Who Keeps The Money When Your Health Plan Has a Good Year?

Here's a question I like to ask business owners: last year, did your health plan have a good year or a bad year?

Most can't answer. They know what the renewal looked like and roughly what they paid, but they have no idea whether their employees actually used more care or less than expected. That's not a knock on anyone. For most employers, that information never crosses their desk.

Now here's the follow-up question, and it's the one that stings. If your plan did have a good year, and claims came in lower than the insurance company priced for, who kept the difference?

If you're fully insured, the answer is your carrier. Not you. Not your employees. The savings are built into the premium you already paid, and they stay with the insurer. You might get a slightly better renewal next year, or you might not.

That's not a scandal. It's simply how that model works and could be the best option for you. But it points to something most employers never stop to consider: your health plan has a business model. How it's funded decides who carries the risk, who keeps the savings, how much data you see, and which levers you're allowed to pull. And right now, that decision matters more than it has in years.

Why This Matters Right Now

Health benefit costs are climbing at the fastest pace in 15 years. Mercer projected that the total cost of health benefits per employee would rise 6.5% in 2026, the biggest jump since 2010, and its mid-year update put 2026 on pace for 6.7%, pushing the average above $18,500 per employee. That's the fourth straight year of elevated increases after a decade when costs grew about 3% a year.

Family coverage now costs nearly $27,000 a year. According to KFF's annual survey, the average family premium hit $26,993 in 2025, with workers paying $6,850 of that out of their paychecks. Prescription drugs, including GLP-1 medications, and rising hospital prices are leading the charge.

Employers are responding the way they always have: 59% planned to make cost-cutting changes to their plans for 2026, up from 44% just two years earlier. Usually that means higher deductibles, higher copays, or asking employees to pick up a bigger share of the premium.

Those moves have their place. But they all start from the same assumption: that the way the plan is funded is fixed. It isn't. And for a lot of employers, changing the funding model is a bigger lever than any plan design tweak.

Six Potential Ways to Pay for a Health Plan

There's no single right answer here, and anyone who tells you otherwise is selling something. Each model trades predictability, control and risk in a different way. Here's how they work:

1. Fully insured. This is the traditional route and still the default for most small businesses. You pay a fixed monthly premium, and the insurance company pays the claims. Your budget is predictable, and a bad claims year is the carrier's problem. The trade-off is that a good claims year is the carrier's gain, and you see very little data about what's actually driving your costs. Fully insured plans also carry state premium taxes and the insurer's profit margin, and they have to follow the benefit mandates of the state where the policy is written.

2. Level-funded. Think of this as self-funding with training wheels. You still pay a fixed amount each month, but behind the scenes that payment funds a claims account, administrative fees, and stop-loss insurance that protects you if claims run high. If claims come in under projections, you may get a refund at the end of the year. This model has gone mainstream for small employers: 37% of covered workers at firms with 10 to 199 employees are now in a level-funded plan. The catch? Technically, it's a self-funded plan.

3. Self-funded with stop-loss. Here you pay your employees' claims directly, usually through a third-party administrator, and you buy stop-loss insurance to cap your exposure. Specific stop-loss covers any one person's large claim, and aggregate stop-loss caps your total claims for the year. In return for taking on more risk, you keep the savings in a good year, you get full claims data, and you can choose your own pharmacy benefit manager, networks and programs. This is how most large employers already do it. Two out of three workers with employer coverage are in a self-funded plan, including 80% of those at companies with 200 or more employees.

4. Group captives. A captive lets mid-size employers self-fund together. Each company pays its own routine claims, and members share a middle layer of large-claim risk before commercial stop-loss kicks in. When the group performs well, members can receive a dividend. The benefit is more stable pricing than going it alone, especially as standalone stop-loss premiums jumped about 12.7% in 2026. The commitment is real, though: most captives assume a three- to five-year horizon and require collateral up front. They tend to fit employers with roughly 150 or more employees who are already self-funded or level-funded.

5. ICHRA. An Individual Coverage Health Reimbursement Arrangement flips the model entirely. Instead of buying a group plan, you give employees a tax-free monthly allowance to buy their own individual coverage. Your cost is fixed, you're out of the claims business, and employees choose the plan and network that fit them. ICHRA is growing fast: more than 500,000 people were covered this way at the start of 2026, roughly double the year before, and adoption among large employers more than doubled. It works best where the local individual market is strong, and it comes with its own rules around employee classes and affordability.

6. PEO master plans. A professional employer organization (PEO) pools the employees of many small businesses into one large health plan, so a 25-person company can access pricing and plan choices usually reserved for much bigger employers. Benefits come bundled with payroll, HR and compliance support. It's a strong fit for employers with roughly 5 to 150 employees who want both better benefits and help running the people side of the business. As with any option, look beyond the benefits quote to the full fee structure, contract terms and what happens if you leave.

Don’t Overlook Pharmacy

One more reason funding matters: it decides how much control you have over prescription drug costs, which large employers now rank as their top cost driver. Self-funded and level-funded employers can choose their own pharmacy benefit manager, and many are doing exactly that. The share of employers using one of the "Big 3" PBMs fell from about 64% to 54% in a single year, with the biggest shift among employers under 1,000 employees. New federal law signed in February 2026 will require PBMs to pass 100% of drug rebates through to employer plans, with most provisions taking effect in 2029. If you're signing a PBM contract now, plan for it.

Next Steps You Can Take

Below, you can download a Free Checklist Resource for yourself. Note: Please listen to Episode 4 of The Employer Brief Academy for more information. Also, listen to Episode 2, as this is a compliment to this information.

Benefits Funding Checklist

Is Your Health Plan Funded the Right Way? A free employer checklist to evaluate your current benefits, see which funding models fit your business, and know what to ask before your next renewal.

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