In the evolving landscape of employee benefits, small and medium-sized employers (SMEs) are increasingly turning to Level Funded plans as an alternative to traditional fully insured models. While often marketed as a “best of both worlds” solution—combining the predictability of fully insured plans with the potential savings of self-funding—the reality is more nuanced.
Understanding the mechanics, risks, and carrier strategies behind these plans is essential for any employer looking to stabilize their healthcare spend.
The Mechanics of Level Funding
Level funding is essentially a pre-packaged self-insured product. The employer pays a set monthly “premium” (the level fund), which covers administrative fees, stop-loss insurance, and a claims fund. If claims are lower than expected, the employer may receive a refund of the surplus.
However, the structure of these plans can vary significantly. In many cases, fixed costs can represent 50% to 70% of the total rate. This leaves a surprisingly small portion of the premium actually dedicated to funding claims. Furthermore, any surplus is often split with the carrier rather than being returned entirely to the employer, limiting the “upside” of a healthy year.
The Impact on the Small Group Market
The rise of level funding has fundamentally changed the Affordable Care Act (ACA) small group pool. Because level funded plans are often “manually rated” (based on the health of the specific group rather than the general population), they allow healthier companies to exit the general ACA pool.
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Cherry Picking: Carriers often “cherry-pick” the healthiest groups out of the fully insured market and move them to level funded products.
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The Death Spiral: When healthy groups leave, the remaining fully insured block deteriorates. With only higher-risk individuals left in the pool, rates for traditional plans are driven upward, creating intense renewal pressure for those who stay.
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Credibility Shifting: In the level funded space, even smaller groups are treated as “highly credible.” This shifts a significant amount of risk onto the employer’s shoulders, as their specific claims experience dictates their future costs more than ever before.
Why Carriers Favor Level Funding
It isn’t just employers seeking these plans; insurance carriers are actively driving the transition. Some carriers have openly stated that they are moving business toward level funding because it is more profitable for the carrier.
By shifting the risk to the employer while maintaining high fixed administrative costs, carriers can protect their margins. For 100+ groups that already have credible claims data, level funding is a fair competitive option. However, for smaller groups, it is often a strategy used by carriers to reposition risk rather than actually reducing the cost of care.
When is Level Funding a “Smart” Strategy?
Level funding can be an excellent transition strategy for an employer moving toward full self-insurance, but it is not a “set it and forget it” solution. If claims run poorly, the employer absorbs the brunt of the renewal increase. To provide true value, a plan must be built on three pillars:
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Transparency: Employers must have clear insight into where every dollar of their “level” payment is going—how much is for insurance, how much is for admin, and how much is for actual care.
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Proper Claims Funding: The claims bucket must be adequately funded to prevent volatile spikes in renewal rates.
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Active Cost Containment: Most standard level funded plans do not add meaningful cost-control measures (such as reference-based pricing or directed specialty pharmacy programs). Without these, the plan is simply repositioning risk, not lowering the actual cost of healthcare.
Conclusion
For SMEs, the value of a level funded plan depends entirely on its structure. While it offers a pathway out of the deteriorating ACA small group pool, it requires a proactive approach. To move beyond mere risk repositioning, employers must demand transparency and implement active cost-control measures to ensure their benefits remains sustainable for the long term.
