Why it matters
A fully insured plan is the traditional way to buy group health coverage. The employer pays a premium each month, and the insurer pays every claim, however high they run. In the KFF 2025 Employer Health Benefits Survey, 67% of covered workers were in self-funded plans, so about a third were fully insured. Most of them work at smaller firms.
The premium is set before the year starts. Claims during the year don't change it. They show up later, at renewal, and only for groups large enough to be rated on their own claims.
Where the premium goes
An illustrative group with 50 employees paying $40,000 a month.
| Piece | Monthly | Year |
|---|---|---|
| Expected claims | $34k | $408k |
| Insurer's costs | $6k | $72k |
| Premium | $40k | $480k |
The insurer's costs, often called retention, cover administration, state premium taxes, a charge for taking the risk, and profit. Here they're 15% of premium. The real share varies by insurer, market and group size.
Worked example: a good year and a bad year
Same group, same premium. Only the claims change.
| Good year | Bad year | |
|---|---|---|
| Premium | $480k | $480k |
| Claims | $360k | $540k |
| Difference | +$120k | −$60k |
| You pay | $480k | $480k |
In the good year the insurer keeps $120,000, and its $72,000 of costs come out of that. In the bad year it pays $60,000 more in claims than it collected, before its costs. The employer pays $480,000 either way.
Read the transcript
Claims go up. Claims go down. Your price doesn't move. That's a fully insured plan. You pay a fixed premium and the insurer takes the risk. About a third of covered workers are in one.
Take a fifty-employee group paying forty thousand a month. About thirty-four thousand is expected claims. The other six covers the insurer's costs: administration, taxes, a charge for the risk, and profit.
In a good year, claims come in low and the insurer keeps the difference. In a bad year, the insurer pays. Your cost is four hundred eighty thousand either way.
How your price is set depends on your size. In the small group market, up to fifty employees in most states, insurers can price only on age, location, tobacco and family size. Not your health, and not your claims. Larger groups are rated on their own claims, so a bad year shows up at the next renewal.
The trade-off: you pay for certainty. A good year doesn't come back to you, state insurance mandates apply, and smaller groups see little of their own claims data.
So ask your broker three things. How much of our premium is the insurer's costs? Are we rated on our own claims or the pool? And would level-funding or self-funding cost us less? Find out more at actuariallysound dot com.
The one exception: MLR rebates
The insurer keeps a good year, with one exception. Under the ACA's medical loss ratio rule, an insurer has to spend at least 80% of premium on care and quality improvement in the small group market, and 85% in large group. If it falls short, it owes rebates.
The test isn't run on your group. It covers the insurer's whole market in your state, averaged over three years. A group with a very good year can get nothing back, and a group with a bad year can still get a check.
How the price is set
The rules depend on group size.
Small groups. In most states the small group market covers employers with up to 50 employees. California, Colorado, New York and Vermont extend it to 100. Under the ACA, small group rates can vary on only four things:
- Age, up to 3 to 1 for adults
- Location, by state-defined rating area
- Tobacco use, up to 1.5 to 1, where the state allows it
- Family size, because each covered person is rated
Health status and claims history aren't allowed. Each insurer prices all its small group business in a state as a single pool. A small group's own bad year doesn't drive its renewal. The pool's experience does.
Larger groups. Above the small group limit, insurers use the group's own claims. They blend its history with a manual rate, weighting each by credibility, so a bigger group's own experience counts for more. That's experience rating. A bad year here usually shows up at the next renewal.
Fully insured, level-funded and self-funded
The three funding options compared.
| Fully | Level | Self | |
|---|---|---|---|
| Monthly bill | Fixed | Fixed | Varies |
| Bad year | Insurer | Stop-loss | You* |
| Good year | Insurer | Partial | You |
| Mandates | Apply | Exempt | Exempt |
| Claims data | Limited | Some | Full |
*Up to the stop-loss limits.
A level-funded plan has a fixed bill like a fully insured plan, but the employer is self-funding underneath and can share in a surplus. A self-funded plan pays claims as they come in, keeps all of a good year and pays all of a bad one, up to its stop-loss limits.
The trade-off
- A good year doesn't come back to you. Low claims help the insurer's results. Apart from a possible MLR rebate, the employer gets nothing back.
- State insurance mandates apply. Fully insured plans are regulated by the state, so state-required benefits are included and state premium taxes are built into the price. Self-funded plans are generally exempt from both.
- Smaller groups see little of their own claims data. Many insurers give small groups summary reports or none at all, which makes it harder to judge whether another funding option would cost less.
What you get in return is certainty. The budget is fixed for the year, and the insurer absorbs the bad months, the large claims and the run-out when the plan ends.
Common misunderstandings
Questions to ask your broker
- How much of our premium is the insurer's costs?
- Are we rated on our own claims or the pool?
- Would level-funding or self-funding cost us less, and what would we give up?
- Has our insurer paid MLR rebates in our state recently?