Managing High-Risk Employees in Your Health Plan: Strategies for Mid-Size Employers

When a handful of employees on your team have serious health conditions, it can feel like your entire benefits strategy is under threat. Carrier denials, surprise rate hikes, and the fear that one or two high-cost claims will blow up your renewal are real challenges that mid-size employers face every year. But there are proven strategies that companies with 20 to 250 employees are using right now to keep their health plan stable while still taking care of the people who need coverage most.

This is not about finding ways to avoid covering sick employees. That would be illegal under the ACA, and it would also be wrong. This is about structuring your benefits in a way that spreads risk intelligently, keeps costs manageable, and ensures that every employee, regardless of their health status, has access to meaningful coverage.

If you have ever watched your renewal come in at 30 or 40 percent higher because of a few large claims, or if you have been told by a carrier that they will not quote your group at all, this guide is for you. We will walk through the strategies that experienced benefits advisors use to help mid-size employers navigate exactly this situation.

Why High-Risk Employees Create Outsized Cost Pressure

In any employer-sponsored health plan, a small number of participants generate the majority of claims. This is not unique to your company. Across the U.S. employer market, the top 5 percent of claimants account for roughly 50 percent of total health plan spending, according to data from the Kaiser Family Foundation and Mercer. For a mid-size employer with 100 employees, that means approximately 5 people are driving half of your total benefits cost.

When those high-cost claimants include employees with conditions like cancer, end-stage renal disease, organ transplants, or complex chronic conditions, the financial impact is amplified. A single cancer treatment regimen can cost $150,000 to $500,000 or more per year. For a fully covered group with 100 lives, that one claim can represent 20 to 40 percent of the entire annual plan spend.

What Happens at Renewal

If you are on a fully covered group plan, the carrier sees every claim. When renewal time comes, those high-cost claims get baked into your rate. A group that had $800,000 in claims on a $600,000 premium is going to see a renewal increase of 25 to 50 percent, or the carrier may decline to renew entirely. This is the renewal shock that drives many employers to start exploring alternative funding strategies.

The problem is compounded when you try to shop your group to other carriers. Underwriters at competing carriers can see your claims experience through the Medical Information Bureau and other data sources. If your group has known high-cost claimants, you may receive declinations from multiple carriers, leaving you with no competitive alternatives.

The Carrier Denial Cycle

Here is how the cycle typically works. Your current carrier issues a renewal with a 35 percent increase. Your broker shops the group to five other carriers. Three decline to quote. One quotes at a rate higher than your current renewal. One quotes competitively but excludes prescription drug coverage for the high-cost conditions. You end up accepting the 35 percent increase or taking a plan with coverage gaps that hurt the employees who need it most.

This cycle repeats every year, and each iteration pushes costs higher. Breaking out of it requires a fundamentally different approach to how you fund and structure your health plan.

Strategy 1: Level-Funded Plans with Stop-Loss Protection

Level-funded plans are a middle ground between fully covered and self-funded. The employer pays a fixed monthly amount that covers expected claims, administrative fees, and stop-loss premiums. If actual claims come in below the expected level, the employer gets a refund. If claims exceed the expected level, the stop-loss coverage kicks in.

How Stop-Loss Protects Against High-Cost Claimants

Stop-loss comes in two forms. Specific stop-loss (also called individual stop-loss) caps the employer's liability for any single claimant. If you set a specific stop-loss attachment point at $75,000, any claims above that amount for a single individual are covered by the stop-loss carrier. Aggregate stop-loss caps the employer's total claims liability for the entire group. If total claims exceed a predetermined corridor (typically 120 to 125 percent of expected claims), the stop-loss carrier covers the excess.

For employers with known high-risk employees, the specific stop-loss attachment point is the critical variable. Lowering it from $100,000 to $50,000 increases the stop-loss premium but dramatically reduces the employer's exposure to any single catastrophic claim. The trade-off is straightforward: you pay a predictable premium for predictable protection.

Laser Provisions and How to Navigate Them

Stop-loss carriers sometimes apply "lasers" to known high-cost claimants. A laser means the stop-loss attachment point for that specific individual is set much higher than the standard level, sometimes at $200,000, $300,000, or even unlimited. This effectively means the employer is self-covering that individual's claims up to the laser amount.

Lasers are not ideal, but they are not a deal-breaker. An experienced benefits advisor can negotiate laser amounts, structure plan design around the specific conditions, and implement care management programs that reduce the actual claims for lasered individuals. Some advisors also use captive stop-loss arrangements that do not apply lasers at all, which we will discuss next.

Strategy 2: Group Captive Arrangements

A group captive is an arrangement where multiple employers pool their risk together in a shared self-funded structure. Each employer contributes to the captive based on their own claims experience and demographics, and the captive provides stop-loss protection for all members.

Why Captives Work for High-Risk Groups

The key advantage of a captive for employers with high-risk employees is that the risk is spread across a much larger pool. If your 100-person group has three cancer patients, that represents 3 percent of your population. In a captive with 2,000 total lives, those three individuals represent 0.15 percent of the pool. The per-capita cost impact drops dramatically.

Captives also typically do not apply lasers. Because the pool is large enough to absorb individual high-cost claims, there is no need to single out specific claimants for higher attachment points. This is a significant advantage for employers who have been lasered out of the traditional stop-loss market.

Voluntary Ancillary Captives

A newer development in the captive space is the self-funded voluntary ancillary captive. This structure adds voluntary benefits (dental, vision, disability, life) into a captive arrangement where the premiums are lower than traditional voluntary carriers (often 40 to 50 percent lower for employees), and any surplus generated by the captive is returned to the employer. The employer benefits from a new revenue stream, and employees benefit from significantly lower premiums on their supplemental coverage. This approach has been particularly effective for employers with 50 to 250 employees who want to add value without increasing their own costs.

Strategy 3: Two-Tier Plan Design for Salaried and Hourly Workers

One of the most practical strategies for managing cost when your workforce includes both office-based salaried employees and field-based or hourly employees is to offer different plan tiers to different employee classes. This is fully permitted under the ACA as long as each tier independently meets the applicable coverage requirements.

Related reading: ICHRA in year one | voluntary benefits and retention | supplemental benefit programs that cut payroll taxes

How Two-Tier Works

The salaried tier receives a major medical plan with a traditional network (PPO or HMO), standard deductibles, and comprehensive coverage including specialist visits, hospitalization, prescription drugs, and mental health services. This is the plan your office staff and management team use, and it functions like a standard employer-sponsored health plan.

The hourly tier receives a Minimum Essential Coverage (MEC) plan, sometimes paired with a Minimum Value Plan (MVP) or a limited medical benefit. MEC plans satisfy the ACA employer mandate for applicable large employers (those with 50 or more full-time equivalent employees) at a significantly lower cost than major medical. Monthly employer costs for MEC plans typically range from $50 to $150 per employee, compared to $500 to $900 for major medical.

The ACA Compliance Angle

Under the ACA employer mandate, applicable large employers must offer minimum essential coverage to at least 95 percent of full-time employees or face penalty A (the "sledgehammer penalty"). They must also ensure that the coverage offered is affordable and provides minimum value, or face penalty B (the "tack hammer penalty") for each employee who receives a marketplace subsidy instead.

A two-tier strategy satisfies both requirements. The MEC plan for hourly workers meets the minimum essential coverage test. If the MEC plan is designed to also meet affordability standards (employee-only cost does not exceed 9.02 percent of the mainland federal poverty line safe harbor in 2026), the employer is also protected from penalty B. And the major medical plan for salaried workers clearly exceeds all ACA requirements.

Cost Impact of a Two-Tier Design

For a company with 200 employees where 60 are salaried and 140 are hourly, the math can be dramatic. If the employer was previously covering all 200 on a major medical plan at $700 PEPM, the annual cost was $1,680,000. With a two-tier design, the salaried tier at $700 PEPM costs $504,000 annually, and the hourly tier at $100 PEPM costs $168,000. Total annual cost: $672,000. That is a savings of over $1,000,000 per year, or roughly 60 percent.

The trade-off is that hourly employees receive less comprehensive coverage. This is where employer communication and supplemental benefits become critical. Pairing the MEC plan with affordable voluntary benefits (dental, vision, accident, critical illness) helps hourly workers build a meaningful coverage package without creating a major cost burden for the employer.

Strategy 4: Care Management and Disease Management Programs

If you know which employees are driving high claims (and in a self-funded or level-funded arrangement, you have access to this data), you can implement targeted programs to reduce those claims over time. Care management and disease management programs are designed to help high-risk members get the right care at the right time in the right setting, which almost always costs less than unmanaged care.

What These Programs Include

A comprehensive care management program typically includes nurse care coordinators who work directly with high-risk members to coordinate their treatment plans, pharmacy management that steers members toward clinically equivalent but lower-cost medications (generics, biosimilars, therapeutic alternatives), center of excellence referrals that direct complex procedures (like joint replacements, cardiac surgery, or cancer treatment) to high-quality facilities with bundled pricing, and pre-authorization protocols that ensure expensive procedures are medically necessary before they are approved.

Measurable Results

Employers who implement these programs alongside a self-funded or level-funded plan typically see claim cost reductions of 8 to 15 percent within the first 12 to 24 months. The savings come from avoided emergency room visits, more efficient medication management, and steering high-cost procedures to better-value providers. For a group with $1,000,000 in annual claims, that translates to $80,000 to $150,000 in savings per year.

Strategy 5: Reference-Based Pricing for High-Cost Claims

Reference-based pricing (RBP) is a cost management strategy where the plan sets payment rates for hospital and provider services based on a reference point, typically a percentage of Medicare reimbursement rates (often 150 to 200 percent of Medicare). Instead of paying whatever the hospital charges, the plan pays a predetermined, reasonable amount.

How RBP Affects High-Risk Employee Costs

For employees with conditions that require expensive hospital-based care (cancer treatment, cardiac procedures, complex surgeries), RBP can reduce the plan's cost per procedure by 30 to 60 percent compared to network-negotiated rates. A hospital stay that would cost $200,000 under a PPO network might cost $80,000 to $120,000 under an RBP arrangement.

The employer needs a strong patient advocacy and balance billing protection program alongside RBP. When a provider receives payment at 160 percent of Medicare instead of their chargemaster rate, they may attempt to balance bill the patient. A good RBP vendor will negotiate directly with the provider, handle any disputes, and shield the employee from surprise bills.

How to Get Started: A Practical Roadmap

Step 1: Get Your Claims Data

If you are on a fully covered plan, request a claims report from your carrier. You are entitled to this data. It will show you total claims by category, large claimant counts (without identifying individuals), and trend data over the past two to three years. This is the foundation for every strategy discussed in this guide.

Step 2: Model Alternative Funding Structures

Work with a benefits advisor who specializes in alternative funding (not just a broker who sells fully covered plans). Have them model a level-funded plan with varying stop-loss attachment points, a captive arrangement, and a two-tier design. Compare the projected costs of each to your current fully covered renewal. The Health Funding Projector tool below can help you run these comparisons quickly.

Step 3: Implement Care Management Before Switching

If you are going to move to a self-funded or level-funded plan, start care management programs six months before the switch. Getting high-risk members into coordinated care before the new plan year starts means you enter the self-funded arrangement with lower expected claims from day one.

Step 4: Communicate Transparently with Employees

Employees with serious health conditions are understandably anxious about any change to their health plan. Be transparent about what is changing and what is not. Emphasize that their coverage for existing conditions is protected by law, that the plan changes are designed to keep costs stable for everyone (including them), and that new programs like care coordination are specifically intended to help them get better care, not to restrict their access.

Project Your Costs with the Health Funding Projector

Frequently Asked Questions

Can an employer exclude high-risk employees from the health plan?

No. Under the ACA, employers cannot deny coverage, charge higher premiums, or impose different waiting periods based on health status. All eligible employees must be offered the same plan options within their employee class. The strategies in this guide work within these legal requirements by changing how the plan is funded and structured, not by excluding anyone from coverage.

What is a stop-loss laser, and should I be worried about it?

A stop-loss laser is when the stop-loss carrier sets a higher attachment point for a specific individual known to have high claims. For example, if your standard specific stop-loss attachment is $75,000 but one employee had $300,000 in claims last year, the stop-loss carrier might set a $250,000 laser on that individual. This means you are self-covering that person's claims up to $250,000. Lasers are common but can be managed through care management programs, captive arrangements that do not use lasers, or by negotiating the laser amount down with the stop-loss carrier.

How does a two-tier plan design affect employee morale?

The impact depends entirely on communication and supplemental benefits. If hourly employees perceive the MEC plan as inferior with no additional support, morale will suffer. If the employer pairs the MEC plan with affordable voluntary benefits (dental, vision, accident, critical illness) and clearly explains the coverage, most employees appreciate having options. Many hourly workers in industries like construction, hospitality, and logistics are accustomed to MEC-level coverage and value having any employer-sponsored plan.

Is a group captive realistic for a company with 50 employees?

Yes. Most group health captives accept employers with as few as 25 to 50 employees. The captive pools your risk with hundreds or thousands of other employees across multiple employers, so your group size within the captive matters less than your overall claims experience and demographics. Companies with 50 to 150 employees are actually the sweet spot for captive participation because they are large enough to generate meaningful premium volume but small enough that the risk pooling benefit is significant.

What happens if my high-risk employee leaves the company?

If you are on a self-funded or level-funded plan, the departure of a high-cost claimant immediately reduces your prospective claims liability. Your next renewal or plan year will reflect the lower expected cost. If you are on a fully covered plan, the carrier may not immediately adjust your rate, but the reduced claims experience will show up in the following renewal cycle. In either case, the employee is entitled to COBRA continuation coverage for up to 18 months after termination.

Can I require high-risk employees to participate in care management programs?

You cannot require participation as a condition of employment or benefits eligibility. However, you can design your health plan with financial incentives that encourage participation. For example, employees who complete a health risk assessment and engage with a care coordinator might receive a lower deductible, a premium discount, or an HSA contribution. These wellness incentive programs are permitted under HIPAA as long as they meet specific reasonableness standards and offer alternatives for employees who cannot participate due to medical conditions.

How long does it take to see results from these strategies?

Stop-loss protection and two-tier plan designs produce immediate cost impact in the first plan year. Care management and disease management programs typically show measurable claims reductions within 12 to 24 months. Captive arrangements often deliver the strongest ROI in years two and three, after the employer has contributed to the captive's surplus and begins receiving dividend returns. Most employers who commit to a multi-year strategy see cumulative savings of 20 to 40 percent over a three-year period compared to staying on the fully covered renewal treadmill.

References

1. Kaiser Family Foundation. "2025 Employer Health Benefits Survey: Distribution of Health Plan Spending." kff.org
2. Mercer. "National Survey of Employer-Sponsored Health Plans 2025: Self-Funded Plan Trends." mercer.com
3. Society for Human Resource Management. "Managing High-Cost Claimants in Employer Health Plans." shrm.org
4. Centers for Medicare and Medicaid Services. "Minimum Essential Coverage and Employer Shared Responsibility." cms.gov
5. National Association of Commissioners (NAIC). "Stop-Loss Coverage Model Act and Market Practices." naic.org