The Best Alternative Funding Models for Group Health Benefits

If you’re asking what are the best alternative funding models for group health benefits in the US, you’re already ahead of the employers still absorbing double-digit premium increases without question. Many mid-sized employers renew their fully insured health plan each year, absorb a 10 to15% premium increase, and treat it as the cost of doing business. After twenty years of working with manufacturers, construction firms, and logistics companies, I can tell you that assumption is costing employers real money. The alternative funding models for group health benefits are not exotic or risky. They are widely adopted across the US market, with level-funded plans alone now covering roughly 45% of employees at companies in the 50 to 500 employee range, and the math is not subtle.

 

This article covers four structures worth understanding: self-funded plans, level-funded arrangements, group captives, and reference-based pricing. Each one has a different risk profile, administrative requirement, and savings potential. The goal here is clarity, not a sales pitch for complexity. You should finish this knowing which model fits your situation and what the next step actually looks like.

 

Why your fully insured plan costs more than the claims

 

The carrier markup you’re paying every year

 

A fully insured premium is not just the cost of claims. It includes state premium taxes (typically 2 to 3%), the carrier’s administrative fees, a profit margin, and a risk charge the carrier collects for assuming uncertainty on your group. Healthy employer groups subsidize sicker ones within the carrier’s book of business. You pay a fixed number whether your workforce had a great year or a brutal one.

 

The employer bears all the cost of certainty and gets none of the benefit when claims come in low. The carrier keeps the difference. That is not a partnership. It is a one-sided contract dressed up in renewal paperwork.

 

What you lose by staying fully insured

 

Beyond the price markup, fully insured plans offer almost no visibility into how money is actually being spent. Under fully insured arrangements, many employers have limited or no access to utilization data, a well-documented gap that prevents meaningful plan management. There are no year-end refunds for favorable claims experience, and there is limited ability to customize the plan for the specific demographics of your workforce. A 43-year-old crew of ironworkers has a very different utilization profile than the population the carrier priced your plan against.

 

Moving to an alternative model is not about taking on more risk. It is about knowing where the money goes and keeping more of it when your group performs well.

 

What are the best alternative funding models for group health benefits in the US?

 

Self-funded plans: the employer pays claims directly

 

In a self-funded arrangement, the employer pays claims from a designated fund as they occur rather than paying a fixed premium. Stop-loss insurance protects against catastrophic claims, both at the individual claim level (specific stop-loss) and across the total plan (aggregate stop-loss). Because self-funded plans are governed by ERISA, they are exempt from most state-mandated benefits, which removes a meaningful layer of cost. Many employers also pair these plans with an HSA or HRA through a high-deductible health plan (HDHP) structure to give employees a tax-advantaged way to manage out-of-pocket costs. Savings versus fully insured typically run 10 to 30%, depending on claims experience and vendor efficiency.

 

This structure works best for employers with 100 or more employees who also have:

 

• At least 24 months of clean claims history
• Stable annual turnover under 25%
• The cash flow to fund claims in real time

 

The tradeoff is financial exposure and the need for a third-party administrator (TPA) to manage claims processing, network access, and compliance. Self-funding is not a set-it-and-forget-it decision. It requires active management.

 

Level-funded plans: predictability with a refund upside

 

Level-funded plans are the most accessible entry point for smaller and mid-sized employers. The structure works as a hybrid: the employer makes fixed monthly payments that build a claims reserve, with stop-loss coverage layered on top to cap exposure. If claims come in under budget at year-end, the employer receives a surplus refund. Industry data shows that a meaningful share of employers on level-funded plans receive year-end refunds, in some reporting periods, over a third of groups have seen refunds averaging several thousand dollars per group. For more examples of plans gaining traction, see our write-up on the Top 5 Level-Funded Health Plans we’re seeing success with.

 

The market shift toward this model is significant. For employers in the 50 to 500 employee range, the share of covered lives on level-funded plans grew from roughly 10% a decade ago to approximately 45% today. Savings versus fully insured range from 10 to 20% for most groups, with healthy small groups sometimes seeing up to 30%. For a manufacturer with 80 employees and a relatively young workforce, this is often the right starting point before evaluating a captive or full self-funding structure.

 

Group captives: pooling risk with other employers

 

A group captive pools multiple employers into a shared risk structure, making the financial benefits of self-funding accessible to companies that could not absorb a catastrophic claim year on their own. Each employer retains a defined layer of risk, shares the rest with the group, and gains access to full claims data transparency. Stop-loss renewals within captive structures often come in at single-digit increases, compared to the 8.8 to 10.5% annual increases hitting the broader stop-loss market.

 

The case study data here is real. A Missouri equipment manufacturer with 105 employees saved 55% on their RX spend in year one inside a captive structure. These are not projections. They are documented outcomes. For a deeper comparison of funding options and common employer misperceptions, see our analysis on Fully Insured vs Level-Funded vs Captives. 

 

Captives are best suited for employers in the 50 to 300 employee range who want the advantages of self-funding without the full exposure of going it alone.

 

Reference-based pricing: paying based on what care actually costs

 

Reference-based pricing sets reimbursement rates for medical services based on a benchmark, typically a percentage of Medicare rates, rather than a negotiated PPO discount off an inflated chargemaster price. Traditional insurance plans often reimburse providers at roughly 250% of Medicare. RBP arrangements typically land at 140 to 175% of Medicare. That difference shows up directly in claim costs. A Texas construction firm with 86 employees documented a $100k annual reduction, a 16% decrease, after implementing RBP.

 

RBP is not typically a standalone funding model. It is a cost-containment tool layered onto a self-funded or captive structure to reduce per-claim expense. It requires clear employee communication and a process for handling balance billing situations when a provider pushes back. Done well, it is one of the most effective levers available. Done without proper implementation support, it creates noise that undermines the savings. For a practical discussion of how reference-based pricing functions as a strategic lever, see this piece on reference-based pricing.

 

What the real numbers look like by employer size

 

Savings ranges for small, mid, and large employers

 

Small employers in the 20 to 99 employee range are best positioned for level-funded plans, where savings of 10 to 30% versus fully insured are realistic for healthy groups. Mid-sized employers with 100 to 499 employees have the option to pursue either level-funded or self-funded structures, with self-funding producing the higher savings range when claims history is stable. Large employers with 500 or more employees are typically well suited for full self-funding. At that scale, the savings potential is significant and the case for paying carrier risk charges essentially disappears.

 

Stop-loss: the cost of protecting yourself

 

Stop-loss can be what determines whether self-funding is financially viable for a given employer. Specific deductibles range from $25,000 to $250,000 for smaller groups to $500,000 to $1 million or more for large employers. Normalized stop-loss premiums run approximately $229 per employee per month (PEPM) at a $100,000 specific deductible, dropping to roughly $51 PEPM at a $500,000 deductible. Stop-loss premiums rose 8.8 to 10.5% from 2024 to 2025, and the trend is projected to continue into 2026, according to the Aegis stop-loss premium survey.

 

The math works when the employer is large enough and stable enough to absorb the retention layer without significant cash flow disruption. For employers who cannot yet absorb a $250,000 specific claim, level-funded plans and captives lower the barrier considerably by providing stop-loss coverage as part of the structure. That is exactly why those models exist.

 

The compliance reality most employers underestimate

 

ERISA, ACA, and what governs each model

 

Self-funded, level-funded, and captive plans are governed primarily by ERISA, which preempts most state insurance mandates. This is a genuine cost advantage, but ERISA compliance is not optional. Plan documents, Summary Plan Descriptions, Form 5500 filings, and COBRA administration are all required. Captive arrangements must also meet federal Risk Retention Act standards and the captive insurance regulations of the state where the captive is domiciled.

 

Noncompliance carries serious consequences. IRC Section 4980D imposes $100 per employee per day for ACA violations, with no annual cap. ERISA failures, including missing Form 5500 filings or inadequate SPDs, can trigger penalties up to $2,400 per day from the Department of Labor. This is not the area to manage loosely.

 

Nondiscrimination and reporting requirements

 

Self-funded plans must pass IRC Section 105(h) nondiscrimination tests covering both eligibility and benefits. The eligibility test generally requires that the plan benefit 70% or more of all non-excludable employees, or meet one of two alternative thresholds: covering at least 80% of all employees, or covering a nondiscriminatory classification of employees that benefits at least 90% of those eligible. The benefits test requires that the same coverage terms apply to highly compensated individuals and everyone else. Common failures include immediate eligibility for executives while non-HCIs wait 90 days, tiered benefits tied to compensation, and enrollment shortfalls among rank-and-file employees.

 

Every alternative funding model carries a compliance layer. Employers who understand that going in, and work with a partner who manages both the financial structure and the regulatory requirements, move through these transitions cleanly. Those who treat compliance as an afterthought tend to find out why it matters the hard way.

 

How to choose the best alternative funding model for group health benefits in the US

 

Employer size, cash flow, and risk tolerance

 

Size is a factor, but it is not the whole picture. A 120-person manufacturer with a healthy workforce, stable claims history, and strong cash reserves is a better self-funding candidate than a 200-person construction company with high annual turnover and a history of expensive specialty drug claims. The right model comes down to three variables: how much claims volatility the employer can absorb, how much cash flow exists to fund claims in real time, and how much administrative capacity the organization has or can contract.

 

Level-funded plans are the entry point for most employers in the 50 to 150 employee range. Captives open the door for employers who want more transparency and long-term savings but are not ready to go fully self-funded. Full self-funding makes sense once the employer has the size, history, and infrastructure to manage the exposure. These are not permanent categories. Some employers move through all three over time as their size and claims maturity grow.

 

Industries where alternative funding delivers the most

 

Manufacturing, construction, and logistics are where the financial case for alternative funding is clearest. Thin margins, labor-intensive workforces, and premium increases that consistently outpace revenue growth make uncontrolled benefits spending a direct threat to profitability. These industries also tend to have male-dominated, younger-to-middle-age workforces with relatively predictable utilization patterns, which makes the claims experience easier to model and the savings easier to capture. At BeneSmart, the employers we see benefit most are exactly in these sectors, and the results compound over time when the health plan is managed like a supply chain rather than renewed like a subscription.

 

How to evaluate your options and build a path forward

 

Moving from a fully insured plan to any alternative funding model is not always a one-quarter project. A credible evaluation can sometimes require 12 to 24 months of claims data, a review of TPA capabilities, stop-loss terms, pharmacy benefit management strategy, and network or RBP approach. You need to stress-test the plan against your worst claims year, not your best. The output should be a multi-year roadmap, not a single-year swap that leaves you exposed if year one goes sideways.

 

The obstacle for most employers is not the model itself. It is the absence of a structured process and a partner who can translate claims data into a real decision. Many national brokers focus on annual premium negotiations rather than ongoing plan optimization and multi-year strategy. The employers who successfully transition to captive, self-funded, or level-funded arrangements almost always have a consulting partner who builds the roadmap, manages vendor transitions, and runs ongoing performance reviews. That is the work. The plan structure is just the output.

 

At BeneSmart, we run this evaluation process for mid-sized industrial employers, treating the health plan as a supply chain problem with vendors that need to be aligned and measured, not simply renewed. If you are absorbing double-digit premium increases and are not sure whether an alternative model is realistic for your situation, that conversation is worth having. Download our white paper, Alternative Funding 101, for a complete guide on these strategies. The cost of staying fully insured, year after year, is not unavoidable. It is a choice.

 

The bottom line on alternative funding models for group health benefits

 

So what are the best alternative funding models for group health benefits in the US? The honest answer depends on your size, claims history, and cash position, but the options are practical and proven, not theoretical. Level-funded plans are the most accessible entry point. Self-funded and captive structures offer the highest long-term savings for employers who qualify. Reference-based pricing is a cost-containment tool that layers into either structure and compounds the savings. The compliance and administrative requirements are real, but they are manageable with the right partner.

 

The evidence supporting these models, from benchmarks to documented captive outcomes to the measurable savings gap between fully insured and self-funded arrangements, is consistent and well established across the industry. The question is not whether these models work. The question is whether your organization has the claims history, cash flow, and strategic support to implement one effectively. If you want to find out, schedule a funding model evaluation with BeneSmart. We will analyze your actual claims data, identify which model fits, and give you a clear-eyed view of what the transition requires.