Employers provide medical coverage to almost half of all Americans under Medicare age. This practice began during World War II when the government passed the 1942 Stabilization Act to combat inflation by freezing wage increases by employers. To remain competitive, employers began offering benefits to attract and keep employees. Much has changed in the 80 years since then. In the last decade alone, health insurance premiums have risen 55% while wages rose only 30%. Despite rising costs, the insurance products have only gotten worse with employee contributions increasing 40% and individual deductibles rising 110%. Employers have innovated to meet this challenge just like they rose to the challenge in 1942. 

Most employees and health systems only see the insurance card they are handed which contains the rules of payment including copay, deductible, and the rest. But when diving into how the proverbial sausage is made, there is so much more than meets the eye. The first topic to understand is the category of funding. There are three ways employers pay for employee healthcare: fully funded, level funded, and self funded.

Fully Funded: The “standard” way of buying healthcare where the insurance pays for an insurance product through premiums. The largest benefit is the employer taking no financial risk for their employees’ well being. The largest downside is once the employer pays the premium, that money is gone, even if none of their employees use the insurance product at all for any given year. Employers are also subject to arbitrary premium hikes with no recourse. Most old school brokers might trap employers in this category because of how they are compensated. 

Level Funded: A transitional category. Employers still pay a monthly premium, but now instead of all the money disappearing, savings are shared at year end. If claims are less than projected at the year end, employers will receive some benefit. Usually this does not come in the form of cash in the bank, but rather credit towards premium payments the following year. Adds some upside with no increase in risk. Employers will still see premium increases regardless, just less so if they receive the credit. 

Self Funded: In this category, employers essentially become small insurance companies. They determine the parameters of the insurance card and keep a fund for employee health expenditures. The employer will partner with a third party administrator (TPA) to help process the claims, and have stop loss insurance which sometimes comes with the TPA. Employers bear full risk of their employees health costs, but they get more control over how the money is spent and are not beholden to arbitrary annual premium increases.

64% of US workers were covered by a self funded plan in 2021. Previously only the largest employers in the country chose to self fund; the ones who were able to bear a substantial cost (an employee who develops late stage cancer, for example). Nowadays, smaller employers are also able to become self funded through health consortiums and other vehicles which spread out risk. Since employers have taken on the role of insurance companies, new innovations have come out which may prove to deliver higher value care at lower cost. Some of the innovations disrupting employer based care currently include direct primary care (such as my own or larger networks like Nextera Healthcare), transparent PBMs, administrative solutions such as Flume Health, direct contracting, and much more. A whole new class of benefit advisors, such as those certified by Health Rosetta, has arisen to transition employers to self funding and to connect the self funded employers with the right innovations. 

As the country tries to figure out how to deliver and fund primary care, employers will play a huge role in the decision as self funded plans have the potential to completely rebuild the health system for employees. Clayton Christenson in Innovator's Prescription argues that employers might have more incentive to keep employees healthy (for productivity) than the employee has for their own health. Pair that with bearing the financial risk of employee health and you have the perfect opportunity with the right stakeholders to increase investment in primary care and build a system which delivers high quality care while remaining cost conscious.