When was the last time you got anything from your health insurance company that made complete sense at first glance? Whether you’re considering this from the perspective of a patient or an employer, the answer is probably the same – never.
It’s often frustrating for patients, but it’s a major problem for companies trying to provide coverage to their employees without breaking the bank. If the claims data, costs and ever-changing coverage options have become more trouble than they’re worth, it may be time to consider self-funding your company’s health plan.
What self-funding delivers
If you’re asking “wait, what’s self-funding,” click here for a more in-depth explanation. If you’re familiar with the term, you probably understand it to describe a plan designed and funded by one organization – maybe yours! There are a lot of myths and common fears associated with self-funded plans, but the pros often far outweigh the cons of a well-managed plan. Consider the following.
Clarity
There’s no more black box. You’ll have full transparency into where every plan dollar goes. Unlike getting a renewal with little explanation, self-funding allows you to see the claims and understand what’s driving costs. This clarity helps you make smarter decisions and eliminates the frustration of not knowing why you’re being charged so much.
Control
The ability to tailor your plan and aggressively manage costs is a huge benefit. You’re in the driver’s seat now. You can choose which cost-containment measures to implement, design benefits to meet your employees’ specific needs, and pivot quickly if something’s not working. That control means you can truly optimize the plan as a strategic asset, not just treat it as a fixed expense.
Confidence
Get rid of the “what if” nightmares. You can sleep at night, because you’ve put safeguards in place to ensure you will not be blindsided by costs. You’ve addressed the biggest fears, so you can be confident moving forward. You’re effectively managing risk like any other part of your business – with insurance and expertise – instead of hoping an insurance carrier will magically keep your costs down (for the first time ever).
Done correctly, self-funding delivers all three of these. It’s not about gambling, it’s about empowering.
But is it for me?
Self-funding isn’t just for large companies with thousands of employees anymore. Small- and mid-size companies increasingly turn to self-funding to lower costs and improve health benefits. The below chart, aggregated with data from Health Rosetta, shows the likelihood of an organization saving money over time based on the number of lives covered by its plan.
The Financial Benefits
Self-funding offers greater financial efficiency and a chance to innovate. You’re not just cutting costs, you’re creating a healthier, more productive team – and that efficiency hits your bottom line, not the carrier’s.
Any money budgeted for claims that doesn’t get used stays in the plan’s reserves or the company’s coffers, instead of turning into insurance company profit. This creates a powerful incentive: if you invest in employee wellness or better health care management and it leads to even slightly lower claims, your organization reaps 100% of those savings. Instead of a carrier keeping a 15% margin in a good year, you keep it.
Self-funding empowers you to identify cost drivers and health trends within your own workforce. You can design benefits that actually fit their needs and improve health outcomes, which in turn helps control costs.
Safety Nets
The “what if” questions are often the most difficult for organizations considering the transition to self-funding. But a well-structured plan has built-in safety nets to protect against some of the biggest risks. In this section, we’ll discuss those safety nets.
…from big claims.
Many self-funded plans have “insurance for the insurance.” It’s called stop-loss insurance, and it’s a crucial component that makes self-funding both viable and safe. Just like an insurance policy protects against a rare house fire, stop-loss protects your company against rare huge medical claims.
There are typically two kinds of stop-loss coverage:
- Specific stop-loss insurance caps the cost of any single person’s claims at a set threshold (beyond that, the stop-loss insurer pays).
- Aggregate stop-loss insurance caps your entire group’s claims in a year.
With stop-loss in place, your worst-case scenario is no longer unbounded – it’s a known number for which you can budget. No single claim will cost you more than your specific deductible. This directly neutralizes the “million-dollar claim” nightmare. Yes, the claim might occur, but you won’t be on the hook for most of it.
The key takeaway: your maximum cost is not unknown, it’s contractually capped. The company’s financial exposure becomes a predictable number you can budget, much like a premium. Except this way, if you have better than worst-case claims, you come out ahead.
In a catastrophic year, stop-loss ensures you pay roughly the same or less than you would have under a fully insured premium.
…from big drug bills.
Catastrophic pharmacy claims hit just as hard as traditional medical ones. Gene therapies, injectables, or high-cost orphan drugs can exceed $1 million annually for a single patient. That’s why pharmacy costs should be managed with the same seriousness as medical risk. Your PBM contract should serve as a risk transfer tool, just like stop-loss, to create a ceiling on exposure.
Once that baseline contract is in place, a concierge pharmacy team adds the real horsepower. These experts layer on medication management, alternative sourcing, clinical oversight, and formulary design. They can act quickly when expensive claims hit, find funding, prevent overuse, and ensure plan integrity.
Pharmacy risk is real, but with the right contracts and the right team in place, it’s manageable, measurable, and no longer a source of fear.
Employee Impacts
Cost is one major reason many organizations look to self-funding. Another frequent concern is employee satisfaction and outcomes. Happy, healthy employees are more productive and more loyal. Every employer understands the value of retaining great people, and it’s admirable to be concerned about how a transition like this may affect your covered members.
The truth is, with the right support in place, most employees won’t notice a difference – except, perhaps, for the better. This isn’t just cost management, it’s experience enhancement. They’ll still receive an ID card, have access to a broad provider network, and be able to get care the way they always have. But on top of that, you can add wellness programs and care navigation options that actually make it easier for employees to get what they need. Your advisors will support the transition with proactive communication – emails, FAQs, info sessions – so no one feels lost. Employees can rarely tell the difference between a self-funded plan and a fully insured one in terms of using their benefits.
A Guided Path
Self-funding is not a solo journey. It’s a guided path.
Your Advisors = Your Risk & Compliance Managers
Having a knowledgeable guide is itself a risk mitigation strategy. Your advisors should go beyond shopping insurance quotes. Good ones act as risk strategists and compliance managers for your health plan. Your advisors should be a vigilant extension of your leadership team. Well-chosen, experienced compliance experts should keep the plan up to date with every regulatory change and ensure coverage rules meet Affordable Care Act requirements.
Your advisors should:
- provide an ERISA-compliant plan document and Summary Plan Description (SPD).
- handle all annual filings, like the Form 5500.
- monitor all claims.
- audit all invoices.
- identify company-specific trends.
- design cost-containment strategies.
- deploy and manage point solutions.
- report results on monthly or quarterly cadence.
- review stop-loss annually.
- review the PBM contract annually.
Your team should coordinate all the moving parts as a cohesive ecosystem so nothing falls through the cracks. We’ll go over how to choose the right advisors in another article.
Ready to learn more?
Our founder and CEO Phil Baker wrote an eBook – Self-Funding Without FearTM– to guide employers through the process. Download it for free here.