Self-funding isn’t the right fit for every employer, but misconceptions about how the model works may prevent some companies from considering an option that could offer greater flexibility and control. This is particularly true for small and midsize employers that may assume self-funding is too risky or complex for their organization.
Common Misconceptions About Self-Funding
In the self-funded or self-insured model, the employer assumes direct financial responsibility for employees’ covered health claims rather than purchasing a fully insured health plan. Employers often purchase stop-loss coverage to limit their exposure to unexpectedly high claims.
It’s a fairly simple idea, but employers frequently have misconceptions about what self-funding really means for financial stability and risk tolerance. Specifically, employers often assume that self-funding is
- Too risky
- Too complex
- Only for very large employers
The reality is more nuanced. Self-funding has become an option for employers of many sizes. In 2025, 51% of covered workers at firms with 10 to 199 workers were enrolled in either a level-funded or self-insured plan, according to KFF. Understanding why starts with looking at how self-funded plans actually work: who pays the claims, who administers them and how employers can manage the risk of unexpectedly high claims.
Who Pays the Claims?
Self-funded employers are responsible for paying covered health claims. This is why it’s called “self-funding.” However, taking responsibility for claims also comes with distinct advantages.
If you want to offer your employees health coverage, you’re going to have to pay something.
- In the fully insured model, you pay premiums to an insurance company, and in exchange, the insurance company assumes the financial risk for covered claims. This provides greater predictability, but employers may have less flexibility over certain aspects of the plan. The level of claims data and reporting available can also vary based on the plan and carrier arrangement.
- In the self-funded model, you fund covered claims and typically pay administrative and other plan expenses. Because you’re the plan sponsor and assume the financial risk for claims, you generally have greater flexibility over plan design. You can also use claims and utilization data to better understand where plan dollars are going and inform plan decisions.
Claims costs can vary, sometimes significantly, from month to month and year to year. Employers need to plan for that variability. However, stop-loss coverage can be used to limit exposure to unexpectedly high individual or aggregate claims. If effective plan design and health and wellness initiatives help improve outcomes and manage costs, the employer may benefit directly from lower claims spending.
Who Administers Claims?
You don’t have to administer the claims just because you fund them. Most employers do not have the experience or resources needed to take on claims administration, and that’s fine. You don’t need to hire an internal team to handle claims. Employers sponsoring self-funded plans typically contract with a third-party administrator or insurer to provide administrative services, including claims processing.
Depending on the plan arrangement, employers may also work with vendors that provide network access, negotiate or reprice claims, manage pharmacy benefits or perform other specialized functions.
This arrangement greatly reduces the complexity involved in self-funding. Although there is still some complexity – you have to design the plan, hire your vendors and sign mutually beneficial contracts – once everything is in place, self-funding can go very smoothly, and it doesn’t have to eat up your company’s resources.
Who Carries Catastrophic Risk?
For many employers, this is the sticking point. Paying expected claims is one thing, but serious illnesses and injuries can trigger six- or seven-figure claims. If one of your plan members is diagnosed with cancer, stroke or kidney disease, or if multiple plan members have complicated pregnancies or other health concerns in the same year, your claims could be much higher than expected.
But self-funded employers don’t need to cover these catastrophic claims out of pocket.
Self-funded employers typically purchase stop-loss insurance to limit their exposure to unexpectedly high claims. Specific stop-loss coverage can reimburse the employer or plan for claims above a predetermined amount for an individual enrollee, while aggregate stop-loss coverage can provide protection when total claims exceed a predetermined amount for the plan year.
Is Self-Funding Right for Your Company?
Don’t assume your company isn’t a good candidate for self-funding. If you’re dissatisfied with your fully insured health plan options and you’d like to explore arrangements that give you more control and flexibility, self-funding could be a good fit. You can also explore related options, including group captive arrangements and self-funded direct partnership plans.
