Beyond Fully Insured: How Self-Funding Can Deliver Superior Results for Employers and Employees  

Fully insured health plans can feel like the default choice.  

They’re familiar, they’re predictable,and for many employers, they’ve been the “set it and renew it” approach for years. But as healthcare costs continue to rise, renewals are becoming harder to absorb without shifting more cost to employees. That’s why more employers are taking a serious look at self-funding. Not because it’s trendy, but because it can offer more control, flexibility and transparency while managing long-term costs.  

This article breaks down what self-funding is, why employers explore it, common myths, and what to prepare for if you want to evaluate whether it’s a fit. Throughout the process,OneDigital helps employers model risk, assess feasibility, and implement a strategy that supports both affordability and a strong employee experience.  

What is a self-funded health plan?  

In a self-funded (or self-insured) health plan, an employer pays eligible medical and pharmacy claims directly instead of paying a fixed premium to an insurance carrier.   

Most self-funded plans still include similar but enhanced components to what is built into a fully insured premium:  

• A third-party administrator (TPA) to process claims and manage plan operations  

• Stop loss insurance to protect against catastrophic and total claims 

• Employer discretion on final projected claims  

• Ongoing reporting and analytics to monitor performance and guide decisions  

 If you’re new to the basics, The Employer’s Guide to Self-Funded Health Plans is a helpful primer on how the model works and what employers should consider.  

Why employers consider self-funding  

The biggest reason employers explore self-funding is to gain control of the components built into the healthcare budget.  

In a fully insured plan, employers have limited visibility into what is driving up costs and what cost containment levers they can pull to lower costs. If claims trend up, premiums increase. If claims trend down, premium decreases are rare given the carrier trend assumptions. As a result, many employers feel forced into short-term fixes like plan design changes or contribution increases that shift costs to employees without solving the underlying challenges.  

Self-funding gives employers an opportunity to:  

• Review cost drivers and uncover potential waste through enhanced claim reporting  

• Tailor plan design changes to their workforce and own claim patterns  

• Retain all claim surplus and potential for rebate pass through to maximize savings  

• Comply with ERISA, pre-empting state regulations and taxes  

• Unbundling all self-funded components for additional vendor selection 

• Implement point solutions directly targeting claim trends  

• Select the appropriate risk protection for catastrophic claims  

• Final determination of self-funded budget based on risk tolerance and long-term strategy 

For additional context on what’s pushing costs upward, Why Healthcare Costs Will Keep Rising offers a useful view of the market pressures employers are facing.  

How to prepare a client for a self-funded transition 

If you’re considering self-funding, success depends on planning and coordination. Employers should prepare for:  

1) Bank Account  

Self-funding requires a managed bank account with appropriate funds for a defined claim wire transfer period (typically weekly).   

2) Designated HR Employee 

Employers will need a designated human resources employee who handles eligibility questions and has authority to handle protected health information.  This employee will need HIPAA compliance training.  

3) Budget 

Self-funded plans still require a budget framework (often called premium equivalents or budget rates). The budget typically includes projected claims, administrative costs, stop-loss premiums, and a margin or reserve.  The employer has the final determination on the budget rates.  

4) Reserves 

Employers may need to account for claims incurred but not yet report (IBNR) on the balance sheet in case of a fully insured return or employer ceases to exist.  

5) HR Strategy 

Employers now bear the financial risk of the healthcare budget and need an aggressive marketing campaign to improve population health and maximize point solution engagement.  

6) Implementation Timeline 

Self-funding is not a last-minute decision. Employers should allow time for vendor selection, contracting, security review, HRIS setup, and open enrollment communications.  

7) Ongoing Monitoring and Reporting  

You should expect regular reporting (monthly or quarterly) to track performance, compare budget-to-actuals, and identify cost drivers.  

What are the downsides of self-funding?  

Self-funding can be highly effective, but it is not risk free. The most common concerns include:  

• Potential financial responsibility for claims exceeding the annual budget  

• Increased complexity and monitoring of plan performance  

• Stop loss premium volatility and potential risk transfers via “lasering” 

The good news is that many of these risks can be mitigated with the right stop loss contract and appropriate risk margin.  

To learn more, The Importance of Stop Loss Coverage and Lasering vs. Premium Adjustments break down how stop-loss works and what employers should watch for.  

Common myths about self-funding  

Myth 1: “We don’t have the HR bandwidth for self-funding.”  

A common misconception is that HR teams will be stuck managing claims.  

A strong administrator structure means employers are not approving claims or writing checks to employees. Operationally, the day-to-day experience can remain very similar to fully insured, especially when implementation is well managed.   

For a simple overview, Third-Party Administration 101 explains what a TPA does and how they support employers.  

Myth 2: “We’re not big enough to self-fund.”  

Self-funding is not limited to jumbo employers (> 1,000 employees).  Many mid-sized organizations evaluate self-funding, and in many markets, employers can explore it at smaller sizes. The key is creating a healthcare budget with the appropriate margin and stop loss protection to manage both claim volatility and severity.  

The more useful question is: “What is our risk tolerance, and what level of catastrophic protection do we want in place?”  

Myth 3: “Self-funding is too much financial risk.”  

The traditional fully insured model does not allow for the employer to choose the level of “pooling” or stop loss protection.  Employers can choose the stop loss deductible that is appropriate to their risk tolerance.  The maximum liability for the plan year is communicated so the worst case scenario is known in advance.  

OneDigital is equipped with benchmarking and deductible modeling capabilities so employers can choose the appropriate risk protection and maximize financial savings.  

Next step: evaluate whether self-funding fits your strategy  

If your organization is facing rising renewals and limited flexibility, self-funding may be worth evaluating, even if you do not make a change this year.  

OneDigital can help you compare fully insured, level-funded, and self-funded options through a practical feasibility approach that includes claims analysis, stop-loss modeling, and implementation planning.  

Connect with a OneDigital employee benefits expert ,  to conduct a risk assessment to explore self-funding options, understand your risk profile, and build a benefits strategy that supports both cost control and a strong employee experience.  

FAQs  

What is the difference between level-funded and self-funded?  

Level funding is often a transitional product to a traditional self-funded model. It typically bundles plan administration, claims funding, and stop loss protection into a fixed monthly cost like a fully insured premium. 

It can be a useful way to gain additional claim data and potential for a surplus return.  However, it can come with higher fixed costs and a pricing structure that has a limited probability of a surplus based on the claim funding and the carrier surplus share split.   

For a helpful comparison, Self-Funded vs. Fully Insured: Weighing the Cost Savings for Your Business walks through how these models differ and what employers should evaluate.  

Are there more carriers providing self-funded services?  

Yes, there are only a handful of carriers that offer fully insured or level-funded arrangements.  Self-funding will allow for greater choice of TPAs (carrier vs TPA model), stop loss carriers (bundled vs unbundled), PBMs (bundled vs unbundled) and point solutions.  

Is self-funding only for large employers?  

No employers of all sizes are evaluating self-funding if the state mandates allow for self-funding.  Small to mid-size employers need the appropriate risk protections and claim margin in place to reduce claim volatility and severity.  

Will self-funding create more work for HR?  

It should not create an additional workload if the plan is set up appropriately.  A TPA and advisory team will support plan administration, reporting, and vendor coordination.  Employers can rely on the plan document to make financial fiduciary decisions.  

What’s the biggest risk in self-funding?  

Unexpected, catastrophic claims and claim volatility.  Stop loss coverage with strong contract terms and the appropriate risk margin are key to minimizing financial risk.