Most small business owners, when asked what kind of health insurance their company has, will say some version of “we have Aetna” or “we have BlueCross.” The carrier is the answer. The structure (how the plan is actually funded) is almost never part of the conversation.
But structure is the single biggest lever an employer has on what they pay and what they control. There are three types of employer health plans in common use, and each one distributes costs and risks differently. Understanding which one you’re on, and whether a different one would fit your business better, is the foundation of every benefits decision that matters.
Here’s the plain-English version.
Type 1: Fully-insured
A fully-insured plan is the default. It’s what most small and mid-sized businesses end up on because it’s what brokers lead with.
How it works. The employer pays a fixed monthly premium to an insurance carrier. The carrier takes on all the risk: they pay claims, they absorb bad years, they keep the savings from good years. The employer’s financial exposure is capped at the premium.
What the carrier does:
- Prices the plan based on risk pool averages and group factors
- Pays all claims
- Manages the network, administration, and member services
- Keeps any surplus from favorable claims experience
- Sets the renewal rate each year
What the employer does:
- Pays the premium
- Distributes ID cards and benefit information
- Complies with ACA employer requirements (50+ employees)
The pitch: predictability and simplicity. You know exactly what you’ll pay each month.
The catch: on a multi-year basis, fully-insured is the most expensive structure. You’re paying the carrier’s profit margin, reserve requirements, administrative markup, and a subsidy for the rest of the pool. You never see your claims data, so you can’t evaluate whether you’re being priced fairly. Annual renewal increases compound. Sustained mid-single-digit increases over five years produce a substantially higher premium baseline than the starting point.1
Who it fits: very small groups (fewer than 10 employees), companies with unpredictable or high-risk claims profiles, or employers who don’t want to engage with the plan beyond signing a contract.
For most other employers, fully-insured is the structure to compare against, not the structure to default into. Why rates keep going up walks through what’s actually driving the year-over-year increases on a fully-insured renewal.
Type 2: Level-funded
A level-funded plan is a self-funded arrangement packaged into fully-insured-style monthly payments.
How it works. The employer pays a fixed monthly amount that covers three things: expected claims, administrative fees, and stop-loss insurance. At the end of the plan year, if claims came in below the expected amount, the employer may receive a refund of the surplus.
What the carrier does:
- Administers the plan and processes claims (often through a TPA arm of a major carrier)
- Bundles stop-loss into the monthly payment
- Reconciles the claims fund at year-end and issues any surplus refund
- Provides claims data to the employer
What the employer does:
- Pays the level monthly amount
- Reviews claims data throughout the year
- Makes renewal decisions informed by that data
- Keeps any surplus from favorable claims experience
The pitch: fully-insured-style cash flow with self-funded-style upside. You see your data. You keep what you don’t spend.
The catch: most level-funded plans require medical underwriting, so groups with known high-cost conditions may see worse pricing or be declined. And while stop-loss caps your worst-case outcome, a bad claims year will affect your renewal pricing more directly than it would under fully-insured.
Who it fits: employers with 10-200 employees, reasonably healthy claims experience, and an interest in seeing their data. It’s the most common first step out of fully-insured for growing businesses.
For a deeper walkthrough of level-funded (including how surplus refunds work, what medical underwriting looks like, and how to read a quote), see Level-Funded Health Plans Explained.
Type 3: Fully self-funded
A fully self-funded plan is where the employer takes on the claims risk directly, pays claims as they occur, and uses stop-loss insurance to cap exposure.
How it works. The employer sets up a claims fund, hires a third-party administrator (TPA) to process claims against it, and buys stop-loss coverage to cap catastrophic risk. Each month, the employer pays the TPA’s administrative fee, the stop-loss premium, and the claims that came in.
What the TPA does:
- Processes and pays claims from the employer’s fund
- Provides network access (usually leased from a major carrier)
- Delivers claims reporting and data
- Handles member services
What the employer does:
- Funds claims as they’re paid
- Pays administrative and stop-loss premiums
- Designs the plan (benefits, networks, cost-sharing)
- Manages the plan actively, typically with a benefits advisor
The pitch: maximum control and the lowest total cost for healthy groups.
The catch: monthly costs vary based on actual claims, which some finance teams find uncomfortable. Plan administration is more involved. And if you go fully self-funded with weak stop-loss, a single bad month can hit cash flow hard.
Who it fits: employers with 50+ employees (though some 25-employee groups make it work), stable cash flow, healthier-than-average claims experience, and leadership willing to engage with plan design. Most mid-market and large companies use fully self-funded, and it’s increasingly accessible for well-positioned smaller groups.
Self-Funded Health Insurance for Dummies is the plain-English introduction if this is new territory.
Side-by-side comparison
| Factor | Fully-Insured | Level-Funded | Self-Funded |
|---|---|---|---|
| Monthly cost | Fixed premium | Fixed bundle | Variable |
| Claims risk | Carrier | Employer (stop-loss capped) | Employer (stop-loss capped) |
| Good-year savings | Kept by carrier | Refunded to employer | Kept by employer |
| Claims data access | No | Yes | Yes |
| Plan design flexibility | Low | Medium | High |
| Admin complexity | Low | Low–Medium | Medium |
| Typical size | Any | 10–200 | 50+ |
| Regulatory framework | State insurance | ERISA | ERISA |
| Medical underwriting | No | Yes | Typically yes |
Why most small businesses only hear about fully-insured
The reason fully-insured is the only plan type most small employers know about is a structural feature of the brokerage industry. Most benefits brokers are paid on commission, calculated as a percentage of the fully-insured premium. When premiums go up, broker compensation goes up. When an employer moves to a level-funded or self-funded arrangement, commissions on the self-funded portion are typically lower and may be structured as a flat fee.
This isn’t a conspiracy. It’s an incentive. Most brokers are honest professionals, but the path of least resistance in their business is to renew the fully-insured plan and point to “the market” when premiums rise. Presenting alternatives takes more work, generates less revenue for the broker, and can make the conversation uncomfortable.
The tell: ask your broker directly what the level-funded and self-funded quotes look like for your group. If the answer is a shrug or a redirect to “that’s not really for businesses your size,” get a second opinion. For context on what to look for in a benefits advisor, How to Choose the Right Health Insurance Broker is a useful starting point.
The question every employer should ask at renewal isn’t “how much is my fully-insured plan going up?” It’s “what would a level-funded or self-funded quote look like for my group?” If no one will answer that, you’re being underserved.
How to choose the right type
The decision rubric comes down to four factors:
1. Group size. Under 10 employees, fully-insured is usually the only practical option. 10–50 employees, level-funded becomes viable. 50+, fully self-funded is worth modeling seriously.
2. Claims profile. Groups with healthier demographics benefit most from alternative structures because they stop subsidizing the broader risk pool. Groups with known high-cost conditions may get worse quotes on level-funded and may actually benefit from the risk-pooling of fully-insured.
3. Cash flow. If your CFO needs fixed monthly payments for planning, level-funded is the natural fit. If variability is tolerable, fully self-funded typically costs less.
4. Appetite for engagement. Level-funded and self-funded plans reward employers who pay attention to claims data and actively manage the plan. Fully-insured rewards employers who don’t.
Most growing companies end up on a progression: fully-insured at launch, level-funded as they hit 25+ employees and get tired of double-digit renewal increases, and fully self-funded at 100+ as they get comfortable with the model and want to optimize further.
The short version
There are three types of employer health plans, and each one is the right answer for someone. The problem isn’t that any structure is universally better. It’s that most small businesses are only ever shown one of the three, and they spend years wondering why their premiums keep climbing without context on what alternatives would look like.
The fix is straightforward. Ask for quotes on all three structures at your next renewal. A broker who refuses to do that is telling you something important about how they make their money. A broker who does it and walks you through the numbers honestly is doing the job they’re supposed to do.
Not sure which structure is right for your business? We can run quotes across all three types for your group, compare them side by side, and walk through the trade-offs. No commission on the back end — just a straight analysis of what fits. Talk to us.
Footnotes
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Compounding example: a 5% annual renewal increase over 5 years produces approximately a 28% higher premium baseline than the starting point. Actual outcomes vary by carrier, group experience, and market conditions. Historical employer premium trend data is published in the Kaiser Family Foundation Employer Health Benefits Survey. ↩