Low-Wage Workers in Level Funded Industries: Cost Shifting Dressed as Coverage

LFP-06.04 | Sharp Analysis | Series 06: The Populations

A level funded plan with a $2,575 deductible and $7,500 out-of-pocket maximum provides nominal coverage to a home health aide earning $34,900 annually. Functionally, the deductible alone consumes 7.4% of her gross income. The out-of-pocket maximum, if reached, represents 21.5%. She has a coverage card. She has a legal obligation to pay these amounts before the plan pays most of her claims. She will not pay them if she can avoid it, because she cannot afford to. She will avoid care, which means she will use the emergency department when avoidance is no longer possible.

This is not a critique of level funded specifically. The same plan design sold by a fully insured carrier produces the same access barrier. The structural problem is that the industries where level funded adoption is growing employ large numbers of workers at income levels where standard small-employer plan designs function as catastrophic-only coverage in practice. The employer has fulfilled a legal obligation. The worker has a benefit that does not function as a benefit for the vast majority of what she actually needs healthcare for.

The Income Distribution in Level Funded Industries

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Level funded adoption concentrates in specific industries. Construction, home health care, landscaping and groundskeeping, food service, janitorial services, staffing agencies, and personal care services show accelerating level funded penetration, driven by the industry structure: enough employees to form a risk pool, enough employer sophistication to evaluate the model, and competitive pressure to offer health benefits for recruiting purposes.

The workforce these industries employ sits well below the income assumptions embedded in standard plan design. The Bureau of Labor Statistics Occupational Employment and Wage Statistics for May 2024 establishes the income reality. Home health and personal care aides, the largest single occupation in the country at 4.0 million workers, had a median annual wage of $34,900. Landscaping and groundskeeping workers, numbering nearly 943,000 nationally, had a mean annual wage of $40,880. Food preparation and serving workers averaged $33,380. Janitors and cleaners, excluding maids and housekeeping, had a mean wage of approximately $39,540 for the occupational group. Construction laborers at the entry level earn medians ranging from approximately $35,000 in lower-wage states to $50,000 in high-cost markets.

The BLS Quarterly Census of Employment and Wages confirms the industry-level picture. The average weekly wage in home health care services (NAICS 6216) was $669 in 2023, or approximately $34,788 annually. In food services and drinking places (NAICS 722), the average weekly wage was $474, or $24,648 annually. These are averages. The lower quartile of each workforce earns less.

The wage distribution matters because plan design parameters do not adjust to worker income. A $2,575 deductible is the same nominal dollar amount whether the member earns $35,000 or $90,000. As a share of income, those costs are radically different in their effect on whether the member seeks care.

Plan Design at These Income Levels

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The KFF 2024 Employer Health Benefits Survey reports plan design parameters by firm size. Workers at firms with fewer than 200 employees faced an average annual deductible of $2,575 for single coverage, compared to $1,538 at larger firms. Thirty-two percent of covered workers at small firms were enrolled in plans with deductibles of $2,000 or more. The ACA permits out-of-pocket maximums up to $9,450 for single coverage in 2024; many small employer plans set their limits in the $6,000 to $8,000 range.

Worker premium contributions add to the cost burden before a single claim is filed. The KFF 2024 EHBS shows workers at small firms contributing an average of $1,368 annually for single coverage. Combined with the $2,575 deductible, a worker earning $34,900 faces $3,943 in premium-plus-deductible exposure annually — 11.3% of gross income — before any coinsurance or copay.

The Commonwealth Fund’s 2024 Biennial Health Insurance Survey classifies an adult as underinsured if out-of-pocket costs excluding premiums equal 10% or more of household income, or the deductible alone constitutes 5% or more of household income. A worker earning $34,900 with a $2,575 deductible meets the deductible threshold for underinsurance (7.4%) before seeing a single provider. The coverage is real. The underinsurance is also real.

The Commonwealth Fund’s 2024 survey found that 23% of adults with health insurance all year were underinsured by this definition. Among the underinsured, 66% had coverage through an employer. The underinsured population is not primarily the uninsured who slipped through the system. It is enrolled workers who carry coverage cards and cannot afford to use them.

The Utilization Evidence

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The relationship between cost sharing and utilization is not speculative. It has been documented across decades of health services research, from the RAND Health Insurance Experiment through current quasi-experimental studies of natural policy changes.

The foundational evidence comes from the RAND Health Insurance Experiment, conducted from 1974 to 1982, in which researchers randomly assigned participants to health plans with differing cost-sharing levels. Participants in high-cost-sharing plans used fewer services across all categories of care, including preventive and clinically necessary services. The effect was larger for low-income participants than for higher-income participants facing the same plan design, because the dollar cost shared was a larger fraction of their income.

Wharam, Zhang, Eggleston, Lu, Soumerai, and Ross-Degnan’s 2017 study in JAMA Internal Medicine examined the effect of employer-mandated transitions from low-deductible to high-deductible plans on diabetic patients. Among low-income patients, high-deductible plan enrollment was associated with an increase of 24 additional emergency department complication visits per 1,000 members, a 53% relative increase. The cost per emergency department episode rose $322 per individual, a 65% relative increase. The mechanism is legible: primary care becomes unaffordable, complications develop without outpatient management, emergency department utilization rises when the complication can no longer be deferred. A follow-up study by Wharam and colleagues published in Annals of Internal Medicine in 2018 found that high-deductible insurance was associated with delays in care for macrovascular complications of diabetes, including delayed outpatient visits for angina, peripheral artery disease, and transient ischemic attack.

The AHRQ Medical Expenditure Panel Survey provides population-level utilization data. Among privately insured adults with household income below 200% of the federal poverty level, the rate of unmet medical needs due to cost in 2022 was substantially higher than among higher-income groups with the same insurance status. The insurance status is identical. The cost barrier operates differently by income level. This is what underinsurance looks like in survey data.

Emergency department utilization data from the National Center for Health Statistics shows that privately insured adults in the lowest income quartile use emergency departments at higher rates than those in higher income quartiles, a pattern consistent with primary care avoidance due to cost sharing followed by emergency department presentation when conditions become acute.

The Commonwealth Fund 2024 Biennial found that 57% of underinsured adults reported forgoing needed care due to cost. This is not a population that chose not to get care for convenience. These are people for whom the arithmetic of cost sharing produced a decision to delay.

The Coverage-Access Distinction

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The employer has met its legal obligation. The ACA’s employer shared responsibility provisions require applicable large employers to offer minimum essential coverage to full-time employees. For small employers below the 50-employee threshold for shared responsibility, no ACA mandate applies, but the employer who offers a level funded plan has made a choice to provide coverage and expects compliance credit for it. The plan must meet minimum value standards: covering at least 60% of total allowed costs. A plan with a $2,575 deductible and $7,500 out-of-pocket maximum can meet minimum value while remaining effectively inaccessible for any care below the deductible threshold.

The compliance framework does not ask whether the enrolled worker can use the coverage. It asks whether the coverage is offered. These are different questions. Their divergence is most visible at income levels where the cost-sharing architecture exceeds the worker’s ability to pay.

The normative claim resting on this evidence is that there is a category of plan design that functions as cost shifting rather than coverage. The employer’s monthly contribution to the level funded plan creates an appearance of comprehensive benefits. The plan design shifts the cost of non-catastrophic care to the worker. The worker, unable to pay the cost sharing, does not seek care. The deferred care reappears as higher-acuity conditions, emergency department utilization, and worse chronic disease outcomes. The cost that was shifted from the plan to the worker ultimately shows up in the healthcare system as uncompensated care and preventable acute events.

This dynamic is not unique to level funded plans. It applies wherever plan design and worker income are mismatched in the same way. The level funded market’s growth in industries employing low-wage workers makes the mismatch more visible and more consequential, because the industries adopting level funded are precisely those where the wage floor is lowest and the workforce has the fewest resources to absorb cost sharing.

The solution is not to redesign the coverage product as charity. It is to recognize that plan design parameters should be set in relation to the income distribution of the actual covered population, not against an assumed population at higher income levels. Income-adjusted HRA arrangements, low-deductible plan options for the lower-income portion of a mixed-income workforce, and first-dollar coverage for preventive and primary care services are mechanisms that reduce the income-coverage mismatch without eliminating the plan’s ability to manage total cost. LFP-11.09 examines how benefits architects address this problem in practice for mixed-income small employers.