Healthcare costs continue their relentless upward march, placing immense pressure on company budgets. For HR and finance leaders at mid-market organizations, the traditional, fully insured model often feels like a trap—offering little control, transparency, or relief from annual premium hikes. The constant cycle of renewal negotiations can leave you feeling powerless, forced to choose between absorbing unsustainable costs or shifting a heavier burden onto your employees.
It’s time to move beyond this reactive posture. A proactive, strategic approach to benefits funding can unlock significant savings, improve cash flow, and give you greater control over your second or third-largest line item. By embracing alternative funding models, you can transform your benefits plan from a fixed expense into a manageable, data-driven asset.
This requires a close partnership between HR and finance, armed with the right data and expert guidance. Here are four strategic moves you can make right now to take control of your healthcare spend.
1. Evaluate Level-Funded Plans
For many employers transitioning away from the fully insured world, a level-funded plan is an ideal first step. It combines the predictable monthly payments of a fully insured plan with the financial advantages and transparency of self-funding.
Think of it as self-funding with training wheels. You pay a fixed monthly amount to a carrier or third-party administrator (TPA). This payment is divided into three components:
- Administrative Costs: Fees for claims processing, network access, and plan management.
- Stop-Loss Insurance: A premium for insurance that protects you from unexpectedly high claims, both for individual employees (specific stop-loss) and the entire group (aggregate stop-loss).
- Claims Funding: The estimated amount needed to pay your employees’ medical claims for the year.
If your actual claims come in lower than the funded amount, you receive a refund or credit at the end of the year. This is a significant advantage over a fully insured plan, where the carrier keeps any surplus.
Pros and Cons:
The primary benefit is the potential for savings and access to your plan’s claims data, which is invaluable for making future strategic decisions. You gain insight into what’s driving your costs. However, if claims exceed the funded amount, you are protected by your stop-loss policy, but you won’t see a surplus refund.
Compliance and Cash Flow:
Level-funded plans are governed by ERISA, not state insurance mandates, which can offer greater plan design flexibility. From a finance perspective, the fixed monthly payment simplifies budgeting, avoiding the volatile cash flow swings that can occur with pure self-funding. Filing a Form 5500 is typically required, underscoring the need for diligent record-keeping.
2. Explore Group Captives
What if you could gain the scale and risk-sharing advantages of a massive corporation? That’s the core idea behind a group captive. A captive is an insurance company owned and controlled by its members. Instead of paying premiums to a traditional carrier, a group of like-minded employers pool their funds and risk together to self-insure their health benefits.
This is a move for organizations ready to take on a higher level of ownership and governance. In a group captive, you share risk with other high-performing employers who are equally committed to controlling costs and promoting employee wellness.
How It Works:
Each member company pays into the captive, which covers a predictable layer of claims. Above that layer, the members share risk collectively before a comprehensive stop-loss policy kicks in to cover catastrophic claims. This structure provides multiple layers of protection.
The advantages are compelling:
- Greater Control: Members have a say in plan design, vendor selection, and cost-containment strategies.
- Financial Rewards: You retain underwriting profits and investment income that would otherwise go to an insurance carrier.
- Data and Collaboration: You gain access to sophisticated data analytics and can benchmark your performance against other best-in-class employers, sharing strategies that work.
Underwriting Discipline and Governance:
Joining a captive requires a commitment to strong underwriting discipline. Prospective members are carefully vetted for their financial stability and risk management practices. This ensures you are pooling risk with responsible partners. As a member-owner, your team will participate in the captive’s governance, contributing to the strategic decisions that drive its success.
3. Tighten Your Stop-Loss Strategy
For any self-funded plan—whether level-funded, part of a captive, or a standalone arrangement—stop-loss insurance is your most critical financial safeguard. It’s the backstop that protects your organization from budget-breaking catastrophic claims. But not all stop-loss policies are created equal, and a passive approach can expose you to significant financial risk.
Finance and HR leaders must work together to scrutinize the details of their stop-loss contract. Key areas include:
- Specific vs. Aggregate: Specific stop-loss (or “spec”) protects you from high claims from a single individual. Aggregate stop-loss protects you if your total group claims exceed a certain threshold. Understanding the interplay between these two is crucial.
- Contract Terms: Pay close attention to the contract period. A “12/12” contract covers claims incurred and paid within a 12-month period. A “12/15” contract provides a three-month run-out period, covering claims incurred during the plan year but paid in the first three months of the next. This extra coverage is vital for accurate financial reconciliation.
- Lasering: This is a practice where the stop-loss carrier assigns a higher specific deductible to an individual with a known high-cost health condition. While it helps keep the overall premium down, it increases your direct financial exposure for that person. You need a clear strategy for managing these lasers, including robust employee support and clinical management programs.
A proactive stop-loss strategy involves more than just signing the renewal. It means actively marketing your coverage, negotiating terms, and analyzing your claims data to ensure your deductibles and triggers are aligned with your risk tolerance and financial goals.
A Case Vignette: Manufacturing Firm Takes Control
A 450-employee manufacturing firm was stuck in a familiar cycle. Their fully insured premiums had increased by double digits for three consecutive years. The finance team couldn’t budget effectively, and HR was tired of presenting diminished benefits to frustrated employees.
Working with their benefits advisor, they transitioned to a level-funded plan. In the first year, their claims ran lower than projected, and they received a six-figure surplus refund—money that went directly back to their bottom line. The claims data they received revealed a high prevalence of unmanaged diabetes. They used this insight to launch a targeted wellness and disease management program. By year three, they had enough data and confidence to join a group captive with other manufacturing firms, further reducing their costs and gaining access to innovative cost-containment solutions they couldn’t implement on their own.
4. Consider Reference-Based Pricing (RBP)
Reference-based pricing is a more aggressive cost-containment model that moves away entirely from traditional PPO networks and their negotiated “discounts.” Instead of paying a percentage of a hospital’s billed charges, an RBP plan pays a set amount for services based on a benchmark, typically a percentage of what Medicare would pay (e.g., 120-160% of Medicare).
The core principle is simple: pay a fair and reasonable price for services rendered. Because provider costs for the same procedure can vary dramatically within the same geographic area, RBP aims to eliminate that wild variation.
The Dynamics:
Implementing RBP requires a robust partnership with your TPA and a strong member advocacy component. Since you are operating outside of a network contract, there is a risk that a provider may “balance bill” the employee for the difference between their charge and what the plan paid.
This is where member navigation becomes critical. Your TPA must provide expert support for employees, including pre-service education and negotiation assistance if a balance bill occurs. A well-run RBP program has a dedicated team to defend members and negotiate with providers on their behalf, resolving the vast majority of issues with no financial impact on the employee.
For HR and finance, RBP offers the potential for deep savings and unparalleled transparency into healthcare costs. However, it represents a significant change for employees. A comprehensive communication and change management plan is not just recommended; it is essential for a successful transition.
Chart Your Course to Financial Control
The path away from a fully insured plan requires courage, collaboration, and expert counsel. These four strategies—level-funding, group captives, stop-loss optimization, and reference-based pricing—offer a roadmap to take back control of your healthcare spend.
By uniting the financial discipline of your finance team with the employee-centric focus of HR, you can build a benefits program that is both fiscally responsible and a valuable tool for attracting and retaining top talent. The first step is understanding your options and assessing your organization’s readiness for change.
Ready to explore which alternative funding strategy is right for your organization? Let’s connect for a complimentary benefits cost and compliance review to analyze your data and chart a course toward a more sustainable future.
