Inside the 2-Tier Health Plan: How Smart Network Design Drives Real Savings

You just saved $430,000!

That’s what we told our client after their stop-loss was re-rated for a 2-tier network model — a savings of nearly 10% of their annual health plan cost, with no contingencies or reductions in benefits.

What made this savings especially impressive was how quickly it occurred. The savings didn’t just appear at the end of the year through lower claims—they began immediately when the stop-loss carrier reduced the plan’s claim projection, also known as the aggregate (agg) factors, which estimate expected claims costs.

By recognizing the lower expected claim costs under the new 2-tier structure, the carrier lowered the maximum plan cost before the plan year even began. In other words, the employer realized a measurable premium reduction upfront—before the first claim was paid.

Now that the plan is live, those projected savings are being confirmed in real time as claims continue to run below prior-year levels.

So the natural question is: Who wouldn’t want to reduce costs like this?

A 2-tier model isn’t a quick plug-and-play fix. The logistics have to be just right—from having a major hospital system within the group’s footprint to finding a partner willing to contract directly at lower rates than national PPO networks. But when the pieces line up, the results can be exceptional.

Let’s take a deeper look at how 2-tier plans operate and why they’re becoming one of the most powerful tools in modern self-funded plan design.

The Concept: What Is a 2-Tier Network?

A 2-tier network integrates two levels of access for plan participants:

• Tier 1: A direct contract with a regional health system—including hospitals, outpatient facilities, and specialists—that provides lower negotiated service fees compared to standard PPO discounts.
• Tier 2: A national PPO network used for care outside the Tier 1 system, giving members broad geographic access and flexibility.

This structure combines the value of direct contracting with the safety net of national access, letting employers localize their plan where it matters most while maintaining coverage everywhere else.

How the Cost Structure Works

Employers pay a modest access or network-integration fee to the TPA (Third-Party Administrator, responsible for claims processing and plan administration) to enable the direct contract arrangement. This fee supports the repricing infrastructure and claim-redirect technology that automatically routes Tier 1 claims through the preferred hospital system and applies the direct-contract rates.

Despite this small fee, overall plan costs typically fall 8–15% based on effective utilization of Tier 1 providers, though savings vary by workforce and market. For comparison, other self-funded models like Reference-Based Pricing (RBP) plans can achieve 40–60% savings, while MEC plans offer fixed administrative costs of $50 per employee per month plus claims, as outlined in our MEC plan overview.

Plan Type: Who Can Use a 2-Tier Model

Two-tier plans are implemented in self-funded health plans. To succeed, an employer should:

• Be large enough to qualify for stop-loss coverage (in most states, 50–100 full-time employees; in New York, usually 100+).
• Have a geographically concentrated workforce near a major hospital system or integrated delivery network.
• Be open to direct contracting and proactive cost management instead of relying solely on PPO discounts.

The Role of the TPA

The TPA plays a central role in making a 2-tier plan function – managing claims processing, eligibility, and compliance, ensuring smooth operation of the 2-tiered networks. They must:

• Integrate directly with the hospital system’s repricing partner.
• Redirect claims to the correct tier in real time.
• Manage adjudication rules for both Tier 1 and Tier 2 providers.
• Handle communication and Explanation of Benefits (EOBs) clearly for members.

Choosing a TPA experienced with direct contracting and repricing integrations is critical. Without that technical alignment, even the best contract won’t produce measurable savings.

How Claims Flow in a 2-Tier Plan

Here’s how the system typically operates behind the scenes:

1. Claim Submission: The provider sends a claim to the TPA.
2. Claim Redirect: The TPA identifies whether the provider is part of the Tier 1 system.
3. Repricing: If Tier 1, the claim is sent to the repricing partner to apply the direct-contract rates.
4. Adjudication: The TPA applies member cost-sharing (deductible, copay, or out-of-pocket max).
5. EOB & Payment: The TPA issues the Explanation of Benefits and processes payment to the provider.

The process is seamless for members but requires tight coordination between the TPA, repricer, and hospital partner.

Driving Employee Engagement

A 2-tier network only delivers savings when members actually use the Tier 1 providers. To encourage this, employers design incentives such as:

• Lower deductibles for Tier 1 care.
• Reduced or $0 copays for office visits, imaging, or procedures within the Tier 1 system.
• Lower out-of-pocket maximums for Tier 1 services.

These incentives create a win-win dynamic—employees save money and receive coordinated, high-quality care, while the plan benefits from lower claim costs.

Geography Matters

Not every market is suited for a 2-tier model. Success depends on:

• Having a dominant or cooperative health system within commuting range of most employees.
• A strong employer presence in that system’s catchment area.
• A willingness by the hospital to enter direct contracts below PPO rates in exchange for higher steerage and guaranteed payment speed.

In dense urban areas like New York, Chicago, or Dallas, the opportunity can be significant. In more fragmented or rural regions, it’s harder to achieve critical mass.

Plan Design & Steerage

Employers typically use plan design to “steer” members toward Tier 1 care. For example, the plan may offer:

• $0 Tier 1 office visits.
• Tier 1 labs and imaging not subject to the deductible.
• Standard cost-sharing for Tier 2 (PPO) care.

These differences motivate employees to use the Tier 1 network naturally—without mandates or penalties. Over time, most members migrate toward Tier 1 providers once they see the value and cost difference.

The Takeaway

A well-structured 2-tier plan can reduce healthcare spending by 8–15% while improving the member experience. Success requires the right hospital partner, a capable TPA, member education, and strategic plan design. To explore how 2-tier plans work for your organization, visit  https://memberlybenefits.com/2-tier-plan/  or contact Dom Maggiore, our Benefits Strategy Specialist, today.

How Memberly Helps

Memberly specializes in designing and implementing 2-tier self-funded health plans for employers and multi-employer groups. Our team:

• Identifies health systems open to direct contracting at competitive rates.
• Partners with TPAs that have the technical and administrative expertise to manage the two-tier structure.
• Develops communication and incentive strategies to steer employees toward Tier 1 care.
• Models expected savings, stop-loss impact, and cash-flow outcomes before launch.

Learn more about our 2-tier plan offerings at https://memberlybenefits.com/2-tier-plan/ 

or contact Dom Maggiore, our Benefits Strategy Specialist, to explore whether a 2-tier network could work for your organization.