2 days ago
Group Health Plan Funding: Alternative Considerations For Employers
Teah Corley is the founding principal and CEO of EmployerAdvocates.
The landscape of employer-sponsored healthcare is rapidly evolving, with rising costs (registration required) driving the need for innovative funding alternatives. As a group health plan consultant for more than 20 years, I have seen many small and mid-sized employers—particularly those with fewer than 200 employees—think their only viable option is a fully insured plan through a national carrier. However, this approach often defers critical cost controls and financial advantages to the insurance companies.
The Hidden Costs Of Fully Insured Plans
In a fully insured model, employers relinquish control over cost containment and forfeit pharmaceutical rebate revenue. These rebates—paid by manufacturers to pharmacy benefit managers (PBMs) to secure approved drug list (formulary) placement—are retained by insurers rather than benefiting the employer's health plan.
Additionally, fully insured employers often lack access to transparent claims data, making it difficult to analyze cost drivers or implement strategic savings initiatives. Ultimately, cost-containment options are limited, and premium increases leave employers with little recourse beyond plan design changes or cost-shifting to employees.
Exploring Alternative Funding Models
For many employers, the prospect of self-funding can be daunting due to concerns over cash flow and risk exposure. However, alternative strategies—such as level funding and group captive models—could offer a reasonable middle ground, enabling cost control and financial flexibility without assuming the full self-insured risk.
Level funding mirrors the structure of a fully insured plan, but with a crucial distinction: When claims are lower than expected, employers can recoup surplus funds rather than losing them to an insurer. In a fully insured model, this excess funding is retained by the insurance carrier. The level-funded model provides greater financial predictability while offering the potential for cost savings.
For employers seeking even greater control, group captive funding allows employers to share risk through risk pools spread among multiple employers. Under this model, each participant self-funds claims up to a predetermined stop-loss threshold, beyond which costs are covered by a shared risk layer and, ultimately, a reinsurance policy.
This structure allows smaller businesses to leverage the benefits traditionally reserved for large self-funded employers, such as lower pharmacy spend—in my experience, employers often see a 13% to 15% reduction in drug costs when transitioning from a fully insured to a self-funded model with full rebate pass-through. This number is also consistent with what we hear from our peers across the country. Other benefits may include:
• Full transparency into claims data for strategic cost management
• Retention of pharmaceutical rebates to offset expenses
• Reduced administrative costs and ability to plug-and-play best-in-class vendors
• Greater control as self-funded employers control their own custom plan designs and implement custom cost-containment solutions
Employers also have the option of advanced funding models whereby a plan's full three-year projected liability, plus a buffer (often 15% to 25%), is underwritten and funded in advance. This three-year advanced funding is provided via a private capital raise with a capital partner that retains the risk with the employer leveraging the interest earned on a large sum over three years. This model creates a static, reliable budget and fixed monthly contribution over 36 months.
The corpus is held in a special purpose entity trust and the health plan's monthly fixed costs and claims are paid from the trust. The trust itself carries the debt at a 102% collateralization level. This advanced funding strategy can be wrapped around and co-exist with a fully insured, level-funded or self-funded model to create stability and predictability over an extended period beyond the traditional one-year policy cycle.
Making The Right Choice For Company Needs
I've noticed employers that employ 50 to 200 people are the most vulnerable to the misconception that the only option for an employer this size is to fully insure its health plan risk through an insurance carrier.
Historically, selecting a fully insured plan was the only option for employers in this size range. Captive models that allow employers to share a layer of risk at the stop-loss level have gained momentum in recent years as a mechanism for allowing smaller employers to self-fund a portion of health plan risk to gain greater control over cost containment.
Many employers operate under the misconception that self-funding exposes the plan to open-ended risk. To the contrary, self-funded plans that incorporate a layer of stop-loss insurance or a shared captive layer of risk have a known maximum liability, very similar to fully insured plans. The key difference is that self-funded plans have access to greater transparency, control and cost-containment flexibility.
When it comes to the risks that employers need to know about to make fully informed decisions, it's important for employers to fully understand the policy terms and limitations. For example, a self-funded strategy with stop-loss or a captive funding strategy will include a stop-loss insurance policy to protect the employer from upside risk. Each policy type has a maximum liability, but may also contain limitations or exclusions.
It's also important for employers to fully understand the "attachment point" or the maximum liability that the employer will be responsible for versus what liability the stop-loss or captive will assume. Reading and understanding the policy terms and exclusions to fully understand the maximum liability can help employers better mitigate risk exposure.
The Future Of Employer-Sponsored Healthcare
As healthcare costs continue to rise, employers can explore innovative funding strategies to maintain affordability and control. Level funding and captive models may present compelling alternatives that help balance risk, transparency and financial efficiency. For forward-thinking businesses, these approaches could offer a pathway to sustainable, cost-effective healthcare solutions—without sacrificing the quality of employee benefits or financial stability.
Employers may want to request a funding analysis from their broker or consultant to compare and contrast the financial implications, pros and cons of each funding model to make fully informed decisions.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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