Fully insured vs. level-funded health plans: how to decide
Level-funded plans give you claims data and a shot at money back, at the cost of underwriting and some complexity. Here is how the two structures actually differ and which groups each one suits.
If you have only ever been quoted fully insured coverage, you have seen one of several ways to fund a health plan. That is not unusual. For a long time, fully insured was effectively the only option available to employers under a few hundred employees, and a lot of brokers still quote it by default because it is the simplest thing to sell.
Level-funding changed that. Carriers now write level-funded plans for groups in the 20s, and for a healthy group of almost any size it is worth at least modeling. It is also genuinely not right for everyone, and the ways it can go wrong are less obvious than the ways it can go right.
Here is the actual comparison.
What fully insured means
You pay the carrier a fixed premium every month. In exchange, the carrier takes on all the risk of your employees' claims. If your group has a terrible year with three transplants and a long NICU stay, you pay exactly what you agreed to pay. If your group has a wonderful year and barely touches the plan, you also pay exactly what you agreed to pay, and the carrier keeps the difference.
That predictability is the product. You are buying certainty, and certainty has a price.
What you generally do not get is data. Under most fully insured arrangements, especially for smaller groups, the carrier is not obligated to show you your own claims experience and often will not. Which means when your renewal comes in at 14 percent, you have no independent way to evaluate whether that reflects your group or the carrier's book.
What level-funded means
You pay a set monthly amount, which is built from three components:
- Expected claims, an actuarial estimate of what your group will use, held in a claims account
- Administration, the cost of the network, claims processing, and member services
- Stop-loss premium, insurance that caps your exposure
Your employees experience it identically to a fully insured plan. Same card, same network, same process. The difference is entirely in how the money moves behind it.
At the end of the plan year, if actual claims came in below the expected amount, you may get a share of the surplus back. If claims came in above, stop-loss insurance absorbs it, which is the whole point of the structure.
There are two kinds of stop-loss and both matter. Specific stop-loss caps what you pay on any single individual, typically somewhere between $20,000 and $75,000 for a group this size. Aggregate stop-loss caps your total claims across the whole group, usually at around 120 to 125 percent of expected. Between the two, your worst case for the year is a known number, not an open-ended one.
The real differences
On predictability, the gap is smaller than it sounds. Your level-funded monthly payment is set for the year, the same as a fully insured premium. The variability sits in whether you get a refund, not in what you pay each month. Any finance team that can handle a fully insured plan can handle a level-funded one.
On data, the gap is enormous, and this is the most underrated part of the decision. Level-funded plans come with claims reporting. You find out that a third of your spend is one chronic condition, or that your emergency room utilization is twice what it should be because nobody knows where the urgent care is, or that a handful of specialty drugs are driving your pharmacy trend. Every one of those is actionable. Under a fully insured plan you would simply never learn it.
On upside, fully insured has none. If your group is healthy, that money is gone. Under level-funding, a healthy group can see a meaningful refund. It is not guaranteed and should never be budgeted, but over several years a genuinely healthy group tends to come out ahead.
On getting in, level-funding requires underwriting. Your group answers health questions or the carrier reviews prior claims. A group with known high claims may be declined or quoted at a rate that removes the advantage. Fully insured plans in the small group market are guaranteed issue, meaning the carrier must take you regardless of health status. That is a real protection and it matters for some groups.
On getting out, fully insured is clean. You finish the year, you move, done. Leaving a level-funded plan means settling run-out claims, which are claims incurred during your plan year but submitted after it ended. That settlement takes months and can produce a bill after you thought you were finished. It is manageable, but you need to know it is coming.
Which one fits your group
Fully insured usually fits groups under about 25 enrolled, groups with known significant claims, employers with no appetite for any variability at all, and organizations where nobody has the bandwidth to look at a claims report even if one arrived.
Level-funding usually fits groups roughly 25 to 200 enrolled with a reasonably healthy census, employers who want to understand their own cost drivers, businesses stable enough to absorb a run-out settlement, and companies that have been getting renewal increases that feel disconnected from how little their people actually use the plan.
That last signal is the most common one. If your group barely uses the plan and your renewal still goes up 12 percent every year, you are subsidizing somebody. Level-funding is how you stop.
The questions that decide it
Before you take a level-funded quote seriously, get answers to these:
What is the specific stop-loss level, and what happens if we hit it? A low specific level means more protection and a higher stop-loss premium. Make sure you know where your ceiling per person actually is.
Is the aggregate corridor 120 percent or 125 percent? This sets your genuine worst case for the year. Work out that dollar figure and ask whether your business could absorb it. If the answer is no, the structure is not right for you regardless of how good the projection looks.
Is the contract 12/15, 12/18, or paid? This determines how run-out claims are handled and it is where employers get surprised. A paid contract is the cleanest. Ask specifically.
What is the surplus sharing arrangement? Some carriers refund 100 percent of surplus, some share it, some keep it entirely. A level-funded plan with no surplus sharing is a fully insured plan with extra paperwork.
What are the renewal terms if we have a bad year? Some carriers will re-underwrite aggressively after high claims. Understand the downside path before you take the upside one.
What claims reporting do we actually get, and how often? Monthly, with enough detail to act on, is the standard to hold out for. "Available on request" usually means quarterly and thin.
A word about the middle path
You do not have to decide this in one year. A reasonable approach is to get quoted both ways at your next renewal, without committing to anything, and simply look at the numbers. A level-funded quote costs you nothing but the underwriting questionnaire, and even if you stay fully insured you will have learned something about how carriers view your group.
The employers who get burned by level-funding are almost always the ones who were sold it as a straightforward way to save money without being told about run-out, aggregate corridors, or re-underwriting. The employers who do well with it are the ones who understood the structure going in and had the cash position to handle the bad version.
The short version
Level-funding is not a trick and it is not automatically cheaper. It is a trade: you take on a bounded amount of claims risk, and in exchange you get your own data and a share of your own good years. For a healthy group between roughly 25 and 200 employees, that trade is often clearly worth making. For a group with significant known claims, or one that genuinely cannot absorb a bad year, fully insured remains the right answer and there is nothing wrong with that.
Get both quotes. Then decide with the numbers in front of you rather than with the default.
This is general information, not legal or tax advice. Rules, thresholds, and carrier practices change, and how any of this applies to your company depends on facts we may not know. Check anything you intend to rely on with qualified counsel or your tax advisor. See our disclosures.