Level-Funded vs. Reference-Based Pricing: What Mid-Size Employers Need to Know Before Switching

Every spring, thousands of small and mid-size employers open a renewal letter and feel the same thing: dread. Premiums up 12%. Up 18%. Sometimes more. And the only option their broker offers is a slightly different version of the same plan they already have. If you run a company with 25 to 100 employees, you know this cycle well. It feels like there's no way out — but there is.

Three alternatives are gaining real traction right now: ICHRA (Individual Coverage Health Reimbursement Arrangements), level-funded plans, and reference-based pricing. Each one works differently. Each one fits a different kind of employer. And each one carries its own trade-offs that your employees will feel on day one. A Vermont employer with about 35 employees recently sat across the table from advisors who laid out all three options in concrete numbers — $737, $802, and $750 per employee per month — and had to choose. This article breaks down what those numbers actually mean, which option makes sense for which employer, and what you should ask before making any move.

If your renewal is coming up and you're evaluating alternatives, this article walks through all three options with real numbers so you can have an informed conversation with your advisor. All figures used as illustrations are drawn from actual employer quotes and are presented as educational examples, not guarantees — your group's experience and census will determine what you're quoted.

Why Mid-Size Employers Feel Stuck in Fully-Funded Plans

A fully-funded plan — what most people call a "traditional" group health plan — works like this: you pay a fixed monthly premium to a carrier. The carrier takes on all the risk. If your employees have a lot of claims, the carrier pays. If they have very few claims, the carrier keeps the surplus. You never see a refund. You never see the claims data. You just get a bill every month.

For small employers, this model made sense for decades. You can't self-fund with 10 employees — one catastrophic claim could wipe out your reserves. So you buy the predictability. The premium is the premium, and you budget accordingly.

The Problem Hits Around 25 Employees

Once you get to 25 or 30 employees, something shifts. You now have enough people in your group that your own claims data starts to matter. Carriers price your renewal based on your actual experience. If your team had a rough year — a few hospitalizations, a high-cost claimant — your next renewal can spike dramatically. But you still don't see the data. You don't know who drove the costs (HIPAA rules prevent that). You just absorb the increase.

Meanwhile, the carrier is also factoring in trend — the general direction of medical costs across their entire book. Even if your group had a perfectly healthy year, you might still see a 6–8% increase just from trend. Add a bad claims year on top of that, and 20% increases become common.

Why Brokers Keep Selling the Same Thing

Most brokers earn commission on the premium you pay. When the premium goes up, their commission goes up. That doesn't mean every broker has bad intentions — many genuinely don't know the alternatives well enough to present them confidently. But it does mean the system isn't designed to push you toward better options. It's designed to roll you into the next year's plan with as little friction as possible.

That's the trap. And breaking out of it starts with understanding what's actually available to you.

What Is a Level-Funded Plan?

A level-funded plan sits between fully-funded and fully self-funded. Here's the plain-language version: instead of paying one big premium that covers everything, you pay three separate buckets every month.

The first bucket is your expected claims — the carrier's estimate of what your group will actually spend on medical care. The second bucket is your stop-loss premium — this is actual protection that caps your risk if claims run high. The third bucket is administrative fees. Add them together and you get your "level" monthly payment.

How the Refund Works

The key structural difference with level-funded plans: the claims bucket is yours. If your employees use less care than expected, you get some of that money back at the end of the year. That refund can be significant — sometimes 10–15% of what you paid in. Over a few years of healthy claims, those refunds add up.

The stop-loss protection means you're never exposed to runaway costs. If one employee has a $500,000 claim, your stop-loss kicks in above your specific deductible (typically $20,000–$50,000 per person) and covers the rest. You get the upside of a good claims year without being wiped out by a bad one.

The Vermont Example: $802/Month Per Employee

In the Vermont case, the level-funded option through Nationwide priced at $802 per employee per month. That came with a $3,500 deductible and a $7,500 out-of-pocket maximum. The network was Signal/Aetna — a large, established network that most Vermont providers already participate in. Employees would barely notice a difference in how they access care.

That's the key selling point of level-funded: it feels like a traditional plan to employees (same cards, same networks, similar deductibles) but the economics are fundamentally better for the employer over time.

Who Level-Funded Is Right For

Level-funded works best for employers who have a reasonably healthy workforce, want to start seeing their own claims data, and want a network-based plan that employees will recognize. It's the lowest-friction step away from fully-funded. If your group has had unpredictable claims history or you have several employees with expensive ongoing conditions, stop-loss pricing may come back high — and the savings shrink. Run the numbers on your specific group before deciding.

What Is Reference-Based Pricing?

Reference-based pricing (RBP) is a more aggressive departure from the traditional model. Instead of using a network of negotiated rates, it pays providers based on a benchmark — typically a percentage of what Medicare pays for the same service.

Medicare sets reimbursement rates for every procedure, every hospital admission, every lab test. Those rates are public. An RBP plan says: "We'll pay 135% of Medicare for this service." That's the reference. It's usually higher than what Medicare pays, but lower than what a large carrier pays a hospital after their negotiated discount.

Why Hospitals Charge So Much More

Before we go further, it helps to understand the gap. A hospital might bill $50,000 for a knee replacement. A large carrier's negotiated rate might be $28,000 — a 44% discount. But that $28,000 is still a multiple of what Medicare pays, which might be $12,000 for the same procedure. A 135% Medicare rate would pay the hospital $16,200. The hospital's margin shrinks. Most hospitals will accept it — because some revenue beats none. But not all will.

The Balance Billing Risk (And How Good RBP Plans Handle It)

The primary risk with RBP is balance billing: a provider who doesn't accept the reference rate can send a bill to the employee for the difference. This is called balance billing. If a hospital bills $50,000, the plan pays $16,200, and the hospital doesn't accept that — your employee could get a bill for the remaining $33,800. That's a serious problem.

Good RBP programs deal with this proactively. They typically include:

• Claims advocacy: A team that negotiates directly with providers before and after care to get claims accepted at the reference rate.
• Balance bill protection: A guarantee that employees won't be left holding the bag. The plan pays or negotiates down to zero employee liability.
• Pre-authorization guidance: Helping employees identify which facilities are likely to accept RBP rates before they go in for non-emergency care.

When RBP is done well, employees rarely notice a difference. When it's done poorly — with no advocacy support and no balance bill guarantee — it becomes a nightmare. Ask specifically about these protections before choosing any RBP plan.

The Vermont Example: $737/Month Per Employee

The RBP option in the Vermont case also came through Nationwide, priced at $737 per employee per month — $65 less per month than the level-funded option. Same deductible ($3,500). Same out-of-pocket max ($7,500). The only difference is how providers get paid on the back end. At 35 employees, that $65 gap is $2,275 per month, or $27,300 per year. Not trivial.

What About ICHRA?

ICHRA (Individual Coverage HRA) is a completely different model. Instead of the employer buying a group plan, the employer gives each employee a monthly allowance — in the Vermont example, $750 per month — and employees use that money to buy their own plan on the state exchange.

This sounds appealing on paper. The employer's cost is fixed and predictable. No renewal surprises. No group underwriting. Just a defined contribution per employee, per month.

The Problem: Exchange Plans Aren't Built for Working Adults With Good Incomes

In the Vermont example, the $750/month allowance sounds reasonable until you price out what it actually buys. The lowest-cost exchange plan — a bronze plan — ran about $950/month in premium alone. That means the employee is paying $200/month out of pocket just for the premium. And that bronze plan comes with a $10,000 deductible. Not a typo. Ten thousand dollars before most benefits kick in.

For an employee earning $55,000 a year, a $10,000 deductible means they're effectively unprotected for routine and moderate medical events. They might avoid going to the doctor because of what it might cost. That's not health coverage — that's catastrophic-only coverage dressed up as a benefit.

When ICHRA Makes Sense

ICHRA works better when employees qualify for premium tax credits on the exchange — which happens when household income falls below 400% of the federal poverty level. It also works for employers with geographically dispersed teams, or where benefits standardization across a diverse group is genuinely difficult. For a cohesive 25–50 person team in Vermont, ICHRA mostly just shifts financial burden to the employees. That's not a benefits improvement. That's a cost shift.

Side-by-Side Comparison: Three Options for a 35-Person Vermont Employer

Let's put the numbers next to each other so they're easier to digest.

Monthly Cost Per Employee

ICHRA: $750/month employer contribution. Employee pays ~$200+ in additional premium plus all costs up to a $10,000 deductible.
Level-Funded (Nationwide/Aetna): $802/month total employer cost. $3,500 deductible, $7,500 OOP max. Full Signal/Aetna network.
Reference-Based Pricing (Nationwide): $737/month total employer cost. Same $3,500 deductible/$7,500 OOP max. No traditional network — providers paid at 135–140% Medicare.

Employee Experience

ICHRA: Each employee shops and manages their own plan. Different employees have different plans, different networks, different deductibles. Complex to administer and explain.
Level-Funded: Identical to what employees expect from a group plan. Same card, same network, same process. Minimal disruption.
Reference-Based Pricing: Mostly the same experience, but employees should know about the RBP structure so they're not surprised if a balance bill arrives — even if advocacy services ultimately resolve it.

Employer Risk Profile

ICHRA: Very low risk for the employer. Defined contribution, no claims exposure.
Level-Funded: Moderate risk, well-managed through stop-loss protection. Potential upside (refunds) if claims are low.
Reference-Based Pricing: Similar to level-funded, but with the additional operational complexity of managing balance billing situations.

Annual Employer Cost at 35 Employees

ICHRA: $315,000 (fixed, but employee net cost is much higher due to premium gap and high deductibles)
Level-Funded: $336,840/year (with potential refunds if claims run below projection)
Reference-Based Pricing: $309,540/year ($27,300 less than level-funded before any refunds)

Vermont's RBP Legislation: A Signal, Not Just a Trend

In June 2025, Vermont signed legislation that moves the state toward reference-based pricing as a standard approach to reimbursement. The transition is expected to play out over 2–3 years. This isn't a fringe policy experiment — it's a state government concluding that the current model of hospital pricing is unsustainable and that Medicare-anchored rates are a workable alternative.

What This Means for Vermont Employers

Vermont employers who adopt RBP now aren't taking a flier on an unproven model. They're getting ahead of a state-level direction. Providers who push back against RBP rates today will be operating under a similar framework in the next few years regardless. The learning curve for employees and HR teams starts now, not in 2027.

A Broader National Signal

Vermont isn't alone in watching hospital pricing with skepticism. The No Surprises Act, price transparency rules from CMS, and growing employer frustration with network-based plans have all pushed RBP closer to the mainstream. What was once a specialty product used by large self-insured employers is now accessible to groups as small as 25 people. The direction of travel is clear. The question is when you want to get on board, not whether the model is viable.

What to Ask Before You Make a Move

Whether you're considering level-funded, RBP, or ICHRA, there are questions every employer should get answered in writing before signing anything.

For Level-Funded Plans

• What is the specific stop-loss threshold per employee (specific deductible)? What is the aggregate stop-loss cap?
• How is the claims fund structured — are unused funds refunded at year-end, and how is that refund calculated?
• Will we receive monthly claims reporting, and how detailed is it?
• How is renewal pricing determined — based on our own claims experience or on the carrier's broader book?
• What happens in year two if we have a bad claims year — is there rate stability protection?

For Reference-Based Pricing Plans

• Does the plan include balance bill protection — in writing — with zero employee financial liability?
• What is the claims advocacy process? How quickly does the team respond when a provider disputes a payment?
• What percentage of claims in this region are accepted at the reference rate without dispute?
• Is there a pre-care provider lookup tool so employees can check before scheduling non-emergency care?
• How does the plan handle emergency care at non-participating hospitals?

For ICHRA

• What is the average net employee cost after the employer contribution — including premium and out-of-pocket exposure?
• Do any employees qualify for premium tax credits on the exchange? (ICHRA eligibility can affect this.)
• How will HR manage the administrative complexity of employees on different plans with different networks?
• What happens when an employee has a high-cost event under a bronze plan with a $10,000 deductible?

How to Use the Health Funding Projector

The Health Funding Projector is a free tool built specifically for this kind of decision. You plug in your group size, your current premium, your employees' average age range, and your claims history if you have it. The tool models what each funding approach would likely cost over one, three, and five years — including stop-loss scenarios, refund potential, and out-of-pocket impact on employees.

It's not a replacement for a real quote. But it gives you a defensible baseline before you walk into a broker conversation, so you're not just reacting to whatever number gets put in front of you. You'll know whether the quote you're being shown is in the right range, and you'll have the language to ask for what's missing.

The projector also models ICHRA scenarios — so you can see the employee net cost at different allowance levels and different plan tiers. That $750/month looks very different when you map it against what a silver plan actually costs in your state versus a bronze plan.

Frequently Asked Questions

Is level-funded right for small groups, or do you need to be a certain size?

Level-funded plans are generally available to groups starting at 25 employees, though some carriers will go as small as 10. The sweet spot is 25–200 employees — large enough that your own claims data is statistically meaningful, small enough that you can't afford to fully self-fund without stop-loss protection. At 25–50 employees, level-funded typically delivers 10–20% savings over a comparable fully-funded plan, depending on your group's claims history and the carrier's underwriting.

What happens if an employee gets a balance bill under reference-based pricing?

With a well-structured RBP plan, the employee should never have to pay a balance bill. The plan's advocacy team steps in, contacts the provider, and negotiates the difference down to zero employee liability. This process takes time — sometimes weeks — and it requires the employee to communicate with the advocacy team rather than just paying the bill. The important thing is that employees understand this process before they need it. If your RBP plan does not include a written balance bill guarantee with zero employee liability, that's a disqualifying gap. Do not buy that plan.

Can we switch back to a fully-funded plan if level-funded or RBP doesn't work out?

Yes, generally. Most level-funded and RBP arrangements are annual contracts. At renewal, you can return to a fully-funded plan if you choose. The caveat is that if you had a bad claims year while on a level-funded or self-funded arrangement, that claims experience follows you — fully-funded carriers will price your next renewal based on it. Switching isn't a guaranteed reset. That's why it's worth thinking about your multi-year strategy, not just the first-year premium.

Does ICHRA work if some employees are older and have higher health needs?

ICHRA gives every employee the same allowance (or a tiered allowance by age, which is allowed). Older employees or those with higher health needs will find that the allowance buys much less — because their premiums on the exchange are higher and their plan options at a given contribution level may be more limited. ICHRA shifts the risk of age-based cost variation to employees rather than pooling it across the group. For employers with a mixed-age workforce, this can create real equity concerns and retention problems among older employees.

How does reference-based pricing affect specialist access and hospital care?

Unlike a network-based plan, RBP doesn't restrict employees to a specific list of in-network providers. Technically, employees can go to any provider — the plan will pay at the reference rate regardless of where they go. In practice, some hospitals and specialists push back more than others. High-volume academic medical centers and large hospital systems are the most likely to dispute RBP payments. Community hospitals, independent specialists, and outpatient facilities tend to accept reference-rate payments more readily. Your RBP carrier should be able to give you acceptance rate data for your specific region.

What does Vermont's RBP legislation actually mean for employers operating there?

Vermont's 2025 legislation doesn't require employers to adopt RBP immediately. It sets a policy direction: the state is moving toward Medicare-anchored reimbursement as a standard over a 2–3 year transition period. For employers, this means the infrastructure — provider familiarity, administrative processes, advocacy services — will continue to mature in Vermont specifically. Employers who adopt RBP now are ahead of the curve, not guinea pigs. The balance billing disputes that have historically been RBP's main drawback are likely to decline as the model becomes the norm rather than the exception.

References

1. Kaiser Family Foundation (KFF). 2024 Employer Health Benefits Survey. San Francisco: KFF, 2024. https://www.kff.org/health-costs/report/2024-employer-health-benefits-survey/
2. Centers for Medicare and Medicaid Services (CMS). Medicare Physician Fee Schedule. Baltimore: CMS, 2025. https://www.cms.gov/medicare/physician-fee-schedule
3. SIIA (Self-Insured/Alternative Funding Industry Association). Introduction to Self-Funding and Stop-Loss Coverage. Simpsonville, SC: SIIA, 2024. https://www.siia.org
4. U.S. Department of Labor. FAQs About Affordable Care Act Implementation: Individual Coverage HRAs. Washington, DC: DOL, 2023. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-45
5. KFF. Average Benchmark Premiums and Financial Assistance by State. San Francisco: KFF, 2024. https://www.kff.org/affordable-care-act/state-indicator/average-marketplace-premiums-by-metal-tier/
6. SHRM (Society for Human Resource Management). 2024 Employee Benefits Survey. Alexandria, VA: SHRM, 2024. https://www.shrm.org/research/surveys/pages/employee-benefits-survey.aspx
7. Health Affairs. Reference-Based Pricing: Evidence and Implications for Employers. Health Affairs Blog, 2023. https://www.healthaffairs.org
8. Vermont Legislature. Act 67: An Act Relating to Health Care Payment Reform. Montpelier, VT: Vermont General Assembly, 2025. https://legislature.vermont.gov