As healthcare costs rise, many employers are turning to self-funded health plans as an alternative to traditional fully insured models. In fact, KFF reports that 63%of the more than 160 million people who receive health benefits through their employer are now enrolled in self-funded plans. Despite this growth, self-funding is often misunderstood, and misconceptions can keep organizations from choosing an option that may better support both their budgets and their employees.
In a fully insured plan, the insurance carrier assumes the financial risk in exchange fora fixed premium. With a self-funded health plan, the employer takes on that financial risk, collecting premiums from enrollees and paying medical claims as they are incurred. Employers may administer these plans internally or partner with a third-party administrator (TPA) and must also purchase stop-loss insurance to protect against large individual claims or unusually high overall claims.
Here are five common myths about self-funded health plans:
1. Self-funded plans are only for large employers.
While large employers are more likely to choose self-funded plans, many small and midsized organizations are making the shift as well. By partnering with a TPA and adding stop-loss coverage to protect against catastrophic claims, smaller groups can manage their own health benefits with more control and predictability. This model offers greater flexibility in plan design and clearer insight into health care spending. According to KFF, 27% of covered workers at employers with fewer than 200 employees and 57% at employers with200–999 employees are enrolled in self-funded plans. With the right guidance and safeguards, self-funding can be a cost-effective, strategic alternative to traditional insurance for organizations of all sizes.
2. Self-funded plans are too risky.
Risk is inherent in every health plan model. Employers can reduce financial exposure in self-funded plans through strong claims oversight, cost-saving initiatives (such as wellness programs), and stop-loss insurance. Stop-loss coverage caps an employer’s liability for high claims and is available in two forms: individual (specific) and aggregate (total claims). Many employers choose both for broader protection.
Individual stop-loss limits the employer’s cost when a single employee’s medical claims exceed a set attachment point, protecting against unexpectedly high individual claims. Aggregate stop-loss protects against the total claims of the group exceeding a predetermined attachment point for the plan year, typically reimbursing the employer once this threshold is surpassed.
Data transparency in self-funded plans further helps employers identify cost drivers and implement targeted cost-containment strategies. With careful planning, self-funding can be a stable, cost-efficient way to deliver employee health benefits.
3. Self-funded plans mean more administrative burden.
You don’t have to manage this alone. A trusted TPA can oversee claims, compliance, member services, and technology, while giving you greater flexibility in plan design and vendor selection. You decide how much responsibility they take on for designing and administering your self-funded plan.
4. Self-funded plans are too complex.
While self-funding introduces new concepts, it does not need to be overwhelming. Many arrangements are designed to resemble fully insured plans, making the transition easier for employers. With the support of experienced brokers, TPAs, and consultants, organizations can navigate plan design, compliance, and ongoing management with confidence. Once they make the switch, many employers gain clearer insight into health care spending, stronger cost control, and a more strategic benefits approach, demonstrating that the long-term advantages can outweigh the initial learning curve when you have the right consulting team in place.
5.Self-funded plans aren’t compliant with health care regulations.
Many employers assume self-funding is less regulated than fully insured plans. Self-funded health plans must comply with key federal laws, including ERISA, the ACA, and HIPAA. While they follow many of the same rules for nondiscrimination, claims procedures, and reporting, self-funded plans offer greater flexibility in plan design and cost management, allowing employers to tailor coverage to their workforce while remaining compliant.
Conclusion
Self-funded health plans can help employers better manage health care costs, customize coverage, and improve transparency. By clearing up common misconceptions, employers can make more informed decisions about their benefits strategy. To consider self-funding, employers should start by evaluating their group health goals and benchmarks, financial position, workforce needs, and potential partners. Self-funding is not the right fit for every organization. Download the bulletin for more details.
