Self-funded health insurance is becoming an increasingly popular option for employers looking to manage rising healthcare costs more efficiently.
But while self-funding can lead to cost savings, it’s equally important to understand how these plans will impact your employees’ benefits, care experience, and overall satisfaction. After all, a health plan isn’t just a financial decision—it plays a major role in your team’s peace of mind, access to care, and long-term well-being.
For many companies, self-funded insurance offers greater flexibility, tailored coverage options, and long-term savings for both the business and its employees.
However, like any major benefits decision, it comes with trade-offs that every business owner should evaluate carefully before making the switch.
Key Takeaways
- Yes, self-funded insurance can be good for your employees when the plan is well-managed and paired with strong financial protections.
- These plans often lead to lower premiums and customized benefits that better match what employees actually need.
- Your employees will still use their insurance the same way—ID cards, doctors, and prescriptions—while your company manages the costs behind the scenes.
- Drawbacks include year-to-year cost variability and the potential need to adjust coverage if your business experiences unusually high medical claims.
- Pairing a self-funded plan with a Health Savings Account (HSA) gives your employees added tax benefits and support for out-of-pocket expenses.
Now let’s take a closer look at what self-funded health insurance really means and how it could fit into your employee benefits strategy.
What is Self-Funded Health Insurance?
At its core, self-funded health insurance means your business—not an insurance company—pays for employees’ healthcare costs directly.
Instead of paying fixed premiums to an insurance carrier, you set aside funds to cover employee medical claims as they arise. This gives you greater control over plan design, cost management, and coverage decisions.
For your employees, it often means more tailored benefits but also some differences in how their coverage is managed.
Here’s a simple way to look at it:
- You act as the insurer, funding claims directly from your healthcare fund.
- A third-party administrator (TPA) handles day-to-day operations like paperwork, claim processing, and support.
- Stop-loss insurance protects your business in case of unusually high-cost claims.
- Your employees still access care through doctors, hospitals, and pharmacies, just like they would under a traditional health plan.
To decide, “Is self-funded insurance good for employees?”, it’s helpful to compare it with fully insured plans:
- Cost control: You retain unused healthcare funds rather than handing them to an insurer.
- Customization: You can tailor your plan to match the specific needs of your workforce.
- Risk exposure: Your company takes on more financial responsibility compared to a fully insured plan.
- Flexibility: You can modify coverage options as your team and business evolve.
How Self-Funded Insurance Works for Employees?
Understanding how a self-funded plan functions behind the scenes helps you make better decisions for your team and manage expectations.
While you handle the financial side, your employees typically experience the plan much like any traditional insurance. They’ll still visit doctors, fill prescriptions, and receive care—though there are a few differences in how it’s administered.
Who Controls the Plan?
With a self-funded health plan, you design and fund the benefits yourself, rather than relying on a traditional insurer’s preset packages.
This control allows you to create more relevant coverage, improve wellness offerings, and potentially reduce out-of-pocket costs for your employees.
From your employees’ perspective, nothing really changes during a doctor visit. They still use an ID card, visit in-network providers, and access services just like they would under a traditional plan.
How Claims Are Paid?
When your employees seek care or fill a prescription, their claims are submitted to a third-party administrator (TPA).
The TPA processes those claims and pays them directly from your company’s healthcare fund. If a high-cost claim arises, stop-loss insurance helps shield your business from large, unexpected expenses.
According to the 2023 KFF Employer Health Benefits Survey, around 65% of covered workers are now enrolled in self-funded plans, highlighting just how common and stable this approach has become across U.S. businesses.
Benefits of Self-Funded Insurance for Employees
So, is self-funded insurance good for employees?
It can It can offer several meaningful advantages; not just for your team, but also for your company’s long-term benefits strategy. several real advantages that employees feel directly.
One of the biggest advantages is how much more control you gain over plan design. That flexibility allows you to create benefits that better match what your employees truly need. This differs from the rigid, one-size-fits-all packages offered by traditional carriers.
Here are a few key advantages your employees may experience:
- Lower premiums: With reduced administrative fees and streamlined claims processing, you can save significantly, and many businesses choose to share those savings with employees through lower premiums.
- Flexible benefits: You can include services your workforce actually values like mental health support, telemedicine, or robust wellness incentives.
- Custom-designed care: Self-funded plans give you the ability to tailor coverage to your team’s demographics and health priorities, creating more relevant, personalized options.
- Better wellness programs: You can invest in preventative care, screenings, and incentives to help employees stay healthier and avoid costly medical issues.
- Tailored coverage: You can refine your plan year-over-year to reflect changes in your workforce or business goals.
With self funded health insurance plans, the goal is often simple: create coverage that supports your employees while managing costs.
And when done right, both sides can benefit.
Drawbacks and Risks of Self-Funded Insurance
While self-funded insurance has many advantages, it’s essential to understand the potential risks your business and your employees may face if the plan isn’t structured carefully.
Self-funded plans have year-to-year cost variability, unlike fully insured plans with predictable premiums. If your employees’ healthcare claims are higher than expected, you may need to adjust coverage, increase contributions, or rethink plan features.
Here are some challenges you should consider before making the switch:
- Year-to-year variability: Since your company pays claims directly, one year of high medical expenses can affect future plan design or increase the costs your business (and employees) must absorb.
- Less predictability: If your business experiences unpredictable claim fluctuations, your team could see changes to premiums, deductibles, or covered services.
- Network limitations: Depending on how your self-funded plan is structured, provider networks may be more limited than those offered by large national carriers.
- Financial risk: Without strong stop-loss insurance in place, a few high-cost claims could strain your budget and force difficult decisions around coverage or employee contributions.
Ultimately, the success of a self-funded plan depends on how well it’s managed and how stable your workforce’s claims history is. Strong administration, careful forecasting, and the right protections make all the difference.
With proper planning, many of these risks can be minimized.
Is Self-Funded Insurance Cheaper? And For Whom?
The cost-effectiveness of a self-funded plan largely depends on your workforce’s size, health profile, and claims history.
For businesses with a younger, healthier employee base and stable claims, self-funding can result in significant savings. Rather than paying fixed premiums (including insurer profit margins), you keep control of the funds and retain unused healthcare dollars.
However, self-funded insurance isn’t always cheaper, especially for smaller businesses with unpredictable claims. High-cost medical events can cause expenses to spike unexpectedly.
That’s why many small and mid-sized firms pair their plans with robust stop-loss insurance to mitigate risk.
For example, a 30-person team might see low costs during a year of routine care. But a few major surgeries the next year could cause expenses to surge beyond traditional plans.
Understanding these variables is key before making the shift.
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How an HSA Fits Into Self-Funded Insurance?
One of the best ways to strengthen self funded health insurance plans is by pairing them with a Health Savings Account (HSA).
Because self-funded plans often come with higher deductibles, offering an HSA can help your employees manage out-of-pocket expenses, while also giving them a way to build long-term, tax-advantaged savings.
The funds belong to the employee, grow tax-free, and roll over from year to year.
Here’s why HSAs work well alongside self-funded coverage:
- Tax savings for employees: Employees enjoy tax-deductible contributions and tax-free withdrawals for qualified medical expenses, making it a valuable financial tool.
- Long-term savings potential: Unused HSA funds accumulate and roll over year after year, helping employees build a healthcare safety net for the future.
- Employer contribution options: You can contribute to your team’s HSAs as part of your benefits strategy, boosting engagement and showing added support.
When integrated well, HSAs give your team more financial control and confidence, making your self-funded plan more competitive and attractive.
We’ve helped many businesses set up HSAs that work hand-in-hand with their self-funded insurance plans.
If you’re exploring this option, we can help you set up an HSA for your employees, too.
Bottom Line: Is Self-funded Insurance Good For Employees (And When It Makes Sense)?
So, is self-funded insurance good for your employees?
In many cases, yes—especially when it’s thoughtfully designed and backed by the right financial protections.
If your company has relatively stable claims, strong stop-loss coverage, and a team that values flexibility in healthcare, a self-funded plan can offer meaningful cost savings and more relevant benefits.
But it’s not one-size-fits-all.
Every business needs to evaluate its financial situation, workforce needs, and long-term goals before making the switch.
Not sure if self-funded insurance is the right move for your business?
Talk to one of our Personal Benefits Managers—it’s simple, personalized, and completely free.
For Further Reading:
Frequently Asked Questions (F.A.Q.)
Q: What is self-funded health insurance?
A: Self-funded health insurance means employers pay healthcare claims directly, instead of buying traditional insurance from a carrier.
Q: How does self-funded insurance benefit employees?
A: It offers more customized benefits, potential cost savings, and often includes wellness programs tailored to employee needs.
Q: Is self-funded insurance cheaper than fully insured plans?
A: For many businesses with stable claims, self-funded plans can lower costs and reduce insurer profit margins.
Q: What are the risks of self-funded insurance?
A: Costs can rise unexpectedly if large claims occur, especially without strong stop-loss protection in place.
Q: Do employees pay more with self-funded insurance?
A: Not always. Well-managed plans can lower premiums, but costs may vary depending on claim history.
