This primer on level-funded health plans answers a number of key questions for carriers and health plans, including:

What is a level-funded health plan?

Level-funded health plans are a hybrid approach to employer-sponsored health coverage, sitting between fully insured and self-funded insurance models. In a level-funded arrangement, employers pay a fixed monthly amount (hence the name “level-funded”) to the plan administrator/stop-loss carrier that covers three key components:

1. Expected claims (claims fund): A portion of the monthly payment is set aside to pay for employees’ medical claims up to a predetermined level.
2. Stop-loss insurance premiums: Stop-loss (or reinsurance) coverage protects the employer from large, unexpected claims by capping their maximum financial exposure. This typically includes both:
1. Specific stop loss: Protects against high-cost claims from individual members.
2. Aggregate stop loss: Caps the employer’s total claims liability for the entire group.
3. Administrative costs: A portion of the monthly payment covers fees for plan administration, including claims processing and customer service. At the end of the plan year, if actual claims are lower than expected, the surplus in the claims fund is often shared between the employer and the stop-loss carrier, depending on plan design. If claims exceed expectations, the stop-loss coverage limits the employer’s financial risk to the amount originally funded by the employer.

Why employers choose level-funded health plans

Level-funded plans have become increasingly popular, particularly among small- and mid-sized employers who want more control and potential savings than fully insured plans offer but may not be large enough to self-fund confidently. The main reasons for choosing level-funded plans include:

• Budget predictability: Employers pay a fixed monthly amount, making it easier to budget for healthcare costs compared to the variable expenses of traditional self-funding.
• Potential for savings: If claims are lower than projected, employers may receive a refund or credit, unlike fully insured plans where carriers retain any surplus. This can encourage loyalty to the carrier.
• Risk protection: Stop-loss insurance limits the employer's exposure to catastrophic claims, making self-funding feasible for smaller groups.
• Regulatory flexibility: Level-funded plans may be exempt from certain state-mandated benefits and taxes that apply to fully insured plans, depending on state regulations. Details vary from state to state, so it is important to understand relevant state-specific requirements.
• Data transparency: Employers may gain access to more detailed claims data, enabling better health management and cost control strategies.
• Alternative to Affordable Care Act (ACA) plans: Some employers seek alternatives to ACA community-rated small group plans, which may not be cost effective for healthier groups.

To read the full primer, download the paper here.