Why Level Funding Is Gaining Traction

Category: Healthcare trends.

Introduction:

Level-funded health plans have become one of the hottest trends in employer benefits. In simple terms, a level-funded plan is a hybrid between a traditional fully insured plan and a self-funded plan. Employers pay a fixed monthly amount (level premium) to cover anticipated claims and administrative costs, but unlike a fully insured plan, they can get money back if actual claims are lower than expected. Here in Utah – and across the country – more businesses are switching to level funding to save on healthcare costs without sacrificing coverage quality. In fact, nearly one-third of small-business employees nationwide were enrolled in a self-funded or level-funded plan by 2020, a number that has been steadily rising. Why the growing popularity? Let’s explore the key reasons level funding is gaining traction.

Rising Costs Demand New Solutions:

Healthcare premiums for traditional fully insured plans have been climbing year after year, often outpacing inflation. Small and mid-sized employers, especially, have felt the squeeze. For many, the old strategy of just absorbing a 10% annual premium increase or shifting more cost to employees simply isn’t sustainable. Level funding emerged as a creative solution. It offers cost-containment without cutting benefits. Employers are drawn to the idea that if their workforce stays healthy and uses less healthcare, they shouldn’t have to pay as much. Under a level-funded arrangement, if claims come in lower than expected, the employer gets a refund or credit of the surplus – instead of the insurance company keeping the profits. This aligns incentives, as companies are rewarded for implementing wellness programs and helping employees manage chronic conditions effectively.

Budget Predictability with Upside Potential:

One of the biggest advantages of level funding is that it combines predictability with opportunity. The term “level” refers to the steady, level payments an employer makes – typically a set amount each month, just like a normal insurance premium. This payment covers the estimated claims fund, stop-loss insurance premiums, and admin fees. The predictability is similar to a fully insured plan: you know your cost upfront for the year. But unlike a fully insured plan, there’s upside potential. If the year’s claims are lower, you could get a portion of those funds back. Employers love telling their CFO, “We came in under budget and got a refund.” It’s a stark contrast to fully insured plans where, if claims are low, the carrier simply keeps the excess as profi. With level funding, “all upside – no downside” is a phrase often used. The downside risk is mitigated by stop-loss coverage (more on that next), so you won’t pay more than your level price, but you stand to gain if things go well.

Stop-Loss Protection – Peace of Mind:

A common concern about self-insuring (and by extension, level funding) is the risk of large claims. This is where stop-loss insurance steps in as the safety net. In a level-funded plan, specific stop-loss caps what you’d pay for any individual’s claims, and aggregate stop-loss caps the total claims for the group. For example, if you set an individual stop-loss at $30,000, any claims above that per person are covered by the stop-loss carrier (Balanced Insurance, in our case). So if one employee has an unexpected $200,000 medical event, your plan pays the first $30k (which was budgeted for), and the stop-loss covers the remaining $170k. No financial ruin, no horror stories – just predictable costs. This mechanism takes the fear out of self-funding. Employers can embrace the model knowing they’re shielded from catastrophic claims. It’s worth noting that the cost of stop-loss insurance is built into that level monthly payment, which is why even in a worst-case high-claims year, the employer’s costs don’t exceed the level amount. Think of stop-loss as a guardrail that ensures you only experience the positives of level funding, not the potential negatives of high volatility.

Avoiding Certain ACA Costs and Rules:

Another reason level-funded plans have become trendy is regulatory arbitrage – in a legal way, of course. Fully insured small group plans (for employers under 50) are subject to community rating and must cover state-mandated benefits and adhere to all ACA small group rating rules. This can limit flexibility and often results in higher premiums for groups with younger, healthier demographics. Level-funded plans, because they are technically self-funded, aren’t bound by some of these rules (Section 10: Plan Funding - 10480 | KFF). Insurers (like Balanced Insurance) can medically underwrite level-funded plans or adjust rates based on your specific group’s health risk. If your company’s workforce is relatively healthy, you might score significantly lower rates than you would in the ACA small group market. Additionally, self-funded plans can be exempt from certain state insurance taxes and state benefit mandates, because ERISA (a federal law) generally preempts state insurance regulation for self-funded plans. All this can translate to cost savings or plan design flexibility. Employers do need to follow federal laws like ERISA, HIPAA, and ACA employer mandate provisions, but there is truth in the idea that a healthy small employer might save money with level funding due to favorable risk assessment.

Employee Attraction and Retention:

Employers are also turning to level funding because it lets them maintain or even enhance benefits which helps with attracting and retaining talent. In a tight labor market, cutting benefits to save money is not a viable strategy – you might lose your best people if your healthcare offering isn’t competitive. Level funding lets an employer offer attractive, comprehensive coverage (since the structure itself helps manage cost). Some companies use the potential savings to reinvest in perks like wellness programs, dental or vision add-ons, or richer medical plan options. In essence, it’s a way to get more value out of the dollars you spend on benefits. Employees typically experience a level-funded plan the same way they would any insurance – they have a network, copays/deductibles, an ID card, etc. There’s no disruption to the employee experience; they wouldn’t necessarily know it’s level-funded except perhaps if they’re informed that the company might get money back for good health outcomes (some employers even share a portion of any refund with employees as a wellness dividend, which can incentivize smart healthcare choices).

Real Results – The Data Backs It:

The trend isn’t just anecdotal. Surveys and studies back up the shift. A Kaiser Family Foundation survey noted a steady increase in the adoption of self-funded or level-funded plans by small firms year over year. More recent data suggests that this growth continued into 2022 and 2023, with many insurers (including big names) rolling out level-funded products targeted at 5–50 life groups. In our own experience at Balanced Insurance, we’ve seen clients save anywhere from 5% to 20% in the first year of switching to level funding, with comparable or better coverage. One Utah tech company of 40 employees moved to a level-funded plan and received a significant surplus refund at year-end – those funds went into enhancing their wellness offerings the next year. Another client, a regional retailer, was able to avoid a double-digit renewal increase by transitioning from fully insured to level-funded, and over a three-year period, their average annual increase has been just 3% (well below industry trend).

Conclusion:

Level-funded plans are gaining momentum because they offer a compelling proposition: control and transparency in a world of rising healthcare costs. Employers are no longer passive premium payers; they become active participants in managing healthcare expenses. With the right partner (like a knowledgeable insurer/TPA that can administer the plan and provide stop-loss protection), level funding can be a game-changer for small and mid-sized businesses. Of course, it’s important to evaluate if it’s right for your specific situation – factors like group size, health profile, and risk tolerance come into play. But the bottom line is, as more success stories emerge and awareness grows, level funding is moving from an experimental idea to a mainstream strategy. It’s all about balancing risk and reward – and for many, that balance is strikingly in favor of giving level-funded plans a try.