Self-Funded Health Plans
The vast majority of large employers self-fund — and a rapidly increasing number of small and mid-sized employers are too.
A self-funded health insurance plan is a health benefits arrangement where an employer pays for employees’ medical claims directly, instead of paying a fixed premium to an insurance company to take on all the risk. In a traditional fully insured plan, the employer pays premiums to an insurance carrier, and the carrier pays covered claims. In a self-funded plan, the employer funds the claims itself, usually with help from outside vendors.
How self-funded health plans work
--> Employees use the health plan like normal
--> A third-party administrator (TPA) often processes claims and manages the plan
--> The employer almost always buys stop-loss insurance (also called reinsurance)
--> Any claims above a threshold set by the employer are paid by the stop-loss carrier
--> The employer sets aside money to pay healthcare claims up to their threshold
--> If claims are lower than expected, the employer may save money
--> If claims are higher than expected, the employer may pay more
In simple terms: The employer funds employees’ medical claims directly — usually with a TPA and stop-loss protection — instead of paying an insurer to take on all the risk.
Key advantages of self-funded health plans
--> More control over plan design
--> Control of each piece of the plan
--> Greater visibility into claims data
--> Cost savings when claims are lower than expected
--> Stop-loss protection when claims are higher than expected
--> Flexibility in provider networks and wellness programs
--> Ability to identify problems and opportunities for plan improvement and implement them as needed
--> Avoidance of some state insurance premium taxes and mandates
A rapidly increasing number of small and mid-sized employers are taking advantage of self-funding, especially with stop-loss protection and through captive arrangements.
CuatroBenefits Insights:
The vast majority of large employers have self-funded plans. They realize that they would spend far more money long-term on fully insured plans while having no transparency or control of their plans. A rapidly increasing number of small and mid-sized employers are taking advantage of self-funding, especially with stop-loss protection and through captive arrangements.
The main downside of self-funded plans is risk: the employer is responsible for paying claims, so costs can fluctuate from year to year. When an employer starts a self-funded plan, they typically see that their total cost in year one could be far lower than if they stayed fully insured if claims are less than expected — but could be higher than if they stayed fully insured if claims are higher than expected.
In the past, fully insured employers often felt like the risk or potential for a higher cost year was too much for them to move into self-funding. However, many small and mid-sized employers who have spent time in the fully insured market have reached a point where they feel like their biggest risk is the status quo — staying at the mercy of fully insured health plan rates any longer is a sure-fire way to gobble up their future profitability. They are ready to manage the risk of self-funding and take control to lower their long-term costs.
Self-Funded Health Plan FAQs:
It's a fair concern, but the risk is more controlled than most people assume. Self-funded employers almost always carry stop-loss insurance, which caps your exposure both on any single large claim and on total claims for the year. So while you fund claims directly and benefit when they run low, your worst-case scenario is capped at a level you set in advance. A growing number of small and mid-sized employers self-fund for exactly this reason — the control and savings potential, with guardrails.
Stop-loss is the safety net that makes self-funding work. There are two kinds: specific stop-loss protects you when one person has a very large claim above a set threshold, and aggregate stop-loss protects you if your total claims for the year run higher than projected. Together they mean you're responsible for your group's claims only up to a predictable ceiling — beyond that, the stop-loss carrier steps in. It's what turns “paying claims ourselves” into a manageable, budgetable strategy.
A third-party administrator, or TPA, handles the day-to-day running of your plan — processing claims, providing network access, and serving your members — while you keep control of the plan itself. Just as importantly, a good TPA gives you detailed claims data, so for the first time you can actually see what's driving your costs and make informed decisions about your plan design. That visibility is one of the biggest reasons employers move to self-funding.
They stay with you. That's the core appeal of self-funding: when your employees stay healthy and claims come in low, the money you didn't spend on claims remains in your organization rather than padding an insurance carrier's margins. Over time, that's why the vast majority of large employers self-fund, and why so many smaller ones are following. We'll help you weigh whether your group is positioned to capture that upside.