What is a Self-Funded Health Plan?

What is Self-Funding?

Self-funding, also known as self-insurance, allows employers to take control of their health plan funding in one of three ways: managing the plan internally, outsourcing to a third-party administrator (“TPA”) for claims processing, or utilizing a hybrid approach.

With a self-funded health plan, employers directly pay for claims as they occur, rather than prepaying a fixed premium to an insurance carrier. This approach enables employers to reap immediate savings when claims are lower than expected but also requires them to bear the financial risk of higher-than-anticipated claims.

To mitigate this risk, employers can purchase stop-loss insurance, which acts as a financial safety net by covering unexpected, high-cost claims.

The Advantages of Self-Funded Health Plans

Employers often choose self-funding for two key reasons: cost savings and greater control over their health benefits.

Cost Savings

1. Retaining Savings on Claims: In a self-funded arrangement, employers retain any unspent funds when claims are lower than anticipated. By contrast, in fully insured plans, those savings benefit the insurance carrier. On average, self-funded plans can save employers over 10% compared to fully insured plans.
2. Lower Tax Burden: In many states, premium taxes that apply to fully insured policies do not apply to claims paid directly by employers under self-funded plans. This tax relief can lead to additional savings.

Greater Control

Self-funded plans allow employers to design benefits tailored to their workforce and business objectives. Unlike fully insured plans, self-funded plans are often exempt from state-mandated benefit requirements, enabling employers to:

• Create coverage that aligns with affordability goals and business strategies.
• Maintain consistent benefits across multiple states.
• Adjust plan designs to address changes in workforce demographics.

Additionally, self-funded employers benefit from detailed reporting on plan performance, providing insights into claim patterns and cost drivers. This transparency supports informed decision-making and allows employers to optimize their plan over time.

Comparing Fully Insured vs. Self-Funded Plans

Employers generally fund their health benefits through one of two models: fully insured or self-funded plans. While fully insured plans offer predictability by transferring risk to an insurance carrier, self-funded plans provide flexibility and cost-saving opportunities.

Is a Self-Funded Plan Right for Your Company?

While self-funding isn’t the right choice for every employer, it can be a highly effective solution for companies seeking cost savings, flexibility, and greater transparency in managing their health benefits.

A common misconception is that self-funded plans are only suitable for large employers. In reality, innovative self-funding solutions are available for businesses of all sizes, including small and mid-sized companies.

If you’re considering self-funding, consulting with an experienced advisor can help you assess whether this approach aligns with your organization’s needs and goals.