If you run a business with a group health plan, you’ve seen it: renewal season arrives, and your broker tells you premiums are going up. Again. Maybe 10%. Maybe 20%. The explanation usually boils down to “claims were higher than expected” or “the market went up.”
But the real story is more structural than that. Understanding why premiums keep climbing is the first step toward doing something about it.
The fully funded model, explained simply
Most small and mid-sized businesses in America are on fully funded health insurance plans. Here’s how they work: your company pays a fixed monthly premium to an insurance carrier. The carrier assumes all the risk. If claims are low, the carrier keeps the difference. If claims are high, the carrier absorbs the loss.
Sounds fair. But in practice, the pricing is designed so the carrier rarely loses. Premiums are set based on broad risk pools, with built-in margins for profit, administrative costs, and reserve requirements.
Why rates keep climbing
Three structural forces drive premium increases year after year:
Medical cost inflation. Healthcare costs rise faster than general inflation. New treatments, new drugs, and consolidation among hospital systems all push prices up. This is real, and it affects everyone.
Risk pool averaging. In a fully funded plan, your premium is based partly on your own claims history and partly on the broader risk pool. Even if your team is healthy, you’re subsidizing higher-risk groups in the pool.
No incentive to manage costs. Under the fully funded model, neither the broker nor the carrier has a strong incentive to actively manage your claims. The carrier profits from the spread between premiums and claims. The broker earns a percentage of the premium. Both benefit when premiums are higher.
Key term — Fully funded plan: A health insurance arrangement where the employer pays a fixed premium to a carrier, and the carrier assumes all claims risk. The carrier sets the price, manages the claims, and keeps any surplus. This is the most common structure for small and mid-sized businesses.
The information gap
Here’s the part that frustrates most business leaders once they learn about it: with a fully funded plan, you typically don’t see your claims data. The carrier owns it. You pay premiums, they pay claims, and the only number you see is next year’s rate increase.
That means you can’t evaluate whether your plan is performing well. You can’t identify cost drivers. You can’t make data-informed decisions about your benefits strategy. You’re making one of your largest budget decisions with almost no visibility.
So what can you do about it?
The first step is understanding that fully funded plans aren’t the only option. There are plan structures designed to give employers more transparency, more control, and the potential to benefit from good claims performance.
We cover those alternatives in the next article in this track.
The system isn’t broken for everyone. Carriers and brokers are doing fine. It’s broken for the businesses paying the premiums and the employees navigating the care. That’s who we built Kingsfoil Health to serve.