As healthcare costs continue to rise, many business owners are looking for smarter, more sustainable ways to manage expenses while still offering competitive, high-quality employee benefits.

One increasingly popular option is switching to a self-funded health plan – a flexible, cost-conscious approach that gives employers more control over their healthcare spending and plan design.

But is a self-funded plan the right move for your business?

Below, we’ll break down what self-funded health plans are, the potential benefits and risks, and what you should consider before making the switch.

What Is a Self-Funded Health Plan?

A self-funded (or self-insured) health plan is an arrangement where the employer takes on the financial responsibility for providing healthcare benefits, instead of paying fixed premiums to an insurance carrier.

Instead of purchasing a traditional insurance plan, the employer pays claims out-of-pocket as they occur. Many companies work with a third-party administrator (TPA) to manage the day-to-day operations of the plan, such as claims processing and provider networks.

Benefits of Self-Funded Health Plans for Employers

Many businesses – especially those with stable cash flow and a clear understanding of their workforce needs – are turning to self-funded plans for the following reasons:

1. Cost Control and Potential Savings

Self-funded plans can help eliminate certain expenses, such as state premium taxes. If total claims paid are less than contributions collected, employers can retain the surplus to reinvest in benefits or reduce future contributions.

2. Plan Flexibility

Because self-funded plans aren’t subject to many state insurance mandates, employers have more freedom to customize coverage, manage provider networks, and adjust benefits to better suit their workforce.

3. Transparency and Data Access

Employers gain access to detailed claims and utilization data, allowing them to identify trends, control costs, and make informed decisions about plan design.

Self-Funding Risks and Considerations for Business Owners

While self-funded plans offer advantages, they also come with financial risks, especially if claims exceed expectations. Here are key factors to consider before making the switch:

1. Cash Flow Requirements

Employers must be prepared to pay claims as they occur, making strong cash flow essential. A well-structured budget and reserve strategy is key.

2. Risk Management

To protect against large or catastrophic claims, many employers purchase stop-loss insurance, which sets a cap on the amount the employer must pay annually.

3. Workforce Demographics

Your workforce's age, health conditions, and overall size can affect claim frequency and cost. Analyzing this data can help you assess risk and viability.

4. Employee Contributions

Employers must set employee premiums thoughtfully to ensure they can cover projected claims. Using historical data or insured premium equivalents can help in forecasting.

5. Claims Data Utilization

With a self-funded plan, you'll gain valuable insights from claims data, including cost trends and diagnoses. This helps you tailor benefits and wellness programs more effectively.

How to Prepare for the Transition from Fully Insured to Self-Funding

Moving to a self-funded health plan requires planning and coordination. Here’s how to ensure a smooth transition:

• Develop a detailed transition plan and timeline.
• Partner with a TPA to help design and administer the plan.
• Evaluate stop-loss insurance options.
• Define plan coverage and cost-sharing policies.
• Ensure compliance with ERISA, ACA, and other regulations.
• Train HR and benefits staff.
• Communicate clearly with employees to support understanding and engagement.

Is a Self-Funded Health Plan Right for You?

For many employers, self-funded health plans provide a strategic way to manage healthcare costs and deliver tailored benefits. However, they aren't one-size-fits-all. Business owners should carefully evaluate their financial readiness, workforce needs, and long-term goals before making the switch.

If you're considering a transition or exploring your options, OneDigital is here to help – with expert guidance from initial evaluation through ongoing plan support.

Contact us today to learn how a self-funded health plan could benefit your business and your team.