When providing health insurance to employees, most companies are familiar with the traditional route: buying a fully insured plan from a major carrier. But for organizations looking for more control, cost transparency, and customization, self-funded (or self-insured) health plans are worth a closer look.
While it’s not the right fit for every company, self-funding is gaining traction among employers of all sizes, including small- and mid-sized businesses.
What Does Self-Funded Health Insurance Actually Mean?
In a self-funded plan, you take on the financial responsibility of paying employee healthcare claims directly, instead of paying a fixed premium to an insurance carrier. That might sound risky, but most self-funded plans include stop-loss insurance, which is a safeguard that limits how much the company pays out in total or per employee.
Third-party administrators (TPAs) typically handle the day-to-day details: processing claims, maintaining provider networks, and managing compliance. So, you are not going it alone, you are just taking a more active role in how your health dollars are spent.
Self-insurance is not a new or experimental idea. It’s a proven model that’s been used by Fortune 500 companies and municipalities for decades. But more recently, smaller employers have started adopting it too, thanks to better tools and risk protections.
Why More Employers Are Considering It
Here are a few reasons self-funding is becoming more common:
- Cost Savings Over Time
Traditional insurance includes built-in profit margins and administrative costs. With a self-funded plan, you only pay for the care employees actually use. If claims are lower than expected, you save money, unlike fully insured plans, where unused premiums stay with the insurer.
According to the Kaiser Family Foundation, nearly two-thirds of covered workers in the U.S. are now enrolled in self-funded plans, including a growing number at smaller firms. (KFF Employer Health Benefits Survey)
- Customization to Fit Your People
Self-funded plans can be tailored to better match the needs of your employees, whether that means expanding mental health services, offering virtual care options, or structuring incentives for preventive care. This flexibility is especially appealing for mission-driven companies or those with unique workforce demographics.
From local school districts and construction firms to retail franchises and tech startups, a wide variety of employers are using self-funding to create benefit plans aligned with their specific employee populations. (SIIA)
- Greater Transparency
With a self-funded plan, you gain insight into where your healthcare dollars are going, what services are being used, how often, and by whom (in a HIPAA-compliant way). That data can help make smarter decisions about benefits, wellness programs, and long-term planning.
- Direct Contracting to Reduce Healthcare Expenses
For our clients who have been traveling down this pathway, they have started to look at strategies to address the cost of care by location. We’ve helped them establish a direct price agreement with providers that are cost-aligned with their companies in an effort to reduce the money they spend on the care their team members receive. These arrangements allow for the companies we work with to share the savings with their members by passing along savings at the point of care with these closely aligned healthcare providers.
- Avoiding Certain State Mandates and Premium Taxes
Self-funded plans are governed by federal law (ERISA), which means they often avoid state-level mandates and premium taxes that apply to traditional insurance. Depending on the state, that can mean up to a 2–3% cost savings right off the bat.
What Are the Trade-Offs?
Self-funding isn't a magic bullet. It requires a thoughtful approach to cash flow, employee communication, and risk management. But with the right partners, like experienced TPAs and stop-loss providers, those challenges become manageable.
In fact, there’s now an entire ecosystem of service providers dedicated to helping employers design and manage self-funded plans. These include independent brokers, pharmacy benefit managers (PBMs), care management vendors, and data analytics platforms. This infrastructure has made self-funding more accessible and sustainable, even for smaller organizations.
Smaller employers often explore level-funded options, which combine the flexibility of self-funding with predictable monthly payments and built-in stop-loss protections. These hybrid plans offer a gentle on-ramp to full self-funding, and they’re becoming increasingly popular.
Is It Worth Exploring?
If you value cost control, customization, and transparency, self-funded insurance could be a smart step. It’s not about taking unnecessary risks; it’s about taking thoughtful ownership of one of your largest and most personal investments: the health of employees. With the right structure in place, self-funding offers a way to break out of one-size-fits-all plans and design something that actually reflects the needs and culture of your workforce. It can also create new opportunities for innovation, like wellness initiatives tailored to your employee demographics, access to the right mental health resources, or incentives that encourage preventive care and smarter health choices.
Choosing a self-funded path doesn’t mean navigating the system alone. A growing network of experienced partners, from third-party administrators to pharmacy benefit consultants, exists to help employers manage the details and reduce volatility. Curious if it’s the right fit? A benefits advisor can walk you through the numbers, help assess the company’s risk tolerance, and show you what a plan could actually look like for the team. No pressure, just clarity.
Further Reading From Resources in this Post:
Kaiser Family Foundation: Employer Health Benefits Survey
