When renewal season arrives, most employers assume they have two choices:
Accept the renewal from their current insurance carrier. Shop a few competing carriers in hopes of finding a lower rate.
That’s where most benefits conversations begin. Unfortunately, it’s also why many employers find themselves stuck in the same cycle year after year.
Changing insurance companies can absolutely make sense. But focusing only on carrier quotes assumes the insurance company is the biggest decision you’re making.
It isn’t.
Before deciding whether to stay with your current carrier or move to another one, it’s worth understanding how your health plan is funded. Your funding model influences how much flexibility you have, how much transparency you receive into what’s driving your healthcare costs, and how many opportunities exist to improve your plan beyond simply comparing renewal quotes.
Understanding the Three Funding Models
Most employer-sponsored health plans fall into one of three funding models: fully insured, level-funded, or self-funded.
These aren’t different health plans. They’re simply different ways of paying for healthcare claims.
Fully Insured (2+ employees)
This is the traditional approach and still the most common.
Each year, the insurance carrier estimates what they believe your group’s medical claims will cost, adds administrative expenses, reserves, profit, commissions, and other costs, then builds all of that into your monthly premium.
In other words, you’re pre-paying for your expected claims at the carrier’s highest projected cost.
If claims end up being lower than expected, the insurance carrier generally keeps the difference. If claims are higher, the carrier absorbs the additional cost. The tradeoff for that financial protection is limited transparency into how your premiums were calculated and very little ability to influence future costs beyond negotiating the next renewal.
Level-Funded (5+ employees)
Level-funded plans provide a middle ground.
The employer still makes predictable monthly payments throughout the year, but those payments are based on an estimate of expected claims. If the plan performs better than expected, a portion—and sometimes all—of the unused claim dollars may be returned to the employer.
You gain greater visibility into your plan’s performance and begin to receive meaningful claims data, but the insurance carrier is still making most of the decisions about how the plan is designed and operated.
Self-Funded (25+ employees)
Self-funded plans are often misunderstood.
Many employers hear “self-funded” and assume it means writing blank checks for medical claims. That’s not how properly structured self-funded plans work.
Instead of prepaying estimated claims through fixed premiums, the employer pays claims as they occur while purchasing stop-loss insurance that limits financial exposure if claims exceed predetermined levels.
The real advantage isn’t simply how claims are paid.
It’s that employers gain the flexibility to make better decisions about how their health plan is built.
Where the Greatest Opportunities Exist
Regardless of how your plan is funded, every employer health plan is built from four primary components.
The difference is whether you’re able to evaluate and improve those components independently or whether they’re simply bundled together by an insurance carrier.
Provider Network
Most employees think of the network as the doctors and hospitals they can access.
For employers, however, the network also determines what those providers are paid. Those negotiated reimbursement rates are one of the biggest factors influencing the overall cost of your health plan.
Pharmacy Benefit Manager (PBM)
Prescription drugs continue to be one of the fastest-growing healthcare expenses.
Your PBM determines how medications are priced, which drugs are covered, what pharmacies participate, and ultimately what both employers and employees pay for prescriptions.
Third-Party Administrator (TPA)
The TPA manages the day-to-day administration of your health plan.
They’re responsible for processing claims, issuing ID cards, answering employee questions, coordinating provider payments, and serving as the operational backbone of the plan. The quality of your administrator has a direct impact on both employee satisfaction and administrative efficiency.
Stop-Loss Insurance
For self-funded plans, stop-loss insurance protects the employer from unexpectedly large claims by limiting financial exposure.
Like every other component, it shouldn’t simply be accepted as part of a bundled package. It should be evaluated independently to ensure it provides the right balance of protection, flexibility, and cost.
A Better Way to Think About Renewals
Traditional renewals often consist of comparing one insurance carrier against another.
A more strategic approach is to evaluate each component of the health plan on its own merits.
Is your provider network delivering fair reimbursement rates?
Is your PBM helping control prescription costs or quietly increasing them?
Is your administrator providing the level of service your employees deserve?
Could one or more of these pieces be improved without disrupting the rest of the plan?
Those are the questions that often uncover opportunities simply shopping insurance carriers never reveals.
The funding model matters because it determines how much flexibility you have to ask those questions—and act on the answers.
Changing insurance carriers may be the right solution. But understanding how your plan is funded is often the first step toward building a better one.
If you’re approaching your next renewal and would like a second opinion on your current strategy, I’d be happy to walk you through what’s possible.
Talk soon,