Self-Funded vs. Level Funded Group Health Plans in Phoenix
Many insurance agents and business owners are familiar with traditional fully insured group health plans, but fewer understand how self-funded and level funded arrangements work. These alternatives may give certain employers greater visibility, flexibility, and control over how their healthcare dollars are used.
In this conversation, Norman Noriega speaks with Olivia from Allstate Benefits in Phoenix about the differences between fully insured, self-funded, and level funded health plans. They also discuss which employers may be suitable candidates, how stop-loss protection works, and how underwriting may differ based on group size in Arizona.
Table of Contents
- Why Most Employers Default to Fully Insured Group Health
- How the ACA and Medical Loss Ratio Changed the Market
- Self-Funded Plans Explained: Stop-Loss in Plain English
- Level Funding for Smaller Groups
- Arizona Underwriting for Groups Under 20 and Groups of 20 to 99
- Ideal Group Sizes and Moving to Traditional Self-Funding
- Custom Plan Design
- Network Options
- Frequently Asked Questions
- Key Takeaways
- Next Steps
Why Most Employers Default to Fully Insured Group Health
Fully insured coverage is the group health model most employers recognize. The business pays a set premium to the insurance carrier, and the carrier handles eligible claims throughout the year.
This arrangement can make budgeting easier, but it often gives employers limited insight into how much of their premium is being used for claims, administration, reserves, and other carrier expenses. Employers may also have to choose from a limited selection of preset plan designs rather than building a plan around the specific needs of their workforce.
For many businesses, fully insured coverage remains a practical option. However, employers seeking greater transparency or plan-design flexibility may want to compare it with self-funded and level funded alternatives.
How the ACA and Medical Loss Ratio Changed the Market
The Affordable Care Act introduced several changes to the group health insurance market, including medical loss ratio requirements. These rules generally require insurers to spend a specified percentage of premium revenue on healthcare claims and quality-improvement activities.
Olivia explains that broader risk pooling can sometimes affect pricing for healthier groups because premiums and claims are evaluated across a larger population. In her view, this is one reason some employers explore alternative funding arrangements that connect their costs more directly to the claims experience of their own group.
Medical loss ratio rules are only one part of a much larger pricing system. Carrier expenses, provider contracts, prescription costs, demographics, geographic location, plan design, and claims trends can also influence group health insurance rates.
Self-Funded Plans Explained: Stop-Loss in Plain English
In a self-funded health plan, the employer takes responsibility for paying eligible employee healthcare claims rather than transferring the entire claims risk to an insurance carrier through a traditional premium.
The employer may work with a third-party administrator to process claims, manage enrollment, coordinate provider access, and handle other plan operations. The employer also purchases stop-loss coverage to limit its exposure to unexpectedly high claims.
Types of Stop-Loss Protection
Stop-loss protection can apply to a particularly large claim involving one covered individual, the group’s total claims during the plan year, or both. The exact thresholds and protections depend on the contract.
Olivia explains that traditional self-funding is often more appropriate for larger employers that have sufficient cash flow, financial reserves, and risk tolerance to manage claims as they occur. Stop-loss coverage provides an additional layer of protection if claims exceed the plan’s established limits.
Level Funding for Smaller Groups
- Plan administration: Covers services such as enrollment, customer support, claims processing, and ongoing plan management.
- Stop-loss coverage: Helps protect the employer when eligible claims exceed the limits stated in the contract.
- Claims fund: Holds money that will be used to pay eligible employee healthcare claims during the plan year.
What Happens to Unused Claims Funds?
When claims are lower than the amount placed into the fund, eligible unused dollars may be available for a refund or credit. The amount returned, the timing of the refund, and whether renewal is required depend on the carrier and the specific funding agreement.
According to Olivia, certain Allstate arrangements may return up to 100% of eligible unused claim-fund dollars, even when the employer does not renew. Employers should confirm this provision in the applicable proposal and contract before making a decision.
Arizona Underwriting for Groups Under 20 and Groups of 20 to 99
One of the most important questions Norman asks is whether an employer must qualify for a self-funded or level funded plan.
Olivia explains that underwriting does not always produce a simple pass-or-fail decision. Instead, the health profile and expected claims of the group may affect pricing, plan availability, stop-loss terms, and the amount required for the claims fund.
Groups With Fewer Than 20 Employees
According to Olivia, smaller Arizona groups may be asked to complete individual medical questionnaires as part of the underwriting process. The information may be used to estimate expected claims and determine the appropriate pricing and funding structure.
Olivia also describes an example in which the claims fund is established at approximately 125% of expected claims. This additional funding creates a financial corridor intended to provide protection against claims running higher than projected.
If actual claims perform near or below expectations, some money may remain in the claims fund at the end of the year. Whether those funds are returned depends on the carrier’s contract and the employer’s specific arrangement.
Groups With 20 to 99 Employees
For groups of 20 to 99 employees, Olivia says individual medical questionnaires may not be required under the arrangements she discusses. Underwriting may instead rely on census information and available claims data.
Requirements can vary by carrier, funding product, employer size, participation level, location, and the availability of credible claims information. Employers and agents should verify the current underwriting requirements directly with the carrier.
Olivia also notes that fully insured coverage may remain the stronger option for groups whose risk profile, financial position, or claims history makes self-funding less suitable.
Ideal Group Sizes and Moving to Traditional Self-Funding
There is no universal maximum size for a self-funded health plan. In fact, many large employers use self-funded arrangements because they have the financial resources and workforce size needed to manage claims risk more efficiently.
Olivia describes level funding as especially relevant for employers in the approximate range of 20 to 150 or 200 covered employees. However, this range should be viewed as a general example rather than a strict eligibility rule.
As an organization grows, it may consider moving from level funding to a more traditional self-funded structure in which claims are paid as they are incurred. Larger employers may also separate or unbundle different plan components, including administration, stop-loss coverage, provider networks, and pharmacy benefit management.
The right structure depends on the employer’s size, cash flow, workforce demographics, claims experience, risk tolerance, and long-term benefits strategy.
Custom Plan Design
Plan Features Employers May Be Able to Adjust
- Deductibles
- Copayments
- Coinsurance
- Out-of-pocket maximums
- Prescription drug benefits
- Provider network access
- Employer and employee contribution strategies
Network Options
Self-funded and level funded arrangements do not necessarily require employers to give up access to established provider networks. Olivia explains that groups may be able to choose from broader nationwide networks, regional networks, or narrower network options with different pricing structures.
A broad network may provide employees with more provider choices, while a narrower network may offer lower costs in exchange for a more limited selection of doctors, hospitals, or facilities.
Reference-Based Pricing
Olivia also discusses reference-based pricing. Under this approach, eligible medical claims may be reimbursed according to a defined benchmark, such as a percentage of Medicare reimbursement rates, rather than relying entirely on a traditional negotiated provider network.
Reference-based pricing can be complex. Employers should carefully evaluate provider acceptance, employee education, balance-billing support, claims advocacy, legal considerations, and the administration process before selecting this type of arrangement.
Frequently Asked Questions
With fully insured coverage, the employer pays premiums to an insurance carrier, and the carrier assumes responsibility for eligible claims under the policy. With self-funding, the employer funds eligible claims up to established limits and purchases stop-loss coverage to reduce exposure to unusually high claims.
Stop-loss coverage is designed to limit an employer’s financial exposure under a self-funded health plan. It may provide protection when a single covered individual has a large claim, when the group’s total claims exceed a stated amount, or both.
Level funding allows an employer to use self-funding principles while making predictable monthly payments. Those payments generally cover plan administration, stop-loss protection, and the fund used to pay eligible healthcare claims.
Some level funded arrangements may return eligible unused claims-fund dollars when actual claims are lower than the amount funded. The refund calculation, timing, eligibility, and renewal requirements depend on the carrier and contract.
Olivia states that certain Allstate arrangements may return up to 100% of eligible unused claim-fund dollars. Employers should verify this provision in writing before relying on it.
Underwriting is typically used to evaluate the expected risk and cost of the group. Rather than producing only a pass-or-fail result, underwriting may affect the rate, stop-loss terms, claims funding, and available plan options.
A higher-risk group may receive different terms or determine that fully insured coverage is the more appropriate choice.
Olivia explains that groups with fewer than 20 employees may be asked to complete individual medical questionnaires. The information may be used to estimate expected claims and establish the pricing and funding arrangement.
Current requirements should be confirmed with the applicable carrier because underwriting practices can change and may vary by product.
Olivia says groups with 20 to 99 employees may be underwritten using census information rather than individual medical questionnaires. Available claims history may also be considered.
The exact requirements depend on the carrier, plan, group characteristics, and available data.
Key Takeaways
- Fully insured coverage is familiar and predictable, but employers may have limited claims visibility and plan-design control.
- Self-funding gives an employer more direct responsibility for healthcare claims while using stop-loss coverage to limit financial exposure.
- Level funding combines self-funding principles with a predictable monthly payment.
- A level funded payment generally includes administration, stop-loss protection, and money placed into a claims fund.
- Eligible unused claims-fund dollars may be returned under certain contracts, but refund provisions must be verified before enrollment.
- According to Olivia, underwriting for smaller Arizona groups may differ based on group size, medical information, census data, and available claims history.
- Self-funded and level funded arrangements may allow employers to customize deductibles, copayments, pharmacy benefits, networks, and other plan features.
- Fully insured coverage may remain the better option for employers that are not comfortable assuming additional claims responsibility or whose risk profile does not support alternative funding.
Next Steps
Choosing between fully insured, self-funded, and level funded coverage requires more than comparing monthly prices. Employers should also consider claims risk, stop-loss terms, provider access, employee needs, refund provisions, contract language, and the financial responsibility associated with each option.
MAPFL can help business owners and insurance professionals compare available group health strategies, review important underwriting questions, and understand the tradeoffs before making a decision.
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Reviewed by: MAPFL Editorial Team (Maximize Asset Protection)
This content is provided for general educational purposes and does not constitute legal, tax, financial, or insurance advice. Plan availability, underwriting requirements, funding terms, network access, stop-loss provisions, and potential refunds vary by carrier, employer, location, and contract.
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