Find Health Plan Savings With Strategies Like Level Funding

JUNE 3, 2025

As healthcare costs keep rising, employers with fully insured health plans will continue to see premium increases, often in the double digits. Companies that have lower-than-average claims are considered “preferred risk,” and may find savings by switching from a fully insured health plan to a level-funded one.

This health plan funding strategy allows preferred-risk employers to pay a lower fixed monthly premium to cover claims, administration, and insurance, with the opportunity to see additional return on premium at the end of the plan year. Here’s how employers may benefit from this approach:

Level Funding Provides a Way Out of the Community-Rated Pool

For small businesses in the U.S., the Affordable Care Act (ACA) mandates how fully insured plan premiums are determined. Under the ACA, small group health plans of 50 or fewer employees (100 or fewer in California, Colorado, New York, and Vermont) must include essential health benefits and offer a minimum level of coverage. Often referred to as “community-rated health plans,” insurance companies can only use factors like geographic rating area, age, coverage category (individual or family), and tobacco use to calculate and set premium rates for the fully insured plans or coverages they provide to small businesses. Employers enrolled in one of these plans would be subject to the plan rates, regardless of their individual claims experience.

Under a level-funded plan, however, the premium is calculated based on the individual company’s health plan experience. For employers who are not ready or not eligible to completely self-insure, level funding provides an opportunity to move away from community-rated plans.

The premium for a level-funded health plan includes estimated claims costs and administration fees, as well as stop-loss coverage — where the employer's out-of-pocket expenses are capped at a predetermined amount to protect against high-cost claims. Level-funded plans also feature reduced premium taxes and fewer mandated coverages. Companies with average or better-than-average claims can save 5% to 10% by switching to a level-funded plan.

Employers may also be eligible to receive a partial return on premiums if claims costs are lower than what had been estimated at the beginning of the plan year. Companies with good claims experience could see an additional 5% to 10% in dividends. Read our article on strategies for optimizing level-funded plans and maximizing returns.

For employers concerned about the risks of level funding, stable monthly payments and embedded stop-loss coverage help financially insulate the plan if you go through a bad claims year. Level-funded plans that go from a good claims experience to less favorable can return to the fully insured market for the next plan year. Companies that have already explored level funding and determined it was not a good fit may still be able to reduce health plan costs by adjusting their plan designs.