Level Funded as Supplemental Insurance: Can the Model Work as a Layer Rather Than a Foundation?

Level funded is built as primary coverage. Every component of its pricing and structure, the claims fund contribution, the stop loss attachment points, the administrative fee, the network access arrangement, assumes the plan is the member’s principal payer of medical benefits. Adapting level funded to a supplemental role, wrapping around an ACA marketplace plan, a Medicare arrangement, or a direct primary care membership, requires changing the foundational assumptions of the product rather than adding features to an existing one. The concept has genuine merit for identifiable populations. The product adaptation required to realize it has not been built.

What a Supplemental Level Funded Product Would Do

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Primary coverage pays the bulk of medical expenses. Supplemental coverage fills the gap between what primary coverage pays and what the member owes. The specific gap depends on the primary coverage structure.

For an employer whose workforce has enrolled in ACA marketplace high-deductible plans, the gap is the deductible and coinsurance the employee is responsible for before and after the deductible is met. A bronze-tier marketplace plan in 2025 typically carries a deductible above $6,000 for single coverage, with the member responsible for all costs below that threshold and a coinsurance share above it up to the out-of-pocket maximum of $9,200. An employee earning $45,000 annually who faces a $6,000 deductible effectively has no usable coverage for most healthcare encounters in a given year. A supplemental level funded layer that covered the first $3,000 of the deductible would reduce the member’s financial exposure while limiting the supplemental layer to predictable, primary care-level claims.

For an employer offering ICHRA whose employees have purchased high-deductible marketplace plans, the same gap exists. The ICHRA reimbursement covers the premium. The member’s out-of-pocket exposure for deductibles and coinsurance remains. A supplemental product funded by additional employer contribution could address this gap without requiring the employer to switch from ICHRA to a group plan.

For post-65 members in a small employer workforce who maintain Medicare as their primary coverage through either original Medicare or Medicare Advantage, supplemental coverage addresses the gaps in Medicare benefit design. Original Medicare Part A covers hospital inpatient care with a 2025 deductible of $1,676 per benefit period and daily coinsurance for extended stays. Part B covers outpatient services with a $240 annual deductible and 20 percent coinsurance on the Medicare-approved amount with no out-of-pocket maximum. A small employer with several employees in this category might want to offer a supplemental product that addresses these gaps without migrating to a fully separate coverage vehicle. (Series 16 addresses the post-Medicare market in depth.)

For employers with direct primary care arrangements, the structural situation is different. Direct primary care practices, of which more than 2,800 operate across all 50 states as of early 2026, provide unlimited primary care access for a monthly membership fee that typically ranges from $50 to $150 for an individual. DPC practices do not bill third-party payers. The monthly fee covers the included services and the DPC practice provides referrals for anything beyond its scope. As of January 1, 2026, a regulatory change removed the longstanding prohibition on HSA contributions for members with DPC memberships paired with HSA-eligible high-deductible plans, resolving a major barrier to DPC-plus-HDHP combinations. The employer who contracts with a DPC practice for employees and pairs it with high-deductible coverage still leaves a gap for specialty, hospital, and catastrophic care. A level funded layer sized to address that gap without duplicating DPC primary care would be a genuine product design.

The Structural Challenges

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The technical barriers to supplemental level funded are real and require deliberate product innovation to address. They are not insurmountable.

Stop loss underwriting for supplemental risk differs from primary coverage underwriting in ways that require carrier adaptation. Primary coverage stop loss attaches above a specific per-member amount, the specific deductible, where the plan has paid the first dollar of claims from the claims fund. A supplemental level funded layer does not pay first-dollar claims on most encounters; it pays a defined gap amount for qualifying events. The variance characteristics of this supplemental risk are different from primary coverage variance. The stop loss carrier’s attachment point must be calibrated to the supplemental product’s structure rather than to primary coverage norms, and the per-member maximum the stop loss carrier is underwriting is lower if the supplemental layer has lower expected claims. No standard stop loss product has been designed for this use case. Carriers willing to underwrite it would need to develop new rating and pricing frameworks.

Claims coordination is an administrative burden that primary coverage does not face. A supplemental level funded layer must know what the primary coverage paid before determining its own liability. For ICHRA-plus-supplemental arrangements, the supplemental layer must receive claims data from the employee’s individual marketplace carrier, which has no obligation to share data and which the employer has no direct contracting relationship with. For Medicare-plus-supplemental arrangements, the supplemental layer must coordinate with either original Medicare or the Medicare Advantage plan. The data exchange requirements and the administrative complexity of coordinating with multiple primary payers that are outside the employer’s control are substantially more complex than administering a single primary plan.

Regulatory classification is uncertain and varies by state. A supplemental health arrangement that is structured as a group health plan under ERISA carries ERISA’s compliance obligations and preemption framework. One structured as an accident and health insurance product under state insurance regulation carries state insurance department oversight. One structured as an HRA covering gap expenses carries HRA regulatory requirements. The structure the employer chooses affects which regulations apply, what the employee’s tax treatment is, and what the TPA’s administrative obligations are. Benefits attorneys have not developed consensus guidance on the optimal regulatory structure for a supplemental level funded product because the product does not exist to require it.

ERISA preemption questions become more complex when the level funded layer sits on top of individual market coverage. ERISA preempts state insurance laws for self-funded ERISA plans. If the supplemental level funded layer qualifies as a self-funded ERISA plan, its self-funded component operates outside state insurance regulation. But the employer’s ERISA fiduciary obligations, the plan document requirements, and the SPD disclosure requirements all apply. An employer who sets up a supplemental self-funded arrangement without understanding the fiduciary obligations it accepts is creating fiduciary exposure.

Why the Product Gap Matters

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The populations who would benefit from a supplemental level funded product are real and currently unserved by any existing product architecture.

The ICHRA employer whose employees face high marketplace deductibles and who wants to supplement ICHRA reimbursements with additional cost-sharing protection has no group product designed for this purpose. They could offer a separate HRA for cost-sharing, which carries its own design constraints and administrative complexity. They could offer a hospital indemnity policy, which provides a defined dollar amount per hospitalization but does not fill the deductible gap analytically. No product today fills the ICHRA deductible gap with a self-funded employer-funded layer that the employer can size and structure to the specific gap in their employees’ marketplace coverage.

The DPC employer who wants to pair DPC membership with catastrophic coverage and an employer-funded first-dollar layer for qualifying events above DPC scope has no integrated product. They can assemble DPC plus HDHP plus HRA through separate vendors with separate administration, but the integration is absent and the administrative burden falls on the employer to manage multiple vendors with no shared claims data.

The Medicare-age small employer segment, addressed in Series 16, has demographic characteristics that make gap coverage particularly valuable. Workers aged 55 to 64 who remain employed and covered under an employer plan face the transition to Medicare at retirement. Small employers with multiple employees in this cohort want products that serve this population’s needs without the actuarial instability that high-utilization older workers can create in a primary level funded plan.

Who Could Build It

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The product opportunity exists. The infrastructure requirements are within reach. A TPA willing to invest in supplemental product design alongside a stop loss carrier willing to underwrite the non-standard risk profile and a benefits attorney willing to develop the regulatory framework could bring this product to market. The market is not large enough to attract the resources of large carriers optimizing for volume. It is large enough to matter for a TPA focused on the specific employer segments it serves.

The supplemental level funded product feeds directly into Series 15’s product architecture discussion and Series 16’s post-Medicare market analysis. It is a design problem that awaits the operator willing to solve it.