Fully Insured vs Level Funded vs Self-Funded: What Employers Need to Know

If you have been renewing the same fully insured health plan for years, you may be leaving money on the table — and missing out on information that could fundamentally change how you manage your benefits costs.

Most small and mid-size employers default to fully insured health plans simply because that is what their broker has always recommended. But there are alternatives, and for many employers, those alternatives produce better financial outcomes.

Here is what you need to understand about the three primary funding structures for employer-sponsored health plans.

Fully Insured: The Traditional Model

How it works: You pay a fixed monthly premium to a health insurance carrier. The carrier covers all claims. If your employees have a good year with low claims, the carrier keeps the surplus. If they have a bad year with high claims, the carrier absorbs the excess.

What you know: Your monthly cost is predictable. You know exactly what you are paying.

What you do not know: How much your employees actually cost in claims. Whether you are subsidizing other employers in the carrier's risk pool. What is driving your annual renewal increases.

Who it works for: Employers with very small groups (under 25–50 employees), organizations with high-risk workforces where claim predictability is essential, or employers that simply need simplicity above all else.

The tradeoff: You are paying a risk premium to the carrier every month — essentially insurance on your insurance. For groups with healthy workforces and stable claim patterns, this risk premium represents money that stays with the carrier rather than coming back to you.

Level Funded: The Middle Ground

How it works: Level funding is a hybrid between fully insured and self-funded. You pay a fixed monthly amount — your "level payment" — that covers three components: expected claims, stop-loss insurance, and administration. At the end of the plan year, if your actual claims were lower than projected, you receive a refund of the surplus claims dollars.

What you know: Your maximum monthly cost (the level payment). Your maximum annual exposure (capped by stop-loss insurance). Your actual claims experience throughout the year.

What you do not know: How much, if any, surplus you will receive back — that depends on actual claims.

Who it works for: Employers with 25–200 employees who want more cost control and claims visibility without taking on full self-insurance risk. Companies with relatively healthy workforces that believe their claims experience is better than the market. Employers who have been frustrated by renewal increases and want transparency.

The upside: If your group has a good year, you get money back. Carriers typically return 50–80% of surplus claims dollars. For a 100-person group, a good year could mean a $100,000–$200,000 refund.

The key consideration: Level funded plans come with stop-loss insurance, which protects you from catastrophic individual or aggregate claims. The stop-loss deductible and attachment point are important terms to understand — they determine how much risk you are actually retaining.

Self-Funded: Maximum Control and Risk

How it works: You pay claims as they occur, rather than prepaying them to a carrier. You hire a third-party administrator (TPA) to process claims, and you purchase stop-loss insurance to limit your exposure on high-cost individual claims and in catastrophic aggregate years. You own the claims fund.

What you know: Everything. You have full access to detailed claims data — which services are being used, which conditions are driving cost, which drugs are the most expensive. This data gives you the ability to implement targeted cost management strategies.

What you do not know: Your exact monthly costs (they vary based on actual claims incurred).

Who it works for: Employers with 100+ employees who have the financial capacity to absorb some claims variability, who want full transparency, and who are committed to actively managing their plan. Companies that want to implement pharmacy carve-out strategies, reference-based pricing, or other advanced cost management tools.

The upside: No risk premium paid to a carrier. Direct access to claims data. Ability to implement point solutions to address specific cost drivers. In many states, self-funded plans are exempt from state insurance mandates, which can provide additional flexibility.

The downside: You bear more financial risk. Cash flow can vary month to month depending on claims activity. Requires more administrative involvement and benefits expertise.

Comparing the Three: A Simple Framework

Factor	Fully Insured	Level Funded	Self-Funded
Monthly cost variability	None (fixed premium)	None (fixed level payment)	Yes (varies with claims)
Claims transparency	Little to none	Full	Full
Surplus potential	None	Yes (end of year)	Yes (ongoing)
Stop-loss protection	Built in	Built in	Purchased separately
Minimum size	Any	25+ employees	75–100+ employees
Administrative complexity	Low	Low to moderate	Moderate to high
Best for	Small groups, simplicity	Mid-size, cost-conscious	Larger, data-driven employers

How to Evaluate Which Structure Is Right for You

The right answer depends on several variables:

Group size. Smaller groups (under 25 lives) typically do not have enough data to accurately predict claims, making self-funding riskier. As you grow, the risk becomes more manageable.

Claims history. If your group has had consistently low claims relative to your premiums, you are likely overpaying in a fully insured structure. If you have had high or volatile claims, the predictability of fully insured may be worth the premium.

Financial capacity. Self-funded plans require a claims fund reserve and the ability to absorb some monthly variability. This is not the right structure for organizations with tight cash flow.

Risk tolerance. There is no objectively right answer — some employers value predictability above all else. Others are willing to accept some variability in exchange for lower average cost and more control.

Workforce demographics. A younger, generally healthy workforce is a strong candidate for level funding or self-funding. An older workforce or one with significant chronic conditions requires more careful analysis.

The Mistake Most Employers Make

The most common mistake is defaulting to fully insured year after year without ever evaluating the alternatives. In many cases, employers are paying 15–25% more than they need to because they are carrying a risk premium to the carrier on a population that would cost less to self-insure.

The second most common mistake is moving to a level-funded or self-funded plan without understanding the stop-loss terms, the TPA quality, or the pharmacy benefit structure. The funding vehicle matters — but so does everything underneath it.

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Not sure which funding structure is right for your organization? Benefits Collective helps employers evaluate funding options with real data and modeling. Schedule a free consultation or explore our Funding Strategies guide.