How Employers Pay for Healthcare, Explained

Fully-insured: renting certainty

You pay a fixed premium. The carrier pays claims and keeps what's left. KFF's 2025 survey put the average family premium at $26,993, up 6% in one year. Budget certainty is real, and so is the price of it: in a good claims year, the surplus builds the carrier's balance sheet, not yours. You'll also never see claim-level data. The renewal arrives as a verdict, not a conversation.

Level-funded: the gateway product

A self-funded plan in fully-insured clothing. One level monthly payment bundles expected claims, admin, and stop-loss premium. Run under the funded amount and some surplus comes back at year end. How much is the whole game: some contracts return 100%, plenty split it 50/50 or worse. Same with data: some products share real reporting, others share a postcard. Level-funded is a legitimate first step. Just know it's the on-ramp, not the destination.

Self-funded: owning the economics

Your company pays its own claims through a TPA or an ASO arrangement, buys stop-loss for catastrophic protection, and keeps every dollar claims come in under budget. ERISA governs the plan, which preempts most state benefit mandates, one reason multi-state employers self-fund. You own the claims data, the plan design, and the vendor relationships. You also own the volatility between your stop-loss limits. That's the trade. Reserve for IBNR and the trade works.

Group captives: self-funding with shock absorbers

Employers jointly own an insurance company that takes the middle layer of their stop-loss risk. Each member still self-funds day-to-day claims. The captive layer smooths the mid-size shocks, and underwriting profit flows back to members. Good captives are picky about who joins, which is exactly why they work: you're pooling with companies that manage their plans, not with a carrier's entire book.

ICHRA: stop sponsoring, start funding

The fifth model exits group insurance entirely. With an Individual Coverage HRA, you hand employees tax-free allowances and they buy their own individual-market plans. Your open-ended claims liability becomes a defined contribution, set by employee class, adjustable each year. No renewal negotiation, no stop-loss, no claims volatility, because there are no group claims. The trade: you give up plan design control, and the math only works where the local individual market has real carriers and real networks. It satisfies the employer mandate when the allowance makes a benchmark silver plan affordable.

Down-market footnote: under 50 employees with no group plan at all, the QSEHRA does the same job with simpler rules and annual IRS caps. ICHRA has mostly overtaken it, but for a 10-person shop it still earns a look.

Participating fully-insured contracts

A fully-insured policy with a profit-sharing clause. The carrier tracks your premium against your claims plus a negotiated retention. Run well, and part of the surplus comes back as an experience refund or dividend. Run badly, and the carrier eats the loss, though deficits often carry forward against future refunds. It's a taste of self-funding economics with carrier training wheels. The retention schedule is the whole negotiation. Get it itemized.

Graded (step) funding

A cousin of level funding. Instead of one flat monthly amount all year, your claims funding starts lower and grades up as the plan's claims mature, mirroring how slowly first-year claims actually arrive. Better cash flow in the early months, same self-funded chassis underneath. The questions don't change: who keeps the surplus, what data do you see, and what does year two look like once claims catch up?

Association health plans (AHPs)

Employers buying or self-funding coverage together through a trade or industry association. The 2018 rule that loosened the standards was struck down and then formally rescinded in 2024, so the older test applies: a real association with a purpose beyond insurance, genuine commonality, member control. A strong AHP gives small employers real scale. A weak one is a MEWA with a nicer logo, and that history includes collapsed pools and unpaid claims. Diligence accordingly.

Stop-loss cooperatives and consortiums

A lighter-weight alternative to a captive: self-funded employers pool their stop-loss purchasing, not their risk. The group buys as one block, which means better rates, standardized contract terms, and sometimes shared dividends when the block runs well. No captive ownership, no collateral, easier exit. You give up the deeper risk-sharing economics a true captive earns over time. For a first step out of standalone stop-loss purchasing, it's a reasonable rung.

Specific and aggregate, in one breath

Specific stop-loss caps your exposure on any one person: pick a deductible, say $50,000, and the carrier reimburses claims above it. Aggregate stop-loss caps the whole plan: expected claims times a corridor, usually 125%, and the carrier covers the excess. Specific protects you from one bad diagnosis. Aggregate protects you from a bad year.

Contract types: where the gotchas live

Stop-loss contracts pair two windows: when claims can be incurred and when they can be paid. A 12/12 covers only claims incurred and paid inside the year. A 12/15 adds three months of run-out. A 15/12 covers run-in from the prior plan. Claims routinely pay out weeks after service, so a bare 12/12 leaves your December quietly uninsured. Cheap quotes are often cheap because of this line.

Lasering and how to blunt it

A laserputs a higher deductible on one named individual, shifting their risk back to you. Carriers do it at renewal, after they've seen your claims. The counters exist: no-new-laser guarantees and renewal rate caps, both negotiated at placement, not at renewal. If your advisor didn't raise them, that tells you something.

What is the difference between fully-insured and self-funded health plans?

In a fully-insured plan, you pay the carrier a fixed premium and the carrier pays claims, keeps the surplus in good years, and owns the data. In a self-funded plan, your company pays its own claims through an administrator, buys stop-loss insurance for catastrophic protection, keeps every unspent dollar, and owns its claims data.

Is level-funded the same as self-funded?

Legally, a level-funded plan is a self-funded plan: it sits under ERISA and the employer bears claims risk inside the stop-loss limits. Practically, it is a packaged product. You pay one level monthly amount, and surplus refunds, data access, and renewal mechanics depend entirely on the contract. Some products return all surplus; many split it. Read the contract, not the brochure.

What is stop-loss insurance?

Insurance that protects the employer sponsoring a self-funded plan. Specific stop-loss reimburses claims on any one person above a chosen deductible, like $50,000. Aggregate stop-loss reimburses total plan claims above a corridor, typically 125% of expected. Employees are not the insured party. The company is.

How many employees do you need to self-fund?

There is no legal minimum. Practically, traditional self-funding starts working in the 100 to 150 employee range, level-funded products serve groups from roughly 10 to 100, and group medical captives extend real self-funding economics down to around 50 lives by pooling volatility across member companies.

What is a group medical captive?

A group of employers that jointly own an insurance company taking a middle layer of their stop-loss risk. Each member self-funds its day-to-day claims. The captive layer absorbs mid-size shocks, and underwriting profit returns to the member companies rather than a carrier. It trades some independence for stability and shared purchasing power.

What is lasering in stop-loss?

A stop-loss carrier assigning a higher individual deductible to one named person, usually someone with a known high-cost condition. The rest of the group keeps the standard deductible. A laser shifts that person’s risk back to the employer. No-new-laser guarantees and renewal rate caps are negotiable protections.

Is an ICHRA a funding model?

Yes, the most radical one. An Individual Coverage HRA replaces the group plan entirely: the employer funds tax-free allowances and employees buy individual-market coverage. Claims risk moves to individual carriers, employer cost becomes a fixed defined contribution, and it satisfies the employer mandate when allowances make a benchmark silver plan affordable. For employers under 50 lives with no group plan, the QSEHRA is the simpler small-company version.

What is an association health plan?

A plan sponsored by a bona fide group of employers, letting members buy or self-fund coverage as one larger unit. After the 2018 expansion rule was vacated in court and rescinded in 2024, the older standard applies: the association needs a genuine purpose beyond insurance, commonality among members, and member control. Quality varies widely, so vet the sponsor like you would any carrier.