Having a self-funded insurance plan is sort of like turning your organization into a part-time insurance company. Instead of paying an insurance carrier, you’re the one funding your employees’ health plans. It’s a bold move that can lead to significant savings, but it’s not without its risks.

So what exactly does it mean to be self-insured, and is it the right choice for you? Let’s investigate.

What is a self-funded health plan?

Self-funded insurance, also known as self-insured insurance, is a financing agreement in which an employer bears the financial risk of providing healthcare benefits to its employees. Instead of paying premiums to an insurance carrier like on a fully insured plan, the company sets aside money to pay for insurance claims as they arise.

Here’s how it works:

1. The employer establishes a fund to pay for employee health claims.
2. Employees pay for a portion of their healthcare costs through deductibles, co-pays, and coinsurance.
3. The employer pays for the rest of the claims from the established fund.
4. Most of the time, the employer pays for stop-loss insurance to protect against catastrophic claims.

For example, let’s say you decide to go with self-funded insurance. You might set aside $1 million for your 100 employees’ healthcare costs. When Employee A needs a $50,000 surgery, you pay for it directly from this fund rather than having an insurance company cover it.

The pros of self-funded insurance

You might be wondering why taking on so much financial risk might be worth it. Here are a few reasons:

• Potential for significant cost savings: You’re not paying premiums, which otherwise bolster the insurance company’s profit margin. Not to mention the [rising cost in insurance premiums](https://www.healthcaredive.com/news/employer-healthcare-costs-increase-2025-aon/724505/#:~:text=This year%2C employer insurance costs,costs higher%2C according to Aon.) over the past few years.
• Greater control over plan design: You can tailor your health plan to your employees’ specific needs, which isn’t always possible when going with a fully insured health plan.
• Access to data: You get detailed claims data, allowing for better decision-making and targeted wellness programs as you continue to refine your benefits package.
• Cash flow advantage: You pay for claims only as they arise rather than prepaying premiums.
• Exemption from state insurance mandates: Self-funded plans are regulated by federal law (ERISA), potentially reducing time and cost spent on compliance efforts.

The cons of self-funded insurance

Despite their advantages, self-insured insurance plans also have some pretty steep risks. Here are some of their most important drawbacks:

• Financial risk: You’re on the hook for all claims, which can be unpredictable. As mentioned above, most companies who are self-funded also make use of stop-loss insurance to protect them from potentially catastrophic claims.
• Need for expertise: Managing a self-funded plan requires specialized knowledge. It’s nowhere near as easy as simply paying a premium to an insurance company and letting it handle everything.
• Administrative burden: You’ll need to handle claims processing, compliance, and more. (Though many companies hire a third-party administrator to handle these tasks for them — more on that later!)
• Potential for lasering: [Lasering](https://paretohealth.com/knowledge-center-article/what-is-a-laser/#:~:text=A laser is a separate,is lasered at %24500K.) is the practice of setting higher premiums or excluding coverage for specific pre-existing conditions for certain high-risk individuals within a group plan. Stop-loss carriers may exclude high-risk individuals from coverage, leaving you on the hook for expensive treatments.
• Cash flow volatility: Large claims can cause significant fluctuations in your monthly expenses, making it hard to budget and plan.

What types of companies could benefit from a self-insured health plan?

Self-funding can be a powerful funding strategy, but it’s not for everyone. Some of the organizations that might benefit from it the most are:

• Companies with at least 50 employees: The trick lies in being able to spread the risk across a larger pool, and different types of self-funding strategies like captives and level funding become an option once you meet that threshold.
• Businesses looking for plan flexibility: If you want to tailor a unique plan to your workforce, then self-funding might be the best strategy.
• Companies with predictable healthcare costs: If you can forecast your healthcare spending with some accuracy, then self-funding becomes less risky.
• Organizations with a strong cash flow: You need to be able to handle the potential volatility in claims, and it’s hard to do that if your income isn’t regular.
• Companies in states with high insurance premiums: Self-funding can offer significant savings in areas with high premiums.

What is a third-party administrator, and how do you work with one?

A third-party administrator (TPA) handles the day-to-day administration of your self-funded health plan, including:

• Processing claims
• Providing customer service to employees
• Staying on top of legal compliance
• Generating reports on plan usage and costs
• Negotiating with healthcare providers

When you’re self-funded, you work closely with your TPA to administer benefits from open enrollment and beyond. The TPA provides the expertise you need to run a successful, compliant self-funded healthcare plan.

Bundled vs. unbundled self-funded plans

You have two main options when it comes to self-funded plans: bundled and unbundled. Here’s what you can expect from each.

Bundled self-funded plans

With a bundled self-funded plan, one vendor provides all services, including claims processing, stop-loss insurance, network access, and more.

Bundled self-funded plans can be:

• Simpler to manage, with a single point of contact
• Often more expensive
• Less flexible in terms of choosing individual components

Unbundled self-funded plans

With an unbundled self-funded plan, you’ll work with separate vendors for different services.

Unbundled self-funded plans can be:

• More complex to manage, but with greater control and potential for customization
• Potentially more cost-effective because you can shop around for each service
• Easier to select best-in-class providers for each service

Choosing between bundled and unbundled depends on your company’s size, expertise, and desire for control. Smaller companies often start with bundled plans for simplicity, while larger companies may prefer the flexibility of unbundled plans.

Self-funded vs fully insured health plans: What’s the difference?

While we’ve focused on self-funded plans, it’s worth calling out the specific differences between self-insured and fully insured plans. Let’s do a quick recap on how they differ from each other:

• Financial risk: With fully insured plans, the insurance company bears the risk. With self-insured plans, the employer does.
• Cost structure: Fully insured plans have fixed premiums. Self-insured plans have variable costs based on the actual claims.
• Plan design flexibility: Self-insured plans offer more flexibility. Fully insured plans are beholden to plans offered by insurance carriers.
• Regulatory environment: Fully insured plans are subject to state regulations, while self-insured plans fall under federal law (ERISA).

Is your broker guiding you through all of your options?

Funding is a huge part of your overall benefits strategy, and your employee benefits broker can help you navigate all the options available to you.

At Nava, we believe in empowering HR leaders to make informed decisions. Whether self-funding is right for your company or not, understanding all of your options will help you figure it out.

Ready to explore whether self-funded insurance could be the right funding strategy for your company? Let’s chat.

Next Steps

To continue learning about self-funded health insurance, watch our benefits funding masterclass.