Employer health coverage costs are expected to surge more than 9% in 2026, according to recent reports by two large insurance providers, which would be the largest business health insurance cost increases in at least 15 years.
While large employers can often absorb these increases, smaller firms would be facing a huge challenge.
The rise in healthcare costs has “disproportionately impacted smaller firms,” which pay twice as much for health insurance as their larger counterparts, leading to reduced profits and higher prices, according to the National Federation of Independent Businesses.
“Small business owners are reaching a breaking point with the small group health insurance market,” the NFIB’s Tyler Dever wrote last month. “The cost of health insurance has been the top small business concern for nearly 40 years; however, it has become a growing percentage of total operating costs for businesses operating on tight margins.”
Health insurance remains a top requested benefit from employees, and small businesses that don’t provide this benefit can easily find themselves missing out on great talent.
But with costs increasing so much, how can business owners afford this benefit? One option that is growing in popularity is level funded plans, which are sometimes also called level benefit plans.
What is a level funded health plan?
These plans are a form of self insurance — a sort of “hybrid” between a fully insured plan and a self-insured one. Generally, employers that carry this type of insurance pay for the out-of-pocket health costs that their employees incur up to a certain level before stop-loss insurance kicks in to cover more significant claims.
According to Jennifer Schaeffer, CEO of JS Benefits Group, an employee benefits consulting firm based in Newtown, a level benefit plan is much like a fully insured small-group plan, but the carrier underwrites a company’s group’s health insurance to set rates and includes stop-loss-so you pay a fixed monthly amount for the year.
If your group’s medical claims are lower than expected, there can be a surplus refund at the end of the plan year. But she advises clients interested in these plans that the opposite could happen too.
“Those rates are locked for the year and you know what you’re going to be paying,” she says. “They walk and talk like a traditional small group plan offered by carriers like Independence Blue Cross or Aetna.”
What kinds of companies use level funded plans?
These plans are particularly attractive to small businesses where their employees tend to be younger or in good health and don’t make significant use of their healthcare plans. An employee’s health history is a private affair, but employers investigating level funded plans can have their insurance companies get the data to better understand the risk of providing coverage.
“Carriers assess member risk using their proprietary and company data to price or even decline to quote so that employers shouldn’t (and usually can’t) see individual medical info,” said Robert DeNinno, a principal at Philadelphia-based healthcare benefits brokerage firm Precision Benefits Group. “The carriers determine the risk.”
Large companies that completely self-insure are often subject to fluctuations in the costs they need to fund each year. But for a smaller company, these fluctuations could potentially be catastrophic, which is why a hybrid solution like a level funded plan makes sense.
Schaeffer says that a good level funded plan “avoids claim shocks,” with the employer paying a predictable “maximum” monthly bill — which includes contributions to premiums and to a claims fund — and settling up at year-end.
Many level-funded plans share a portion of unused claims dollars and provide monthly claims runs, and some require renewing to receive the surplus. Employers usually get access to monthly claims data so they can see what services or providers are driving costs, which also creates potential opportunities for wellness programs, targeted cost-management, and pharmacy benefit management.
For some, the savings can be substantial. Even if costs spike, both DeNinno and Schaeffer say, companies usually have the option to revert to a traditional group plan arrangement.
“The rates are generally locked in for a year so a small employer doesn’t have the issue of a large self-insured claim hitting their bank account,” said Schaeffer. “I’ve seen clients save tens of thousands on their premiums using a level funded plan but then had to revert as their risks rose.”
What are the downsides?
Besides the potential downside of higher health claims than anticipated, level funded plans can come with other challenges.
For example, stop-loss premiums can increase sharply as risk increases. Most plans are somewhat constrained to a set of pre-built plan designs so employers have limited options to customize. Businesses may also be subject to more regulatory oversight to ensure that they’re in compliance with the Employee Retirement Income Security Act, Affordable Care Act, and additional testing confirming that higher-compensated employees aren’t receiving discriminatory benefits.
But given the rising cost of health insurance, the number of small businesses considering level funded plans has grown substantially. The Kaiser Foundation has found that the number of small employers offering level funded health plans has increased from 13% in 2020 to about 40% by 2023.
It’s a complicated process to choose the right plan, and DeNinno recommends using a “proactive and savvy broker” and “demand commission transparency.”
“Always get a level-funded quote if you’re eligible,” he said. “But be ready to pivot between plans as your risk changes.”