Why Geography Determines Whether Level Funded Works: The Variables That Matter

LFP-07.01 | Sharp Analysis | Series 07: The Geography of Level Funded

A level funded plan that works in Dallas does not work in rural Montana. The plan document may be identical. The stop loss terms may be identical. The employer profile may be identical. The coverage outcome is not.

Five geographic variables interact to produce the conditions under which level funded works or fails for any given employer: state regulatory treatment, network availability, provider market concentration, ACA marketplace quality, and the concentration of local infrastructure encompassing broker expertise, stop loss carrier appetite, and TPA presence. These variables do not operate independently. Their interaction effects produce geographic patterns that single-variable analysis cannot explain and that most TPA market development strategies do not address.

The KFF 2024 Employer Health Benefits Survey found that 36% of covered workers in small firms offering health benefits are enrolled in level-funded plans. That adoption rate reflects an aggregate across vastly different geographic conditions. In markets where all five variables align, level funded has genuine structural advantages over fully insured and ICHRA. In markets where one or more variables fail, those advantages disappear or invert. The geography has to be read before the plan can be designed.

The Five Variables and Their Relative Weight

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State regulatory treatment is the threshold variable. It determines whether the product can exist at all. Where a state treats level funded as self-funded under ERISA preemption, the employer plan has full plan design flexibility, no premium tax on the claims fund, and no state-mandated benefit requirements beyond federal law. Where a state reclassifies level funded as fully insured, or prohibits stop loss insurance for small groups, the product faces community rating, mandatory benefits, and premium tax obligations that eliminate the model’s economic rationale. New York Insurance Law Sections 3231 and 4317 prohibit stop loss insurance for employers with 50 or fewer employees, which effectively closes the level funded market for small groups in that state. The regulatory treatment question must be resolved before evaluating anything else. A plan that cannot exist legally requires no network analysis.

Network availability determines whether nominal coverage translates to actual access for members. Most level funded TPAs do not build their own networks. They lease access from national aggregators including MultiPlan, PHCS, and First Health. These aggregators built their provider relationships in high-volume metropolitan markets. In Dallas, they deliver dense specialist coverage across dozens of categories. In Cascade County, Montana, the same aggregator relationship delivers a directory with thin participation, providers who are not accepting new patients, and specialists accessible only through long travel. The plan documents are identical. The member experience is not.

Provider market concentration determines what the claims fund actually buys. Commercial prices for hospital services are negotiated between payers and providers, and those negotiations produce results that reflect each party’s market power. A 2023 study using FAIR Health National Private Insurance Claims data found that commercial in-network allowed amounts averaged 246% of Medicare rates for inpatient and outpatient hospital services, with substantial geographic variation tied to market concentration. Research published in Health Affairs, drawing on claims from 70 hospital systems, found hospital prices ranging from approximately 150% to 400% of Medicare depending on provider market structure. An employer claims fund that prices services at 280% of Medicare in a competitive metro market prices the same services at 350% of Medicare in a market where a single health system controls hospital access. The dollar difference per covered life is large enough to determine whether the plan year ends in surplus or deficit.

ACA marketplace quality determines whether ICHRA is a genuine alternative for the employer segment being analyzed. ICHRA’s coverage adequacy depends entirely on what the individual market in a given geographic rating area can provide at the reimbursement level the employer sets. In markets with five or more competing carriers, deep networks, and benchmark plan premiums below the employer’s reimbursement amount, ICHRA may provide comparable coverage to a level funded plan. The Urban Institute has documented that markets with only one or two insurers have substantially higher premiums than markets with five or more. In those weaker markets, the same ICHRA reimbursement buys materially less coverage than a well-structured level funded plan. Where ICHRA is adequate, level funded competes against it directly. Where ICHRA is inadequate, level funded occupies the market without that competition.

Local infrastructure concentration determines whether the product can reach the employer at all. Brokers develop level funded expertise through repeated placements. Stop loss carriers build geographic appetite where volume and claims experience support it. TPAs invest in markets where broker relationships and carrier partnerships create deal flow. The concentration of this infrastructure is self-reinforcing, and its absence creates a cold-start problem that regulatory favorability alone cannot solve (see LFP-07.06 for the full analysis of that feedback mechanism).

How the Variables Interact

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The five variables do not produce additive outcomes. Their interactions create geographic configurations that can only be understood by examining how each variable conditions the others.

A state with favorable regulation but thin networks produces a plan that is legal and inaccessible. Parts of rural Alabama, Mississippi, and Wyoming have minimal state-level regulation of self-funded plans. An employer in these markets can purchase a level funded arrangement. The employees often cannot find in-network specialists within a reasonable drive. The leased network directory reflects a national aggregator’s urban-anchored provider relationships, not the county’s actual provider density. HRSA designates many of these counties as primary care Health Professional Shortage Areas, where the population-to-primary-care-provider ratio exceeds 3,500 to 1. Coverage on paper, emergency department utilization in practice.

A state with deep infrastructure but aggressive stop loss regulation produces a market where the product cannot reach the employer despite adequate conditions on every other variable. The result is not inadequate coverage but no product. The employer defaults to fully insured or ICHRA regardless of what level funded might otherwise have provided.

A state with moderate regulation, adequate metro networks, and weak marketplace options creates the conditions where level funded carries its strongest comparative advantage. Indiana, Ohio, and Tennessee exemplify this pattern. Each has favorable regulatory treatment of self-funded plans, adequate network density in the major metropolitan areas where most of the eligible employer base is concentrated, established broker and carrier infrastructure built through a decade of active market development, and marketplace carrier participation that is present but insufficient to make ICHRA a reliable option in most rating areas. In these markets, level funded beats fully insured on price and transparency and beats ICHRA on coverage reliability.

Texas combines favorable regulation across the full state, deep networks in its large metros (Dallas-Fort Worth, Houston, San Antonio, Austin), below-average ACA marketplace competition in most rating areas, and a broker and TPA community that has made level funded expertise a core competency over two decades. The combination produces the largest level funded market in the country by most measures. California combines deep networks, moderate regulatory treatment, and ACA marketplace competition that is considerably stronger than Texas in most metropolitan rating areas. The combination produces a market where level funded and ICHRA compete directly in ways that do not exist in Texas, and where TPA market development requires a more differentiated geographic approach (see LFP-08.02 for the level funded versus ICHRA competitive analysis).

Dallas Versus Montana: The Same Plan, Different Outcomes

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The abstraction becomes concrete when the five variables are applied to two specific markets that differ across the board.

Dallas operates within Texas, which treats level funded plans as self-funded ERISA plans without additional state-level requirements. The Texas Department of Insurance has not moved to reclassify level funded as fully insured for any employer size segment. Stop loss minimum attachment point requirements are minimal. The plan has full design flexibility, no premium tax on the claims fund, and no state-mandated benefit obligations beyond what federal law requires.

The Dallas-Fort Worth metropolitan area has dense PPO network coverage. Major aggregators including MultiPlan and PHCS maintain extensive provider contracts across the region. Hospital systems compete for network participation. Specialist access in virtually every category is available within a reasonable commute. The network card an employee carries has real value behind it.

The stop loss market in Texas is competitive. Carriers including Sun Life, Tokio Marine HCC, Symetra, and Voya actively underwrite in the state. Specific and aggregate attachment points are available at terms that work for groups as small as 10 lives in favorable risk profiles. The broker community in Dallas includes specialists in level funded placement who work across the employer size spectrum and who have built the case management and population health relationships to support sophisticated plan management. TPA infrastructure is well-established and covers the administrative requirements from eligibility through claims adjudication.

Rural Montana differs on every variable while operating under the same federal legal framework. Montana’s regulatory treatment is favorable to self-funded plans; the state has not moved to restrict stop loss for small groups. That regulatory favorability is necessary but entirely insufficient without the accompanying conditions. HRSA designates the majority of Montana’s counties as primary care Health Professional Shortage Areas. The same aggregator that delivers dense network coverage in Dallas maintains thin provider contracting across most Montana counties. Specialist access requires travel to Billings, Missoula, or often out of state. The network directory an employee receives may accurately list the providers who have contracts with the aggregator while failing to identify which of those providers are accepting new patients or are operating within an accessible distance.

Stop loss carrier appetite for rural Montana is limited. The geography produces low premium volume per market area, which makes the fixed costs of market development and claims management expensive relative to potential revenue. Several major carriers apply geographic loading factors or exclude certain rural Montana counties from their standard underwriting. Broker expertise in level funded is concentrated in Billings and largely absent in the communities where most of the agricultural, energy, and construction employers who would fit the level funded profile are located. TPA infrastructure serving employers in these communities is minimal.

The employer in Dallas writes a fixed monthly contribution and receives a functional coverage product. The employer in rural Montana writes a comparable check and receives a plan document, a directory, and a stop loss certificate. Whether the employees can find in-network providers determines whether those documents mean anything.

Geography as a Primary Strategic Variable

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The argument is operational rather than descriptive. Geography must function as a primary input in TPA market development, product design, and go-to-market sequencing, not as context appended after the product strategy is set.

A TPA entering a new geographic market must assess all five variables before committing resources. Favorable regulation is necessary but not sufficient. Network adequacy must be verified at the county level, not assumed from national aggregator relationships that were built in different markets. Stop loss carrier appetite must be confirmed through direct conversations, not inferred from other states where the same carrier actively underwrites. Broker expertise must be developed or acquired, which requires investment in education, incentive structures, and relationship building that takes time. The infrastructure that exists in mature markets like Texas and Ohio took years of active investment to build. New market entry requires replicating that investment or accepting that the product will underperform against what the regulatory environment technically permits.

A broker advising employers across multiple geographies requires a geographic viability map. The recommendation appropriate for a 20-person employer in suburban Indianapolis is not automatically appropriate for a 20-person employer in the Idaho Panhandle with the same ownership profile and comparable financials. ICHRA may be the more honest recommendation in markets with strong marketplace competition. Fully insured through a regional carrier may be the only practical answer in markets with thin networks regardless of what the regulatory environment permits. The broker who recommends level funded uniformly across geographies is substituting product loyalty for geographic analysis and will produce inconsistent outcomes for clients.

An employer evaluating coverage options must ask geographic questions before plan design questions. Is level funded viable in the specific counties where employees live and seek care, not just in the state as a whole? Is the network the TPA proposes to lease adequate for this employer’s workforce locations? Are stop loss carriers willing to underwrite this geography at terms that make the economics work for the employer’s risk profile? Is the ICHRA alternative genuinely inadequate in this rating area, or does it provide comparable coverage at lower administrative complexity? The answers vary by county and rating area. Assuming national product availability means uniform local viability is the error most commonly discovered at the claims stage, when the employee calls the provider directory and finds the specialist three counties over has not seen new patients since 2021.

The series examines each geographic variable in depth. State regulatory treatment (LFP-07.02) is the threshold condition. Network deserts (LFP-07.03) map where access fails regardless of what the regulatory environment permits. Multi-state employer complexity (LFP-07.04) layers additional variables onto employers whose workforce spans multiple geographic regimes. ACA marketplace quality (LFP-07.05) determines where ICHRA provides genuine competition. The geographic concentration of market growth (LFP-07.06) explains why level funded adoption expands where it does and stalls where it does not.