Choosing the right health plan funding model is one of the most important financial decisions a midsize employer makes. Yet many stick with a fully insured health plan simply because it feels familiar and predictable.
The truth?
That predictability comes with a hidden price: higher fixed costs, no visibility into where dollars are going, and almost no control over how dollars are spent.
Understanding the differences between fully insured, level-funded, self-funded, and the employee benefits captive model helps midsize employers choose the funding approach that best supports their business goals.
Key Takeaways
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- Most small and midsize employers default to a fully insured health plan, but more strategic options exist.
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- An employer’s health plan funding model directly impacts how much control, transparency, and risk they carry.
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- The right funding model helps employers stop reacting at renewal and start building a multiyear, data-driven benefits strategy.
What is a health plan funding model?
A health plan funding model describes how employers pay for employee healthcare.
It determines:
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- How much an employer pays (fixed premiums vs. actual claims)
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- How much data they receive
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- How much control an employer has over plan design
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- Whether an employer can influence long-term costs
Health plan funding models compared
Each health plan funding model delivers different levels of cost efficiency, volatility, transparency, and control. Here’s how they stack up:
Fully insured: Simplicity at the cost of strategy
How it works
The employer pays a premium, a fixed fee the insurer collects, whether employees use healthcare or not.
Cost
Because the insurer takes on the risk of paying large claims, they build in extra cushion to protect themselves and cover administrative costs. That’s why fully insured employers have high fixed costs. Their paying for the insurer’s safety net and administrative inefficiency, not just the actual cost of healthcare.
Volatility protection
None. The cost of large claims are passed on to the employer as a high premium increase the next year.
Data transparency
Fully insured employers have limited claims information and no pharmacy rebate transparency to know how those dollars are spent. They can’t see which conditions or claims are driving costs.
Cost containment levers
Limited. Traditional fully insured health plans are one-size-fits-all because that’s easier for insurers to manage. Fully insured employers don’t have the leverage to tailor benefits to their population or data transparency to help make strategic changes that could help them save money on healthcare costs.
Best for
Employers that prioritize simplicity and are comfortable paying for convenience even if it means giving up transparency, savings, and building a long-term healthcare spend strategy.
Level-funded: The illusion of control
How it works
Employers pay a fixed amount that bundles administrative fees, stop-loss insurance, and estimated claims. That predictability comes at a price: high fixed costs, limited savings upside, and minimal transparency.
Cost
Marketed like self-funding, but fixed costs are often just as high as fully insured. When claims are lower than expected, any savings are capped and usually shared with the insurer.
Volatility protection
None. The cost of large claims are passed on to the employer as a high premium increase the next year.
Data transparency
More claims data transparency than fully insured. Often pharmacy rebates are not transparent or 100% passed back to the employer.
Cost containment levers
Limited. Similar to fully-insured plans, limited access to affordable cost-containment options.
Best for
No one. Level-funding is the worst of both worlds. Some employers use level-funding as a stepping stone to start getting access to claims data. However, those employers are paying just as much as fully insured, with limited upside and all of the same downside risk. Savings are never realized and instead applied to next year’s premium.
Also, watch out for termination liability. Many level-funded plans end early, leaving employers holding the bag for claims.
Traditional self-funding: Control with risk
How it works
The employer pays for the actual cost of healthcare. This can save money (the employer only pays for what employees actually use). But it’s risky. One employee’s cancer diagnosis or premature baby could devastate an annual healthcare budget. There’s upside too, in a year when healthcare claims are lower than expected, the employer keeps the savings instead of the insurance company.
Cost
Self-funding has lower fixed costs than traditional fully insured health plans.
Volatility
Employers pay for smaller healthcare claims. Larger claims are covered by stop-loss insurance. However, traditional stop-loss insurance can be very volatile with high premium increases.
When an employee has a large recurring claim, the carrier can “laser” the medical claims for that individual or condition the next year. This means the employee is excluded from coverage or given a much higher deductible. A laser can significantly increase an employer’s healthcare costs.
Data and control
Full visibility into medical claims and pharmacy rebate transparency.
Best for
Employers that have the cash flow and mechanisms to manage risk intentionally and have the internal or advisory support to do it well.
Self-funding with a ParetoHealth captive
How it works
ParetoHealth pioneered a new model to give midsize employers all the advantages of self-funding while adding the stability of a powerful community that lowers volatility and protects against large claims.
Cost
Similar to traditional self-insurance, self-funding with a ParetoHealth captive has lower fixed cost than traditional fully insured plans.
When claims are lower than expected, employers share in the profits that would typically go to insurance companies. When claims are higher than expected, the captive absorbs the financial shock, providing stability and protection for all ParetoHealth captive Members.
Volatility protection
Unmatched volatility protection. Similar to traditional self-funding, employers pay for smaller healthcare claims.
Unlike traditional self-funding, self-funding with a ParetoHealth captive gives Members access to the ParetoHealth Risk Shield that includes both captive and stop-loss protections that are unmatched in the market. These protections include no new lasers and rate caps on stop-loss insurance renewal increases, making costs more predictable year over year and protecting employers from large-claim volatility.
Data transparency
Full claims and pharmacy rebate transparency. Employers see what they’re spending and why.
Cost containment levers
The ParetoHealth Savings Engine has solutions to address the root causes of high-cost claims. Backed by data, analytics, and in-house clinical experts, it delivers curated programs and multiyear strategies that lower costs over time.
Best for
Midsize employers seeking lower fixed costs, volatility protection, healthcare cost transparency, and strategic levers to contain costs.
A strategic approach to health plan funding
The right funding model should allow midsize employers to build a multiyear benefits strategy that supports their people and their business.
A strategic approach to health plan funding can turn healthcare from a financial unknown into a predictable, sustainable investment.
Forward-thinking employers are joining the ParetoHealth community to gain transparency, reduce volatility, and take control of their healthcare spend.
Written by: The ParetoHealth team
