting every component from a single carrier, employers have the ability to choose the right partners for each part of their healthcare strategy.
It’s the difference between using the builder’s preferred vendors for everything and having the freedom to select the best contractor, electrician, plumber, and designer for each job. Each decision is made based on what delivers the most value, not because it comes as part of a package.
An unbundled approach may include:
- Independent pharmacy benefit managers
- Direct primary care
- Centers of excellence
- Imaging and laboratory partnerships
- Healthcare navigation
- Specialty pharmacy strategies
- Alternative payment arrangements
Instead of accepting a one-size-fits-all approach, employers can build a program around value, what matters most to their people, and the outcomes they want to achieve.
Funding is the foundation. Not the strategy
Moving from fully insured to level-funded can open the door to more control and long-term savings. But making the transition requires planning, a trusted consultant, and a clear understanding of the organization's risk tolerance and cash flow.
With the right support, many companies find the move beneficial. Ultimately, the funding model is just one part of the equation. The strategy behind the plan plays a critical role in helping organizations achieve their goals.
In the next edition of Benefits Architecture: Learn the framework. Elevate the Design, we will introduce DirectPath, a community-owned health plan built around this unbundled approach. We’ll look at how organizations are bringing together independent, high-performing partners to create a more coordinated healthcare strategy — one that improves the employee experience while building a more sustainable benefits plan.
Because when employers have a clearer understanding of where their healthcare dollars are going, they can make better decisions about how those dollars are used.
If you have questions about your benefits plan, don’t hesitate to reach out.
Cost figures, coverage details, and plan design elements presented in this blog are for illustrative purposes only and do not reflect any specific insurance policy or provider. Actual costs will vary based on your organization’s health plan, the insurance carrier, provider contracts, and the specifics of each medical situation. Employers and employees should refer to their official plan documents or speak with their broker or benefits consultant for guidance if needed.
