The Untapped Potential of Health Plan Funding for Mid-Market Employers

In today’s rapidly evolving healthcare landscape, mid-market employers often find themselves at a crossroads when it comes to evaluating their health plan funding structures. Traditionally, these employers perform an annual review of their health benefits, focusing primarily on the renewal rates and associated costs. However, what often gets sidelined is a critical evaluation of whether their funding structure—fully insured, self-funded, or level-funded—still aligns with their organizational needs and employee demographics. This oversight presents a significant opportunity for benefits brokers willing to guide their clients through a thorough analysis of funding options.

As highlighted by Jennifer Schaefer, founder and CEO of JS Benefits Group, the disconnect in understanding the funding mechanisms can lead to suboptimal decisions that ultimately affect both employer finances and employee health outcomes. Research from the Kaiser Family Foundation (KFF) reveals substantive disparities in health plan funding, with the majority of large employers opting for self-funded plans while mid-sized firms remain largely in the dark about their options.

The State of Health Plan Funding in Mid-Market Employers

Mid-market employers, defined as those with 50 to 999 employees, typically have a more conservative approach to health insurance. According to KFF's 2025 Employer Health Benefits Survey, only 27% of covered workers in firms with 10 to 199 employees are enrolled in self-funded health plans, contrasting sharply with the 80% enrollment rate in larger firms. This gap can be attributed to various factors, including lack of expertise, limited access to claims data, and a general preference for the simplicity of fully insured plans.

Under fully insured arrangements, employers pay a fixed premium to an insurance carrier, which assumes the financial risk associated with claims. The appeal lies in cost certainty and straightforward budgeting; however, this model often leaves employers without critical insight into their claims data, which is crucial for understanding the true drivers of healthcare costs. Instead of waiting for clients to initiate discussions about funding structures, brokers should proactively review claims data before renewal, identifying any significant mismatches in funding that could lead to unforeseen rate increases.

Exploring Alternative Funding Models

With the healthcare landscape continually shifting, alternative funding models are gaining traction among mid-market employers. One such model is the level-funded plan, which merges elements of fully insured and self-funded arrangements. Employers pay fixed monthly amounts while purchasing stop-loss insurance to limit their exposure to high-cost claims. If claims are lower than expected, any unused funds can be returned at year-end, making this option attractive for those looking to mitigate risk while retaining some flexibility.

KFF's survey indicates that 37% of covered workers at firms with 10 to 199 employees are now participating in level-funded plans. This rising popularity is reshaping the small group risk pool; as healthier groups transition to level-funded structures, the remaining fully insured pool is left with a higher concentration of sicker employees, leading to escalating costs and premium increases.

Group Captive Arrangements: A Shared Risk Approach

Group captive arrangements are another innovative option that is gaining interest from mid-sized employers. In these structures, companies pool their resources to share risk, retaining responsibility for routine claims while obtaining stop-loss reinsurance for catastrophic costs. This model allows employers to exert more control over their healthcare expenses and outcomes, provided they meet specific underwriting criteria.

While group captives can be advantageous, they often require a commitment from company leadership—especially the CFO—to actively manage healthcare costs and promote employee wellness. Captive managers typically seek three to five years of stable claims history to distinguish genuine risk profiles from random fluctuations. As such, brokers must assess their clients' claims histories before proposing this option, ensuring a realistic fit.

The Importance of Proactive Funding Conversations

Evaluating health plan funding is not about steering every employer away from fully insured coverage; rather, it's about making informed decisions based on comprehensive analysis. With health insurers projecting a median 14% premium increase for the small group market in 2027—a significant jump from previous years—it's imperative for mid-market employers to revisit their funding structures before the renewal process begins.

In fact, data from KFF illustrates a concerning trend: fully insured small group enrollment has plummeted by 41% from 2013 to 2024, dropping from 17 million to 10 million covered workers. As healthier employee groups migrate to level-funded arrangements, the remaining fully insured pool becomes increasingly burdened with sicker individuals, further exacerbating cost pressures.

Building a Strategy for Funding Review

To help mid-market employers navigate these challenges, brokers can adopt a proactive strategy that includes the following steps:

• Request claims data access: At the next renewal discussion, brokers should request aggregate claims summaries even for fully insured clients. This data can provide invaluable insights into healthcare utilization and costs.
• Screen clients for captive eligibility: Before suggesting a captive or level-funded structure, brokers should evaluate the client's claims history against a three-to-five-year benchmark to ensure that a suitable option is being presented.
• Educate clients on market dynamics: Inform clients that the fully insured pool is shrinking and skewing sicker, making it essential to understand the implications of remaining in a fully insured plan.

Key Takeaways

• Mid-market employers often overlook the evaluation of their health plan funding structures, leading to missed opportunities for cost optimization.
• Alternative models like level-funded and group captive arrangements offer flexibility and potential cost savings.
• Proactive engagement with clients about their claims data and market trends can position brokers as valuable partners in decision-making.
• Understanding the changing dynamics of the insurance landscape is crucial to avoiding higher premiums in the future.
• Employers should make informed funding decisions based on comprehensive analysis rather than defaulting to traditional models.

Frequently Asked Questions

What are the primary differences between fully insured and self-funded health plans?

Fully insured plans involve paying a fixed premium to an insurance carrier, which assumes the risk of claims. This model provides cost certainty but limits access to claims data. In contrast, self-funded plans allow employers to pay for claims directly, offering greater control and access to data, but they also carry more financial risk, especially in high-cost claim years.

How can a mid-market employer transition to a level-funded plan?

Transitioning to a level-funded plan involves evaluating the employer's claims history and overall demographics to determine suitability. Employers should work closely with their benefits broker to assess financial implications, secure stop-loss insurance, and communicate changes to employees to ensure a smooth transition.

What role do brokers play in helping employers understand funding structures?

Brokers serve as critical advisors in helping employers navigate complex funding structures. They can analyze claims data, educate employers on market trends, and recommend alternatives that align with the employer's financial goals and employee health needs. A proactive broker can significantly influence the employer's decision-making process regarding health plan funding.