Fully Insured vs Level-Funded vs Captives: What Most Employers Get Wrong

As an employer, the decision you make about your group health plan funding model can have a significant impact on your bottom line. Most employers simply focus on finding the lowest price, but that’s the wrong question to be asking. The real question is: Which funding model gives you the most control over your healthcare costs?

In this in-depth blog post, we’ll break down the three major funding types for group health plans – fully insured, level-funded, and captive self-funded – and explore where they’re similar, where they diverge, and which type is the best fit for different types of businesses. Most importantly, we’ll show you how each funding model impacts your company’s long-term cost control and financial flexibility.

The Basics: Fully Insured, Level-Funded, and Captive Self-Funded

Let’s start by defining the three main health plan funding models:

Fully Insured

The fully insured model is the standard approach that most employers start with. You pay a fixed premium to the insurance carrier, and they take on all the risk. In return, you get limited transparency, zero claims data, and minimal flexibility. The carrier controls everything.

Fully insured plans are typically a good fit for small groups (usually under 25 lives) or businesses that prioritize predictability over performance. However, you can predictably count on high costs with this model, and it’s not ideal for employers who want long-term control or transparency into their healthcare spending.

Level-Funded

Level-funded plans are like a halfway point between fully insured and self-funding. You still pay a set monthly premium, but that money gets split into three buckets: claims, administrative fees, and stop-loss insurance. If your claims are low, you might get a refund at the end of the year – but be sure to read the fine print, as those refunds are often limited.

Level-funded plans are a good fit for groups with 25 to 150 employees, or for employers who are ready to dip a toe into risk-sharing and the importance of data in their business decisions. However, it’s not ideal for companies that want long-term control or real data ownership.

Captive Self-Funded

Captive self-funding is strategic self-funding at its finest. You self-fund your health plan, but you share the risk with other employers inside a captive arrangement. With this model, you get full data ownership, vendor flexibility, and the potential for long-term savings.

Captives are best suited for employers with 50 or more employees, or for companies that are done reacting to renewals and want to start playing offense. However, it’s not for those who aren’t comfortable with carrying a little bit of risk or for those who want a completely hands-off solution.

Key Differences Between the Funding Models

Now let’s dive deeper into how these three funding models compare across several key categories:

Risk

• Fully Insured: You own zero risk.
• Level-Funded: You share some risk.
• Captive: You share risk with other employers strategically.

Data Access

• Fully Insured: You get nothing.
• Level-Funded: You get partial data, often with delayed access.
• Captive: You get full real-time access to data to help you better manage your plan.

Transparency

• Fully Insured: Very low transparency.
• Level-Funded: Medium transparency.
• Captive: Extremely high transparency.

Cost Control

• Fully Insured: No cost controls.
• Level-Funded: Some cost control opportunities.
• Captive: Strong opportunities for cost containment.

Vendor Choice

• Fully Insured: The carrier chooses the vendors.
• Level-Funded: You may have some say in vendors, but often don’t.
• Captive: You choose all the vendors – TPA, PBM, stop-loss, etc.

Upside Potential

• Fully Insured: None.
• Level-Funded: Maybe a little, but it’s shared.
• Captive: Significant upside potential.

Downside Risk

• Fully Insured: The carrier takes the risk, but you pay for it in future renewals.
• Level-Funded: You share the downside risk.
• Captive: Downside risk is capped, and you control the game.

The Impact on Savings

Now, let’s talk about the most important factor: savings. The truth is, switching your funding model won’t magically save you money, but it does set the table and create the conditions that are right for savings. Let’s look at how each model impacts your potential for cost savings:

Fully Insured

With fully insured plans, your costs are locked. The carrier’s margin plus the inflated network rates give you zero flexibility. You’re just hoping for a low renewal each year.

Level-Funded

With level-funded plans, there’s a small chance you might get a refund at the end of the year, but those refunds are usually limited and shared. The game is still rigged with spread pricing and built-in margins.

Captive

This is where you can take real control. With a captive self-funded plan, you design the plan, pick the vendors, eliminate misaligned incentives, and keep the underwriting profit instead of the carrier. For example, we worked with a 150-life manufacturer on a level-funded plan that was being charged $35,000 per month for just three drugs. When they moved to a captive, they saved $215,000 on their Rx spend in the first year alone.

Choosing the Right Funding Model for Your Business

So, how do you know which funding model is the best fit for your business? Here are a few key questions to ask yourself:

1. How much volatility can your company handle?

• If you want zero risk, stick with fully insured.
• If you can handle some risk, level-funded may be a good bridge.
• If you’re ready to play offense, captives are your game.

2. Do you have claims data?

• If not, you’re flying blind. Claims data is essential for modeling your risk.
• If you do have claims data, great – now you can start making informed decisions.

3. Do you want vendors reporting to you, or the carrier?

• Fully insured is hands-off, but without oversight, it gets expensive.
• Captives may take a little extra effort, but they offer a better ROI.

4. Are you willing to change the ecosystem?

• This is where real savings happen – when you unbundle and rebuild the supply chain the right way.
• With a captive, you know where every dollar of your plan spend is going, you can forecast your costs, and you get to choose your own network of care providers.

Remember, there’s no one-size-fits-all answer when it comes to health plan funding models. But staying in the dark and simply chasing the lowest price – that’s the most expensive option. If you’re not sure what model best fits your business, schedule a call with us and we’ll walk you through the options.

At the end of the day, the key is to align your health plan with your business goals, rather than just reacting to the carrier’s renewals. When you take control of your funding model, you open the door to long-term cost savings, better data, and more flexibility to design a plan that truly serves your employees and your bottom line.

 

Your Next Steps

Ready to take control of your health plan? Here are a few key resources to help you get started:

• Book a call to learn how BeneSmart’s Benefit Cost Containment Blueprint can help you roll back your costs.
• Check out the 9 Steps of the Benefit Cost Containment Blueprint in our video series.
• Download BeneSmart’s free Mid-Year Health Plan Review Checklist to assess your current setup.