A small business can buy health insurance through three pools — a fully insured small group plan, a level-funded health plan, or a PEO’s master plan — and the right one depends on your census, your cash cushion, and your state.
Most owners I talk to compare those three options by the monthly number at the top of each quote. That’s a reasonable place to start. But the three aren’t the same product at different prices. Each one shares risk differently, and the monthly number only tells you part of what you’re agreeing to.
With 2027 renewals arriving now, it’s worth knowing what each pool actually is before you pick one. Here’s how I walk clients through it.
Three pools, three different deals
Fully insured is the traditional small group plan. The carrier takes the claims risk, and under ACA rating rules your price moves on age, location, and how the whole state pool performs — not on your own group’s claims. One expensive diagnosis doesn’t reprice your renewal. The tradeoff is that you pay for the pool’s experience, not yours. KFF’s review of 2027 small group filings from nearly 300 insurers puts the median requested increase at 14%, which I covered in more detail in the 2027 renewal math.
Level-funded is self-funding with guardrails. You pay a fixed monthly amount that covers administration, stop-loss insurance, and a claims fund. If claims come in under the fund, some of the surplus may come back to you. Here your own claims do matter, and a good year shows up at renewal.
A PEO plan puts your employees inside a master plan covering a much larger group of lives, alongside payroll and HR. You get access to plan designs and networks a 20-person company often can’t get alone, and you pay an administrative fee on top. You’re still exposed to medical trend — nobody is exempt from that — but you’re part of a far bigger pool.
What a level-funded health plan really costs
Level funding gets a lot of attention right now because, for the right group, it prices well. Enrollment in fully insured small group coverage fell from about 17 million in 2013 to 10 million in 2024, according to KFF data reported by Insurance Business, and part of that shift went into level-funded arrangements.
The number to compare isn’t the monthly payment. It’s the maximum you could pay in a bad year, and what happens the year after. A level-funded health plan quote should answer five questions in writing: what the maximum annual cost is, how much of any surplus actually comes back, how claims incurred before you leave are handled, whether the stop-loss carrier can raise the deductible on one high-cost person at renewal (called lasering), and whether renewal is guaranteed. Under a fully insured plan, the ACA generally guarantees renewal. Under level funding, it usually isn’t.
None of that makes level funding a bad choice. It makes it a different choice. You’re trading the ACA’s protection from your own claims for the chance to keep the savings when claims are low.
Which pool fits which group
This is a starting point from what I see across clients, not a rule. Every group has its own facts.
A level-funded health plan tends to fit a younger, stable group with predictable claims and enough cash on hand to absorb a weaker year without strain. That describes a lot of early-stage tech companies and some professional services firms. If that’s you, it’s worth pricing.
Fully insured tends to fit groups with an older age mix, a known ongoing medical need on the plan, or an owner who simply wants a fixed cost and a guaranteed renewal. That’s not a timid choice. It’s paying for certainty, which is a legitimate thing to buy.
A PEO plan tends to fit companies that want richer plan options than their size would normally get, have employees spread across several states, or were going to outsource payroll and HR anyway. When benefits are part of how you compete for hires, the plan access alone can matter — I wrote about that in losing candidates over benefits.
Then check your state, because it can take an option off the table. New York generally doesn’t allow stop-loss coverage to be sold to small employers, which rules out level funding for most small New York groups. California sets minimum stop-loss attachment points for employers under 50, and Delaware bars stop-loss for groups of five or fewer, per this Fenwick summary of state rules. If you’re in New York, your real comparison is usually fully insured versus a PEO plan.
How to compare the three on one page
Use the same census for every quote. Then put each option into the same three lines: expected annual cost, worst-case annual cost, and what the employee pays per paycheck. For a level-funded health plan, the worst case is the maximum in the contract. For a PEO, separate the health premium from the administrative fee so you can see each one — how PEO pricing works explains where those fees sit, and this checklist covers the ones that don’t always show up on page one.
Compare the networks too. A cheaper plan doesn’t help if your employees’ doctors aren’t in it.
Once it’s laid out that way, the decision usually gets simpler. Sometimes level funding wins clearly. Sometimes staying fully insured is the better value once you account for the downside. Sometimes the PEO comes out ahead when you count what it replaces. It goes in every direction, and which way is a numbers question. If you already have a PEO, a renewal review is a quick way to see whether its plan is still the best fit for your group.
Want to know which health plan pool fits your group for 2027?
I’ll put your census and current renewal side by side against level-funded and PEO options, and show you expected and worst-case cost for each. No sales pitch. Just the numbers.
Related: The 2027 Renewal Math · Platform PEOs vs. People PEOs · Free PEO Audit & Renewal Review