4 myths surrounding self-funded health plans
Self-funded health plans aren’t only for large companies, and they don’t have to be overly expensive. Learn about other self-funding misconceptions.
Sixty-three percent of covered employees were in a self-funded or self-insured plan in 2024.1 These are plans where the employer takes on the financial risk of providing health benefits to their employees and covered dependents, rather than the insurer.
This means that employers are footing the bill if employees’ claims are higher than expected. But this financial risk can also yield positive outcomes: When employee claims are lower than anticipated, employers may save money as opposed to a fully insured plan, where any savings stay with the insurer.
With a self-funded health plan, employers also have more flexibility in designing benefits to meet the unique needs of their workforce, which may help contribute to better outcomes.
Here’s the truth about 4 common myths surrounding self-funded plans:
Myth #1: Self-funded health plans are only for large companies
It’s true that many large businesses choose a self-funded model. It makes sense: With a sizeable workforce, a large business can diffuse the risk of costly claims across its many employees and their dependents, but recent research finds that smaller and midsize employers are jumping on the bandwagon, too. From 2010 to 2023, the percentage of small employers offering at least one self-insured plan grew from 13% to 16%, while medium-sized firms saw an increase from 27% to 32%.2
Smaller businesses can also benefit from the self-funded model. This approach allows employers to tailor benefits to their workforce's specific needs and size. With access to detailed plan data, including claims and utilization patterns, employers can better customize and optimize their benefits. This data enables employers to make informed decisions about how to better engage their employees in making decisions that may lead to lower costs and better health outcomes.
Myth #2: Self-funded health plans are too risky
With a self-funded health plan, employers shoulder the financial risk. And while they can make informed budget decisions based on their workforce's age, region and dependents, predicting exact medical claims is impossible. This uncertainty can lead to higher costs, but it can also result in lower expenses if claims are fewer than expected.
One of the key advantages of self-funded plans is that employers pay only for what their employees use. By educating their staff to make smarter, cost-effective choices — like opting for urgent care over the ER for minor issues — employers can keep costs down. Additionally, stop loss coverage offers protection against catastrophic claims, helping to manage the financial unpredictability.
Myth #3: Self-funded health plans are too much work
It’s true that self-funded health plans require more effort from employers compared to fully insured plans. Employers managing self-funded plans must handle significant administrative tasks like regulatory compliance and claims processing, but health plan representatives, brokers and consultants can often provide support in these areas.
Insurers can also be helpful in supporting employers as they make customizations to their benefits based on their claims data. For instance, if an employer’s workforce has a high percentage of employees with diabetes or dependents with behavioral health issues, they can launch communications campaigns or make benefits changes to address those needs. When an employer makes its benefits package more personalized to its unique workforce, the ROI may be healthier, more productive and loyal employees.3
Myth #4: Self-funded health plans aren’t cost-effective
Self-funded health plans can be cost-effective for employers because they pay only for the actual claims incurred by their employees, rather than a fixed premium to an insurance company. Since employers are taking on the financial risk and much of the administrative burden of their plan, they are potentially reducing overall costs.
Employers also get access to detailed plan data, allowing them to identify trends and make informed decisions to optimize benefits and reduce unnecessary expenses. Additionally, stop loss insurance provides a safety net against catastrophic claims, helping to manage financial risk. By tailoring coverage to their workforce's specific needs, employers can offer more relevant and efficient benefits, leading to better health outcomes and lower long-term costs.
When a self-funded health plan may not be the best option for an employer
All that said, self-funded health plans may not be for everyone. If a smaller employer has a workforce with higher health risks, a history of expensive health care claims, turbulence related to the business’s financial health or large fluctuations in staffing, a self-funded health plan may lead to steeper costs. In that case, a fully insured plan — or the happy medium of a level-funded plan — may be worth exploring.
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