Participants

With a traditional health insurance plan (often called “fully insured”), the employer purchases coverage from an insurance company. The insurance carrier performs “underwriting,” which means it estimates the cost of providing coverage based on the health risks of the employee group. The employer and employees then pay premiums to the insurance carrier. These premiums cover employees’ medical bills, contribute to the insurer’s administrative costs and profits, and are often set higher than the actual cost of the care employees use.

In a self-insured (or self-funded) plan, the employer does not purchase a traditional insurance policy. Instead, the employer collects contributions from employees (often called premiums) and places those funds, along with its own, into a trust account. Medical claims are then paid directly from this account as they occur. While employers may hire outside companies to help administer the plan, the employer takes on the financial risk of paying claims.

With a fully insured health plan, the employer and employees pay premiums to the insurance company. In return, the insurance company assumes responsibility for paying covered medical bills (beyond any deductible). If there is a question about whether a bill should be paid, the appeal is handled by the insurance company, which makes the final decision. The insurance company pays medical providers directly, using its own funds.

With a self-funded health plan, the employer and employees contribute money (often through payroll deductions), and those funds are used to pay medical claims as they are incurred. This means the employer carries the financial responsibility and also manages appeals and payment decisions.

Because the actual cost of medical care for employees is often less than the premiums charged by insurance companies, self-funding can save money. However, it also carries the risk of large, unexpected medical expenses.

To reduce this risk, many self-funded plans purchase a type of reinsurance called stop-loss. Stop-loss does not pay providers directly. Instead, if medical costs exceed a set amount (the deductible), the stop-loss carrier reimburses the self-funded plan for those excess expenses.

Generally, members of a self-funded plan should notice little to no difference in how their claims are handled. Most self-funded employers hire either a third-party administrator (TPA) or an insurance company providing administrative services only (ASO). These organizations receive medical bills from providers, process the claims, and pay the bills. The only difference is that payments come from the employer’s self-funded plan rather than the insurance company’s own funds.

For plan members, the process feels the same. They contribute to the plan (similar to paying premiums), receive a plan ID card, and have providers bill the plan directly. In fact, more than half of Americans with employer-sponsored health benefits are covered through self-funded plans — often without realizing it.

Over time, research shows that most self-funded health plans cost the same or less than comparable fully insured plans. This means that the amount plan members contribute is generally similar to — and often less than — what they would pay under a traditional fully insured policy.

In a fully insured arrangement, the insurance company provides a policy — a contract that explains how the plan works, what benefits are included, which costs are the responsibility of the insured, and all the applicable rules.

Self-funded plans operate in a similar way, but instead of a policy, they have official plan documents and summary plan descriptions. These documents, required by federal law, outline the structure of the plan and provide important information to participants.

Before the plan begins, a third-party administrator (TPA) or administrative services only (ASO) provider helps determine how much funding the plan will need — including member contributions, reserve amounts, and anticipated claims costs. A trust account is then set up to hold these funds.

By law, the plan sponsor must designate a plan administrator. This individual or entity is responsible for ensuring claims are paid correctly, assets are managed prudently, and the best interests of plan members are protected.

Most self-insured group health plans are regulated by the U.S. Department of Labor’s Employee Benefits Security Administration. This authority comes from the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that sets uniform standards for private-sector employee benefit plans, including pensions and health or disability benefits. ERISA preempts state law, which means self-insured plans are generally governed by federal rules rather than state insurance regulations.

Self-insured plans must comply with a variety of federal laws, including: ERISA, the Health Insurance Portability and Accountability Act (HIPAA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Americans with Disabilities Act (ADA), the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Civil Rights Act, and several budget reconciliation acts such as TEFRA, DEFRA, and ERTA.

Because they are primarily subject to federal law, self-insured plans can operate across multiple states without being constrained by state insurance coverage mandates.

Most self-insured health plans are regulated under the federal Employee Retirement Income Security Act of 1974 (ERISA) by the U.S. Department of Labor’s Employee Benefits Security Administration (DOL-EBSA). ERISA requires plans to:

• Provide participants with plan information, including features and funding
• Set minimum standards for participation, vesting, benefit accrual, and funding
• Establish fiduciary responsibilities for those managing plan assets

While ERISA preempts state insurance laws and benefit mandates, self-insured plans must still comply with applicable federal mandates. For certain self-insured plans sponsored by school districts, municipalities, or churches, the Centers for Medicare & Medicaid Services (CMS) has jurisdiction. Members not covered by DOL-EBSA rules should consult their plan documents or an attorney for guidance on appeals.

Additional federal protections include:

• Affordable Care Act (ACA):Prohibits pre-existing condition exclusions, extends dependent coverage to age 26, requires coverage of preventive services, mandates essential health benefits, provides claims appeal rights, and protects employees who report violations.
• Consolidated Omnibus Budget Reconciliation Act (COBRA): Allows eligible employees and their dependents to continue coverage temporarily after certain events such as job loss, divorce, or Medicare eligibility.
• Genetic Information Nondiscrimination Act (GINA):Prohibits discrimination or premium adjustments based on genetic information.
• Health Insurance Portability and Accountability Act (HIPAA): Protects against losing coverage due to preexisting conditions, ensures special enrollment opportunities, and prohibits discrimination based on health factors.
• Mental Health Parity and Addiction Equity Act (MHPAEA): Requires parity between mental health/substance use benefits and medical/surgical benefits.
• Newborns’ and Mothers’ Health Protection Act (NMHPA): Protects coverage duration for hospital stays related to childbirth.
• Women’s Health and Cancer Rights Act (WHCRA): Provides protections for breast reconstruction following mastectomy.

For nonfederal government employers offering self-insured plans, certain provisions of federal law may be exempted, though protections under GINA, creditable coverage certification, and plan notices remain mandatory. For more information, visit the CMS page on self-funded nonfederal government plans.

Being part of a self-insured employee group typically costs less than purchasing individual commercial insurance and gives employers more flexibility to tailor benefits compared to state exchange plans.

Health insurance works by spreading financial risk across a large group of people. Large employer groups can predict healthcare expenses for their employees reasonably accurately. While it’s difficult to know exactly who will incur significant medical costs, pooling these risks across many participants creates an average cost that fluctuates less than individual expenses. This concept, called risk pooling, allows employers to estimate the cost of providing health coverage. Insurance companies operate similarly by pooling the risks of many small groups and individuals.

State exchanges are designed for individuals to select plans that match their medical needs and budget. Plans on the exchange—platinum, gold, silver, and bronze—cover essential health benefits such as preventive and wellness services. Each plan differs in premiums and out-of-pocket costs, and individuals should carefully consider their potential annual expenses when choosing a plan.

The quality of healthcare in self-insured plans is maintained through provider credentialing, peer review, and ongoing monitoring of outcomes and costs. Third-party administrators (TPAs) often contract with preferred provider organizations (PPOs) and other provider groups, reviewing their performance to ensure care meets or exceeds community standards.

Self-insured employers have a long-term interest in the health and welfare of their workforce. Unlike an insurance company that sells an annual policy, a self-insured employer benefits from keeping employees and their dependents healthy, which helps control long-term medical costs.

Many self-insured employers also offer wellness programs to identify potential health issues early, encourage healthy lifestyle changes, and support timely detection, diagnosis, and treatment of illnesses. Because the employer funds actual medical bills rather than paying a fixed premium, maintaining high-quality care directly benefits employees and their families while supporting the overall sustainability of the health plan.

Self-insured employer health plans offer flexibility and access to high-quality healthcare providers. Many employers contract with specialized facilities to handle specific types of care, such as transplants, cancer treatments, or heart surgeries.

Preferred Provider Organizations (PPOs) are often organized by city or region, ensuring employees have access to top hospitals and specialists nearby. Providers—including doctors, hospitals, clinics, and rehab centers—are credentialed to participate in the PPO and are typically paid on a fee-for-service basis, so there is no incentive to ration care.

Independent utilization review companies, contracted by the plan’s third-party administrator (TPA), monitor treatment protocols to ensure they meet best-practice standards. Patients always have the choice of which provider to use, though there may be cost incentives to use providers affiliated with the PPO networks.

Because the employer funds the medical claims and the TPA is independent of the providers, there is an extra layer of review to ensure services are appropriate and charges are accurate, helping maintain both quality and cost efficiency.

Yes, it can be worthwhile to explore the option. While many people believe only large companies can self-fund their health plans, small and medium-sized employers may also benefit, especially if plan members are generally healthy. Each group is unique, and the decision to self-fund depends on factors like employee health, plan size, and financial goals.

Unlike traditional insurance, self-funded plans are not designed to generate profit. Instead, employer and employee contributions are used directly to pay medical claims, offering several potential advantages:

• Improved Cash Flow & Control: Funds are paid only as claims are incurred, rather than upfront premiums, allowing money to remain in the plan until needed.
• Preemption of State Law & Taxes: Self-funded plans operate under federal law, making it easier to offer consistent coverage across multiple states and avoiding state premium taxes.
• Flexibility: Employers can tailor the plan to cover the benefits employees value most and reduce spending on unnecessary coverage.
• Avoid Community Rating Mandates: Self-funded plans are not subject to certain rating rules that may increase premiums for small fully insured groups.
• Access to Plan Data: Employers can review claims data to identify trends, control costs, and design wellness programs that address actual needs.

Self-insurance is not right for every employer, but it is an option worth considering. Researching all available options helps ensure that employees and employers alike can make informed decisions about their healthcare coverage.

Summary Plan Description (SPD): The written statement of a plan required by ERISA. It must be easy-to-read and include eligibility, coverage, employee rights, and appeal procedures.

Mandated Benefits: Coverage that an insurer or plan sponsor is legally required to offer. State laws determine which benefits are mandated.

Plan Year: The 12-month period in which deductible and co-insurance accumulate toward a participant’s out-of-pocket maximums.

Reinsurance: Another term for stop-loss coverage.

ASO (Administrative Services Only): A contract with an insurer to provide administrative services only; no insurance protection is provided.

Benefit Booklet: A booklet explaining plan benefits and related provisions for employees.

Employee Retirement Income Security Act of 1974 (ERISA): Federal law establishing rules for self-funded group health plans and protecting participants’ interests.

Fiduciary: A person who holds or controls property for the benefit of another. Under ERISA, fiduciaries must act solely in the interest of participants and beneficiaries, discharge duties prudently, and follow the plan document.

Plan Document: Explains the provisions of a plan, including benefits and participant rights.

Plan Participant: An employee or dependent covered by the health plan.

Plan Sponsor: The employer, employee organization, or association responsible for maintaining the plan.

Third Party Administrator (TPA): A firm that collects premiums, pays claims, and provides administrative services for the plan.

PPO or Managed Care Network: A network of hospitals and providers offering services at reduced rates. Includes regional/national PPOs and carrier networks like Blue Cross, Cigna, or United.

Medical Management: Services to manage plan assets, including routine claims, case management, and clinical interventions. Can reduce costs by focusing on prevention and wellness programs.

Aggregate Stop-Loss: Insurance limiting overall annual claims liability, reimbursing the employer when total claims exceed a preset level.

Attachment Point: The threshold at which aggregate stop-loss reimburses the employer based on cumulative claims.

Contract Period: The time frame in which a claim is incurred and must be paid to qualify for stop-loss reimbursement.

Run-In: Claims incurred before a plan year but reported after the end date. Paid under the current-year contract including the run-in period.

Run-Out: Claims incurred during a plan year but reported after the end date. Paid under the prior-year contract.

Binder Premium: The first month’s premium required to initiate stop-loss coverage.

Specific Stop-Loss: Reimbursement for claims exceeding the individual deductible during a contract period.

Specific Deductible: The amount of claims the plan is responsible for per individual in a contract period.

Expected Paid Claims: Estimated dollar value of claims to be paid during a plan year or contract period.

Exposure: The extent of risk, measured by participation, demographics, or amounts at risk.

IBNR: Incurred but not reported claims.

Incurred Claims: Claims for which a liability has arisen under the insurance contract.

Lag: Delay between occurrence of a claim and its payment, including IBNR and reported but unpaid claims.

Paid Claims: Total dollar value of claims paid during the plan year.

Policyholder: The employer.

Stop-Loss Carrier: Insurance company providing specific and aggregate stop-loss coverage for the plan sponsor.

Claim Cost Negotiation: Negotiation with providers for predetermined rates or reductions in charges.

Disclosure Statement: Form notifying stop-loss carriers of large or ongoing claims prior to binding coverage.

Reimbursement: Compensation to the employer for claims exceeding specific or aggregate deductibles.

Self-Funding: Paying claims directly instead of purchasing conventional insurance, typically using a TPA and stop-loss coverage.

Shock Loss: A large loss significantly impacting a group, usually claims exceeding 50% of the specific stop-loss deductible.