What Is Commercial Health Insurance? A Guide for Employers
Commercial health insurance is private health coverage, as opposed to Medicare, Medicaid or another government program. If you sponsor a group medical plan for your employees, you already offer it. The label matters because it decides which rules apply to your plan, who carries the risk of large claims, and how the plan works alongside Medicare.
Key takeaways
“Commercial” describes privately sponsored or privately purchased coverage, not a government program. Employer group plans are the largest part of it.
An employer can provide commercial coverage three ways: fully insured, level-funded or self-funded. Who carries the claims risk, and which rules apply, differ with each.
Self-funded plans are generally governed by federal law (ERISA) rather than state insurance rules. Fully insured plans follow state insurance law and the ACA market rules.
If an employee or spouse is eligible for Medicare, the size of your company decides whether your plan pays first or second.
What the term means
In health care, commercial coverage is health insurance that is not a government program. Medicare, Medicaid, CHIP, TRICARE and VA care sit on one side. Employer-sponsored plans and plans people buy for themselves sit on the other. When hospitals, researchers and carriers talk about the “commercially insured,” they mean that second group, although some data sources break out plans bought on the ACA marketplace separately.
For an employer the practical meaning is simple: your group medical plan is commercial coverage. Everything that follows is about the decisions that come with that.
Three ways an employer provides commercial coverage
Fully Insured
You pay a premium, and the carrier pays the claims and carries the risk of unexpectedly large ones. The policy is regulated as insurance, which in Michigan means oversight by the Department of Insurance and Financial Services (DIFS), along with the federal ACA market rules. Insured plans are also covered by the medical loss ratio rule, under which a carrier that spends too little of premium on care owes rebates to the policyholder (Public Health Service Act § 2718, 42 U.S.C. § 300gg-18).
Self-funded
The employer pays claims directly from its own funds, usually through a third-party administrator, and buys stop-loss insurance to cap its exposure to very large claims. A self-funded plan is generally governed by ERISA, which preempts state laws that regulate insurance as applied to the plan (29 U.S.C. § 1144; FMC Corp. v. Holliday, 498 U.S. 52 (1990)). That is why state benefit mandates usually do not reach a self-funded plan, while federal requirements such as the ACA preventive services rule still do.
Level-funded
A level-funded plan is a self-funded plan packaged to feel like insurance: one fixed monthly payment that covers expected claims, administration and stop-loss, with a possible refund if claims run low, depending on the contract. Because the employer is still responsible for the claims, level-funded plans are generally treated as self-funded for regulatory purposes.
Which ACA rules apply to which plans
Not every ACA rule reaches every plan. The essential health benefits requirement applies to non-grandfathered individual and small group insured plans, not to large group or self-funded plans (Public Health Service Act § 2707, 42 U.S.C. § 300gg-6). The preventive services requirement applies to non-grandfathered group health plans of every funding type (42 U.S.C. § 300gg-13). Under the federal definition, a small employer is one with 50 or fewer employees (42 U.S.C. § 300gg-91(e)(4)).
Commercial coverage and Medicare
When an employee or spouse is also eligible for Medicare, the Medicare Secondary Payer rules decide which coverage pays first. For people age 65 or older, the employer plan generally pays first when the employer has 20 or more employees. For people under 65 who are entitled to Medicare because of a disability, a large group health plan generally pays first when the employer has 100 or more employees (42 U.S.C. § 1395y(b)(1)). Smaller employers are generally secondary, and the employee counts have their own rules, so confirm your situation before telling anyone which plan to use.
What to do with this
Confirm how your plan is funded. It is stated in your plan documents, and your carrier or administrator can answer in one sentence.
Ask which state and federal rules apply to your plan because of that funding.
At renewal, ask for the other funding arrangements to be priced against the insured renewal on the same plan design, so you are comparing like with like.
Check your Medicare notices. Creditable coverage disclosures to Medicare-eligible participants are due each year by October 15 (42 C.F.R. § 423.56).
Where we fit
We help employers compare fully insured, level-funded and self-funded options on the same plan design, so the funding decision rests on your own claims data and not on whichever quote arrives first. We also work with your carrier or administrator on the Medicare coordination and notice questions that come with it.
Questions we get
Is commercial health insurance the same as employer health insurance?
Not exactly. Employer plans are the largest part of commercial coverage, but commercial coverage also includes plans people buy on their own.
Is a Medicare Advantage plan commercial insurance?
No. Medicare Advantage is a Medicare program delivered through private insurers, so it is counted with government coverage.
Do state benefit mandates apply to a self-funded plan?
Generally not, because of ERISA preemption. Federal requirements still apply, and a self-funded plan can choose to cover what a state mandate would require. Your administrator can tell you what the plan covers by design.
Does “commercial” refer to the size of the business?
No. It describes the type of coverage, not the size of the employer. Size matters for other rules, such as the small group market and the Medicare Secondary Payer thresholds above.
Who regulates a fully insured plan in Michigan?
DIFS regulates the policy and the carrier. The plan itself is also an ERISA plan, so federal labor and benefits rules apply to the employer as plan sponsor.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
The law behind this page.
Public Health Service Act sections 2707, 2713, 2718 and 2791 (42 U.S.C. §§ 300gg-6, 300gg-13, 300gg-18, 300gg-91); ERISA section 514 (29 U.S.C. § 1144); FMC Corp. v. Holliday, 498 U.S. 52 (1990); Medicare Secondary Payer statute (42 U.S.C. § 1395y(b)); 42 U.S.C. § 18022; 42 C.F.R. § 423.56; Michigan Department of Insurance and Financial Services.
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