Beyond traditional funding options: Fully insured vs self insured vs gap funding

Spoiler alert: You might be overpaying for your employee health benefits. And not just because of the rising costs in healthcare. As a business, getting strategic with how you fund employee benefits can not only help you save money, but it can help you dial in on the best benefits for the overall employee experience. The first step in strategic funding is understanding your options.

Ready to explore smarter HR strategies for employee benefits funding?

A full spectrum of benefits funding models to choose from

Employee benefits funding is much more than just a choice between fully insured and self-funded insurance. There’s a whole rainbow of options in between, and it can get confusing very quickly. The insurance industry loves its jargon, and sorting through all the choices can feel like decoding an alien language. But don’t sweat it. We’re about to demystify this spectrum of options and send you on your way to stellar employee benefits with a financial strategy that fits your needs.

In this blog, you’ll find clear definitions, the pros and cons of each funding strategy, and tips for how to choose the funding strategy that works best for your company and your overall employee experience.

Employee benefits funding models explained

Alright, benefits pros, it's time to take a close look at the alternative funding options for employee benefits. Let’s take a look at each funding type, from the training wheels of fully insured to the black diamond of self-funded insurance.

What is a fully insured health plan?

Fully insured funding options are the most traditional approach — and the least complicated. You pay a fixed premium to an insurance carrier, and the carrier handles all eligible claims, regardless of the total amount. For example, you’ll pay $500 per employee per month to the insurance carrier. For each claim, it’ll be clearly defined what portion of the claim the carrier pays and what you, the employer, pay.

What are the pros of a fully insured health plan?

• Predictable costs: There are no financial surprises with a fully insured plan.
• Minimal administrative burden: There’s less work for HR professionals, perfect for smaller teams.

What are the cons of a fully insured health plan?

• Higher premiums: You’re paying extra for convenience and peace of mind.
• Less control over plan design: You’re playing by the carrier’s rules, plus you must comply with all the state’s regulations.

What is self-funded insurance?

With a self-insured plan, your company pays employees' health claims directly. Most companies who opt for the self-insured funding option work closely with their broker to calculate how much cash to set aside based on previous claim activity, plan design changes, demographic factors, etc.

The majority of companies who opt for options other than self-funded insurance do so because, quite honestly, the financial risk can be scary. However, there is a fail-safe companies can elect to give themselves a bit of a safety net: stop-loss insurance. This type of insurance is used for very large claims. For example, if an employee has a $10,000 surgery, you pay that $10,000 from company funds. But if someone has a $200,000 claim, your stop-loss insurance might cover everything over $100,000.

Another question that comes up often with self-insured plans: If I’m not fully insured through an insurance carrier, do I have a provider network? What about network discounts? Many companies with self-funded insurance administer their plan directly through a traditional insurance carrier. Others may partner with a TPA (third-party administrator) and “rent” a network so they can take advantage of contract pricing between the network and providers. Usually, there’s a PEPM (per employee, per month) fee for this.

What are the pros of a self-insured benefits plan?

• Maximum control: Self-insurance for employee benefits gives you the most control over your plan design. The potential for customization is unmatched.
• Significant cost-savings potential: If claims are low, you could save a lot. Plus, you don’t have to pay a carrier up-front, which means you save that cash.

What are the cons of self-funded insurance?

• Higher financial risk: You’re on the hook if claims are higher than expected (up to your stop-loss protection).
• Complex administration: There’s a lot more to manage with this approach. Administering a self-funded plan involves internal coordination with departments like finance, operations, and HR. It also comes with additional compliance considerations.

What is gap funding?

Gap funding for employee benefits is a good way to dip your toes in the self-funding pool. Your underlying medical plan is still fully insured, but you take on a bit more risk (and potential savings) for a specific portion of the claims. For example, say you purchase a fully insured medical plan with a $3,000 deductible. The employee is responsible for $500 of that deductible, then you cover the additional $2,500 (the “gap” in gap funding), but only if the employee incurs that expense. If the employee doesn’t incur claims up to the full deductible amount, you reap the benefits of lower premium costs for a less generous underlying plan.

What are the pros of gap funding?

• Potential savings: If claims are lower than expected, you will see some financial benefits.
• Fairly predictable costs: You still have a good idea of what you’ll be spending. Many gap funding administrators offer stop-loss protection so you have peace of mind knowing your maximum cost is capped.
• More insights: Gap funding provides you with reporting and insights into how your employees are using their medical benefits that you may not have access to with your fully insured medical plan.

What are the cons of gap funding?

• More complex: It’s not as straightforward as fully insured plans and requires more administrative work for your team, as well as additional employee education.
• Some financial risk: While limited, you’re still taking on more risk than with fully insured plans.

What is level funded health insurance?

Level funded health plans offer a balance between fully insured and self-insured options. You pay a set monthly amount per enrollment tier covering expected claims, administrative fees, and stop-loss insurance. If the actual claims are lower than expected, you get money back. For example, you pay $100,000 monthly. If the yearly claims total $1.1 million instead of the expected $1.2 million, you get  portion of the overage back.

What are the pros of level funded health insurance?

• Refund potential: If claims are low, you could get money back at the end of the year.
• Predictable budgeting: You know your monthly costs, similar to fully insured plans.
• Better data: You receive monthly reporting on how your plan is running, giving you much more claims insight compared to a fully insured plan.

What are the cons of level funded health insurance?

• Higher monthly payments: You’ll pay more each month compared to traditional self-funding.
• Limited savings: The potential for savings isn’t as high as with self-funding. (Often you receive a portion of the savings back as opposed to the entire over-payment.)

What is a captive self-insured plan?

Captive funding for employee benefits allows you to join other employers to share risk and leverage economies of scale for stop-loss insurance. A captive reduces volatility that many mid-sized employers would face if they were self-funding on their own.

What are the pros of a captive self-insured plan?

• Cost-savings potential: Teaming up with other employers could lead to significant savings.
• Shared risk: You’re not alone in handling the financial risk.

What are the cons of a captive self-insured plan?

• Complex setup: It’s not easy to get started with this approach and can require extensive planning and an up-front investment. (Your benefits broker should help you with this.)
• Not a long-term solution: While some captives might be a long-term fit, this is generally a 3-5 year strategy.

What is reference-based pricing for health plans?

Reference-based pricing for employee benefits is an innovative approach to cost control. Instead of using an insurer’s negotiated rates, you set prices based on a percentage of the Medicare rates. For example, you might agree to pay 140% of the Medicare rates. If Medicare pays $1,000 for a procedure, you’d pay $1,400, while the negotiated rate for the same service might be $2,500.

Important note about reference-based pricing: This arrangement often only applies to facilities claims, like hospital stays.

What are the pros of reference-based pricing?

• Dramatic cost savings: This approach can lead to substantial reductions in healthcare spend.
• Transparent pricing: You know exactly what you’re paying for each service that falls under the reference-based pricing arrangement.

What are the cons of reference-based pricing?

• Employee confusion: This can be a complex plan for employees to understand.
• Balance billing risk: There’s a chance that providers may bill your employees for the difference.

What is a PEO and how can it affect funding strategies?

A PEO, or professional employer organization, are essentially outsourced human resources organizations. They offer support with things like benefits, payroll, compliance, and more — all things that a small HR team (or a company without an HR team) might have a hard time handling on their own. When you join a PEO, your employees technically become their employees.

Because of the way PEOs are structured — acting as an employer for up to thousands of workers — they purchase benefits as if they were a large enterprise, granting them better group rates on insurance plans.

What are the pros of using a PEO for benefits?

• Potential cost savings: Because PEOs often get enterprise pricing on health plans, you could benefit from more cost-effective group plans.
• Time savings: Simply put, PEOs do most of the work — from renewals to open enrollment — for you.

What are the cons of using a PEO for benefits?

• One-size-fits-all benefits strategy: PEOs usually offer pre-built packages, which leaves little room for customization.
• Less administrative control: When signing on with a PEO, you’re signing on to their HR processes, vendors, and tech stack as well.

Which benefits funding strategies have the lowest financial risk?

Your company’s appetite for financial risk can play a big role in choosing which funding option works best for you. One one end of the spectrum, you have low financial risk but also less room for control and customization. On the other end of the spectrum, you have endless potential for customization but also take on substantially more financial risk.

Your benefits broker can help you strategize

At Nava, our team of benefits brokers help you with the full spectrum of benefits strategies — from how to structure your healthcare plans to the best funding options.

Let’s chat more about how we can serve your HR team — and your people.

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