You’ve learned about alternative plan structures. You understand how stop-loss insurance works. Now comes the question that matters most: will switching actually save your company money?
The honest answer is that it depends. It depends on your current costs, your workforce demographics, your claims history, and how your plan is managed going forward. But you can model it. And you should model it before making any decision.
This article walks you through a practical framework for comparing your current fully funded plan against a self-funded or level-funded alternative. We’ll use real numbers, identify the key variables, and show you how to think about risk and return over multiple years.
The components you need to compare
When you’re on a fully funded plan, your cost is simple: a monthly premium times the number of covered employees and dependents. That one number covers everything: expected claims, administrative costs, carrier profit, reserves, and risk.
When you move to an alternative structure, those components get unbundled. That’s what gives you visibility and potential savings. Here’s what you need to line up side by side:
Current fully funded premium. This is your baseline. Take your total annual premium cost, including both employer and employee contributions.
Expected claims. This is what your group is likely to spend on medical and pharmacy claims in a given year. If you have claims data from a prior self-funded arrangement or can obtain it from your current carrier, use it. If not, your benefits advisor can estimate based on your group’s demographics, industry, and region.
Administrative fees (TPA costs). In an alternative plan, a third-party administrator handles claims processing, network access, and plan administration. These fees are typically quoted on a per-employee-per-month basis.
Stop-loss premiums. Both specific and aggregate stop-loss have a cost. This varies based on your group profile and the attachment points you select.
Other fixed costs. These may include navigation services, compliance support, pharmacy benefit management, and any other vendors that are part of your plan design.
Potential surplus. In a good claims year, the difference between your expected claims funding and actual claims is money that stays with your company. This surplus is the upside that doesn’t exist in a fully funded arrangement.
A worked example: 50-person company
Let’s walk through a simplified comparison for a company with 50 employees.
Current fully funded cost:
- Monthly premium per employee: $850
- Annual cost: $850 x 50 x 12 = $510,000
Projected alternative plan cost:
- Expected annual claims: $325,000
- Administrative fees (TPA): $36,000 ($60 per employee per month)
- Stop-loss premium (specific + aggregate): $54,000 ($90 per employee per month)
- Navigation and other services: $15,000
- Total projected cost: $430,000
Potential savings in a typical year: $80,000 (roughly 16%)
That $80,000 represents the margin, profit, and risk charge that were embedded in your fully funded premium. By unbundling the plan, you’ve made those costs visible and, in a normal claims year, recoverable.
But this is the expected scenario. Good modeling requires you to look at what happens when things don’t go as planned.
Break-even analysis
Your break-even point is the claims level at which the alternative plan costs exactly the same as your fully funded plan. Above that point, the fully funded plan would have been cheaper. Below it, you’re saving money.
Using the numbers above:
- Total fixed costs in the alternative plan (admin + stop-loss + services): $105,000
- Fully funded annual cost: $510,000
- Break-even claims level: $510,000 - $105,000 = $405,000
If your actual claims stay below $405,000, you come out ahead. If they exceed $405,000, you start losing ground versus the fully funded option, but remember that your stop-loss coverage caps your total exposure.
For this group, expected claims are $325,000. That means claims would need to run about 25% above expectations before you’d break even with the fully funded plan. And even in that scenario, your aggregate stop-loss would begin limiting your exposure once claims exceed the aggregate attachment point.
The purpose of break-even analysis isn’t to predict the future. It’s to understand how much room you have. If your break-even point requires claims to exceed expectations by 20% or more, you have a strong margin of safety.
Risk scenarios you should model
Good modeling means looking at best case, expected case, and worst case. Here’s how to think about each:
Best case (claims run 15% below expected): Claims come in at $276,000. Total plan cost is $381,000. You save $129,000 versus fully funded, a 25% reduction. Some of that surplus may be returned to you directly.
Expected case (claims run as projected): Claims come in at $325,000. Total plan cost is $430,000. You save $80,000, or about 16%.
Moderate adverse case (claims run 20% above expected): Claims come in at $390,000. Total plan cost is $495,000. You still save $15,000 versus fully funded, and you’re below your aggregate stop-loss attachment point.
Severe adverse case (claims run 40% above expected): Claims come in at $455,000. This exceeds your aggregate attachment point of roughly $406,000 (125% of expected). Your aggregate stop-loss kicks in, capping your claims exposure. Your total out-of-pocket cost is limited, and while you may not save money this year, your losses are bounded.
The key takeaway from this kind of analysis is that in most scenarios, the alternative plan delivers savings. In the worst-case scenario, your losses are contained by stop-loss. The risk is real but manageable.
Multi-year modeling: where the real value appears
Single-year comparisons are useful, but they don’t capture the full picture. The real advantage of alternative plan structures compounds over time.
Year one is about establishing your baseline. You may see immediate savings, and you’ll begin collecting your own claims data for the first time.
Year two is where data starts working for you. With a full year of claims data, your benefits advisor can identify cost drivers, adjust plan design, implement targeted wellness or navigation programs, and negotiate better stop-loss terms based on your actual experience.
Year three and beyond is where the compounding effect takes hold. Companies that actively manage their plans often see claims trend improvements of 3-5% annually relative to the market average. That gap widens every year.
Consider the cumulative impact. If your fully funded premiums would have increased 8% per year, and your alternative plan costs increase 4% per year because of active management, the savings gap grows substantially over a three-to-five-year period. What starts as an $80,000 annual savings can become $150,000 or more by year three.
Multi-year modeling is critical because it captures two effects: the immediate savings from eliminating carrier margin, and the long-term savings from active plan management. Both matter, but the second one is where the real transformation happens.
What makes a good candidate for switching
Not every company will benefit equally from switching plan structures. Here are the characteristics that make a company a strong candidate:
Group size of 20 or more employees. Alternative structures can work for smaller groups, but the actuarial math gets more favorable as your group grows. With 50 or more employees, the numbers are usually compelling.
Relatively stable workforce. High turnover creates administrative complexity and makes claims less predictable. Companies with reasonable retention tend to see better results.
Willingness to be an active plan sponsor. Alternative plans reward engagement. If you’re willing to review data quarterly, make informed decisions about plan design, and invest in employee health navigation, you’ll capture more value.
Current premiums that feel out of proportion to your claims. If you suspect you’re overpaying relative to your team’s actual healthcare utilization, modeling will often confirm that intuition.
Leadership that thinks long-term. The biggest wins come in year two and beyond. If you’re looking for a sustainable benefits strategy rather than a one-year fix, alternative plan structures are built for you.
Building your own model
You don’t need to do this alone. A good benefits advisor will build a detailed financial model for your specific situation, using your actual premium data, demographic information, and claims history if available.
When you sit down with that model, here are the questions to ask:
- What are the assumptions behind the expected claims projection?
- Where is the break-even point, and how likely is it that we’d reach it?
- What does the worst-case scenario look like, and how does stop-loss limit our exposure?
- What does a three-year projection look like, including estimated trend improvements?
- What costs are fixed and what costs are variable?
If your advisor can’t answer these questions clearly and in plain language, that tells you something. This decision should be grounded in transparent analysis, not guesswork.
The bottom line
Modeling the ROI of switching plan structures isn’t about finding a guaranteed outcome. It’s about understanding the range of likely outcomes and making a decision with open eyes. For most companies in the 25-200 employee range, the expected savings are real, the downside is bounded by stop-loss, and the long-term trajectory favors active management over passive premium payments.
Run the numbers. Stress-test the assumptions. And make your decision based on data, not inertia.