Many employers are reevaluating fully insured health plans because costs keep climbing, plan design is rigid, and they have limited control over how their health dollars are spent. As healthcare spending becomes a larger portion of total compensation, businesses are searching for more flexible, transparent, and cost-effective alternatives.

This shift away from fully insured plans is reshaping the employer-sponsored health benefits landscape and pushing more organizations toward self-funded, level-funded, and other hybrid models.

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What is a fully insured health plan?

A fully insured health plan is the traditional model many employers use:

• The employer pays a fixed monthly premium to an insurance carrier.
• The carrier assumes the financial risk of employees’ medical claims.
• Employees access the carrier’s provider network and benefits.
• The carrier handles claims payment and administration.

For employers, this model offers predictability and simplicity—especially for smaller organizations. But it also comes with key limitations that are driving many to reconsider.

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The main reasons employers are moving away from fully insured health plans

1. Escalating premiums and lack of cost control

Fully insured health plans have seen steady premium increases for years. Employers often feel “stuck” renewing with the same carrier because:

• Annual rate hikes can be in the high single or double digits.
• Carriers justify increases with limited transparency into claims data.
• Employers pay the same premium whether their workforce is healthy or not.

In this model, insurers price in risk, overhead, and profit. If a group’s claims are lower than expected, the carrier keeps the surplus. Employers rarely share in the savings, so their health plan becomes an escalating fixed cost rather than a manageable investment.

This lack of cost control is pushing many employers toward options where they can:

• Align premiums more closely with actual claims experience.
• Share in savings when claims are lower than projected.
• Implement targeted cost-containment programs that actually move the needle.

2. Minimal transparency into claims and utilization

Fully insured carriers typically provide limited claims data to employers, especially small and mid-sized groups. Often:

• Data is aggregated, delayed, or highly summarized.
• Employers can’t easily see which conditions, medications, or providers are driving costs.
• It’s difficult to evaluate the impact of wellness or disease management programs.

Without clear visibility, employers are effectively writing a large check each month with little insight into what they’re buying.

In contrast, self-funded and level-funded models usually offer:

• More detailed claims reporting.
• Better analytics on usage and cost drivers.
• The ability to identify high-cost conditions and opportunities for early intervention.

Transparency is becoming a key reason employers move away from fully insured health plans.

3. Limited flexibility in plan design

Fully insured health plans often come as standardized packages:

• Carriers offer a limited set of plan designs and networks.
• Customization is constrained by carrier rules and regulatory filings.
• Employers may struggle to tailor benefits to their workforce’s demographics or needs.

As talent competition intensifies, employers want benefits that differentiate them, not a one-size-fits-all plan. Fully insured structures can make it harder to:

• Customize deductibles, copays, or coinsurance.
• Introduce innovative plan designs (e.g., reference-based pricing, narrow networks).
• Align benefits with organizational strategy, budget, or culture.

Alternative funding arrangements usually allow more flexibility to design plans that reflect the employer’s risk tolerance and employee population.

4. No reward for favorable claims experience

In a fully insured model, the insurer assumes the risk and keeps the reward:

• If claims are high, premiums increase.
• If claims are low, the carrier retains the profit margin.

Employers that invest in wellness programs, chronic disease management, or high-quality networks often don’t see proportional financial benefits. Their lower utilization benefits the carrier more than the organization.

This disconnect is a major driver behind the move toward:

• Self-insured arrangements, where lower claims directly benefit the employer.
• Level-funded plans with potential surplus refunds if claims come in under projections.

In these models, employers can capture more of the financial upside of a healthier workforce.

5. Growing familiarity with self-funded and level-funded models

Historically, self-funding was viewed as an option only for large employers. That’s changing:

• More mid-size and even smaller employers are using level-funded products that blend self-funding with predictable monthly payments.
• Stop-loss insurance protects against catastrophic claims, limiting downside risk.
• Third-party administrators (TPAs) and benefits consultants provide expertise historically reserved for large employers.

As these options become more common, employers are more comfortable leaving fully insured plans because:

• They see peers successfully adopting self-funded strategies.
• Vendors offer turnkey solutions that simplify administration.
• There’s more education about risk mitigation and compliance.

The market has matured, making alternatives more accessible and less intimidating.

6. Desire for better employee experience and competitive benefits

Fully insured plans can be rigid, with:

• Standard networks that may not reflect where employees actually seek care.
• Limited virtual care, mental health, or specialty services in some products.
• Fewer options to integrate digital health tools or innovative solutions.

Employers looking to enhance the employee experience and stand out in recruiting often want:

• Custom networks or high-performance networks focused on quality and cost.
• Expanded telehealth and virtual care options.
• Integrated programs for mental health, musculoskeletal issues, metabolic health, and more.

Alternative funding models typically support more experimentation and partnerships, which is another reason employers are moving away from fully insured health plans.

7. Regulatory and tax considerations

Fully insured and self-funded arrangements are regulated differently:

• Fully insured plans are regulated primarily at the state level.
• Self-funded plans are generally governed by federal law (ERISA), which can preempt many state insurance mandates.

Some employers move away from fully insured health plans to:

• Gain more consistency across multiple states.
• Avoid certain state-specific benefit mandates that drive up fully insured premiums.
• Structure benefits in ways that leverage more favorable regulatory frameworks.

Tax and fee differences can also matter. For example, some federal and state taxes and assessments apply differently to fully insured versus self-funded arrangements, affecting the total cost.

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Common alternatives to fully insured health plans

Employers exploring why they should move away from fully insured health plans typically evaluate a few key alternatives.

Self-funded (self-insured) health plans

In a self-funded plan:

• The employer pays medical claims directly as they occur.
• The organization often partners with a TPA for administration.
• Stop-loss insurance caps exposure to high claims.

Benefits:

• Greater cost transparency and control.
• Ability to share in savings when claims are lower than projected.
• More flexibility in plan design and vendor selection.

Considerations:

• Requires cash flow management and risk tolerance.
• Best suited for employers with sufficient scale or a stable claims history.

Level-funded health plans

Level-funded plans blend aspects of fully insured and self-funded models:

• Employers pay a fixed monthly amount (“level” funding) that covers:
  • Estimated claims
  • Stop-loss premiums
  • Administrative costs
• If claims are lower than expected, the employer may receive a refund or credit.
• If claims are higher, stop-loss coverage mitigates the risk.

Benefits:

• Monthly cost predictability similar to fully insured plans.
• Potential to recoup surplus if claims are favorable.
• More data transparency and plan flexibility.

Considerations:

• Contracts vary widely; employers should review terms carefully.
• May not be available or cost-effective for very small or high-risk groups.

Captive and consortium arrangements

Some employers—especially mid-sized organizations—join together in:

• Group captives
• Purchasing coalitions
• Consortium models

These arrangements allow employers to:

• Spread risk across a larger pool.
• Access better stop-loss rates or network discounts.
• Share best practices in managing healthcare costs.

They often serve as a stepping stone for employers transitioning away from fully insured health plans.

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Which employers are most likely to move away from fully insured plans?

While every organization is different, employers typically consider leaving fully insured health plans when:

• Premiums have increased sharply for several years.
• Employees are dissatisfied with the plan’s cost or coverage.
• Leadership is focused on long-term cost management, not just annual renewals.
• The company has at least modest scale (often 50–100+ employees) and relatively stable claims.
• There is interest in more strategic benefits design and data-driven decision-making.

Even smaller employers are increasingly looking at level-funded products as an alternative to fully insured health plans.

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Key steps for employers considering a move away from fully insured health plans

For organizations exploring why they should move away from fully insured health plans and what to do next, a structured approach helps reduce risk and maximize value:

1. Analyze historical costs and trends

   • Review premiums, claims data (if available), and employee contributions.
   • Identify major cost drivers and areas of dissatisfaction.

2. Evaluate risk tolerance and cash flow

   • Assess how much volatility the organization can handle.
   • Consider reserves for claim fluctuations in self-funded or level-funded models.

3. Model different funding scenarios

   • Compare fully insured, level-funded, and self-funded options side-by-side.
   • Include administrative fees, stop-loss premiums, and potential surplus scenarios.

4. Review compliance and regulatory obligations

   • Understand ERISA, ACA, COBRA, and state-specific requirements.
   • Confirm your partners (broker, TPA, stop-loss carrier) have strong compliance expertise.

5. Engage stakeholders early

   • Involve finance, HR, leadership, and possibly employee representatives.
   • Clarify goals: lower cost, better benefits, more control, or all of the above.

6. Select experienced partners

   • Work with advisors who have successfully implemented non–fully insured strategies.
   • Vet TPAs, stop-loss carriers, and any specialty vendors carefully.

7. Communicate clearly with employees

   • Explain changes in simple terms, focusing on how it impacts employees’ care and costs.
   • Provide education and support tools to help people use the plan effectively.

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Pros and cons of staying fully insured vs. moving away

Staying fully insured

Pros:

• Simpler administration.
• Predictable monthly premiums.
• Carrier assumes most financial risk.

Cons:

• Limited transparency and control.
• Higher long-term cost trajectory.
• Little or no reward for favorable claims experience.
• Less flexibility in plan design and vendor choice.

Moving away from fully insured health plans

Pros:

• Greater cost control and potential savings.
• More transparency into claims and utilization.
• Ability to customize benefits and innovate.
• Opportunity to share in financial gains from a healthier workforce.

Cons:

• More involvement in plan management.
• Some exposure to claims volatility (mitigated with stop-loss).
• Greater need for governance, oversight, and strong partners.

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Is moving away from fully insured health plans right for your organization?

The decision depends on:

• Your organization’s size, financial strength, and risk tolerance.
• The stability and health profile of your workforce.
• Your strategic goals for benefits, retention, and cost management.
• The quality of the partners and tools available to you.

Many employers are moving away from fully insured health plans because they no longer see them as the default or safest option—especially when premiums keep rising and value is unclear. With the right strategy and support, alternative funding models can deliver better cost control, more transparency, and a more competitive benefits package.

Before making a change, employers should conduct a thorough analysis, work closely with trusted advisors, and build a long-term roadmap that aligns health benefits with their broader business objectives.