What is a Level-Funded Health Plan?
Published: 7/28/2025
In today's evolving healthcare landscape, employers are increasingly seeking alternatives to traditional fully insured health plans that offer better cost control and flexibility. Level-funded health plans represent a strategic middle ground, combining the predictability of fully insured plans with the potential cost savings of self-insurance. This white paper explores how level-funded plans work, their key advantages over fully insured options, and presents real-world success stories from organizations that have successfully made the transition. With 42% of small and mid-sized employers projected to adopt level-funded plans by 2025, understanding this innovative approach to employee health benefits has never been more important for organizations looking to optimize their healthcare spending while maintaining quality coverage for their workforce.
What Are Level-Funded Health Plans?
Level-funded health plans represent a hybrid approach to employee health benefits, combining elements of both fully insured and self-funded plans. Under this arrangement, employers pay a fixed monthly premium that covers expected claims, administrative fees, and stop-loss insurance premiums. This structure provides the budgetary predictability of fully insured plans while offering the potential financial benefits of self-insurance.
Unlike traditional fully insured plans where insurance carriers assume all risk and retain all profits, level-funded plans allow employers to share in the risk and potential rewards. If actual claims are lower than projected, employers may receive a refund at the end of the plan year – a significant advantage over fully insured plans where excess premiums are retained by the carrier.
Third-party administrators (TPAs) handle the day-to-day management of these plans, processing claims and providing administrative support, which minimizes the operational burden on employers while maximizing transparency and control.
Key Components of Level-Funded Plans
- Fixed monthly premiums based on expected claims
- Stop-loss insurance protection against catastrophic claims
- Third-party administration of claims and benefits
- Potential for year-end premium refunds
- Detailed claims data and utilization reports
- Customizable plan design options
Key Benefits Over Fully Insured Plans
Cost Savings and Predictability
Level-funded plans typically offer lower premiums than fully insured plans because they're based on the employer's actual employee risk pool rather than community rating. Monthly payments remain consistent throughout the year, eliminating mid-year rate increases. Additionally, these plans are exempt from many state insurance taxes and mandates, further reducing costs.
Perhaps most compelling is the potential for surplus refunds at year-end. When claims fall below projections, employers can receive substantial refunds, sometimes reaching 10-15% of annual premiums – funds that would otherwise remain with the insurance carrier under a fully insured arrangement.
Risk Mitigation Through Stop-Loss Insurance
Stop-loss insurance is the cornerstone of level-funded plans, protecting employers from catastrophic claims by covering costs above predetermined thresholds (typically between $10,000-$100,000 per individual). This protection allows small and mid-sized employers to benefit from self-insurance without assuming unmanageable financial risk.
The combination of stop-loss insurance with monthly level funding creates a financial safety net that provides stability similar to fully insured plans but with significantly better economics for employers with healthy employee populations.
Enhanced Transparency and Data Access
Unlike fully insured plans that provide limited visibility into claims data, level-funded plans offer comprehensive monthly reports detailing claims activity, utilization patterns, and cost drivers. This transparency enables employers to identify trends, implement targeted wellness initiatives, and make data-driven decisions about plan design and benefits offerings.
With access to detailed information about ER visits, prescription utilization, and virtual care adoption, employers can develop strategies to address specific cost centers and improve employee health outcomes.
Improved Employee Engagement and Wellness
Many level-funded plans include robust wellness programs, 24/7 virtual care options, and incentives that promote healthier employee behaviors. These initiatives not only improve workforce health and productivity but also directly impact the employer's bottom line by reducing claims costs, increasing potential refunds, and lowering future premiums.
The enhanced member experience offered by many level-funded plans can also serve as a valuable recruitment and retention tool in competitive labor markets, where comprehensive and innovative health benefits are increasingly important to prospective employees.
Success Stories: Real-World Examples
Mid-Sized Tech Company Success
After transitioning from a fully insured plan to a level-funded arrangement in 2024, this 150-employee technology firm achieved a 15% reduction in annual health benefit costs during the first year. The company received a $120,000 surplus refund due to lower-than-expected claims, which they partially reinvested in enhanced mental health benefits.
Using the detailed claims data provided by their TPA, they implemented targeted wellness programs that reduced emergency room visits by 20% and increased preventive care utilization by 35% in just 18 months.
Growing Startup
A rapidly expanding startup with 75 employees needed affordable, flexible health benefits to attract top talent in a competitive market. Their level-funded plan allowed customization of benefits to match their young workforce's preferences while providing predictable monthly budgeting critical for their growth phase.
The company avoided the typical 25% premium increase common in fully insured plans for startups with changing demographics. At year-end reconciliation, they received a 10% premium refund, which they reinvested in an expanded employee wellness program featuring on-site fitness classes and nutritional counseling.
Important Considerations
Key Factors to Consider Before Transitioning
- Group size and demographics significantly impact potential savings
- Claims history and employee health status affect underwriting
- Refund terms vary by carrier and may include renewal requirements
Conclusion: A Strategic Approach to Health Benefits
Level-funded health plans represent a compelling alternative to traditional fully insured arrangements for small and mid-sized employers seeking greater control over healthcare costs without assuming excessive risk. By combining the predictability of fixed monthly payments with the potential for year-end refunds and the protection of stop-loss insurance, these plans offer a balanced approach to employee health benefits.
The enhanced transparency provided through detailed claims reporting enables employers to make data-driven decisions about plan design and wellness initiatives. As demonstrated by the success stories presented in this paper, organizations that have made the transition to level-funded plans have achieved significant cost savings while maintaining or improving the quality of coverage offered to employees.
While level-funded plans may not be the optimal solution for every employer—particularly those with highly unpredictable claims patterns or very small group sizes—they represent an increasingly attractive option in today's evolving healthcare landscape. By partnering with an experienced health insurance advisor who understands the nuances of level-funded arrangements, employers can determine whether this innovative approach aligns with their financial objectives and employee health needs.