5 Common Misconceptions About Self-Funded Plans

As health care costs continue to rise, more employers are exploring self-funded health plans as an alternative to traditional fully insured models.

KFF reports that 63% of the more than 160 million people who receive health benefits through their employer are enrolled in self-funded plans. Yet despite their growing popularity, self-funded plans are often misunderstood. These misconceptions can prevent organizations from making informed decisions that could benefit both their bottom line and their employees.

Under an insured health benefit plan (or fully insured plan), an insurance company assumes the financial risk of loss in exchange for a fixed premium paid to the carrier by the employer. With a self-funded health plan, an employer assumes the financial risks associated with providing health care benefits to its employees. Rather than paying a fixed premium to an insurer, the employer collects premiums from enrollees and pays its employees and their dependents’ medical claims out of pocket as they’re incurred. Employers can administer their health plans themselves or contract with organizations that are third-party administrators (TPAs). Employers with self-funded health plans also typically carry stop-loss insurance to reduce the risk associated with large individual claims or high claims from the entire plan.

This SSG Insight debunks five common myths surrounding self-funded health plans.

1. “Self-funded plans are only for large employers.”

While it is true that, on average, large employers are more likely to choose self-funded plans, a growing number of small and midsized employers are also moving to self-funded plans. By partnering with a TPA and securing stop-loss insurance to mitigate the risk of catastrophic claims, smaller organizations can effectively manage their own employee health benefits. This approach offers enhanced flexibility in plan design and greater transparency in health care spending.

Midsized companies also often consider self-funded plans. According to KFF data, 27% of covered workers at companies with fewer than 200 employees are enrolled in a self-funded plan, and 57% of covered workers at companies with 200-999 workers are. With appropriate guidance and safeguards in place, self-funding can be a cost-effective and strategic alternative to traditional insurance models—regardless of a company’s size.

2. “Self-funded plans are too risky.”

Risk exists in every health plan model. Businesses can reduce financial uncertainty in self-funded health plans with effective claims oversight, cost-saving initiatives (e.g., wellness programs) and stop-loss insurance.

Stop-loss coverage protects employers from excessive claims by capping their financial liability. There are two types of stop-loss insurance: individual (or specific) and aggregate (or total claims). Because health plan usage can be unpredictable, some employers choose to purchase both individual and aggregate stop-loss insurance to provide their organizations with maximum financial protection. Individual stop-loss insurance limits an employer’s liability when an individual employee’s medical claims exceed the attachment point. As such, this coverage can protect employers against unexpectedly high claims from individual employees. On the other hand, aggregate stop-loss insurance can help safeguard employers from the total sum of health claims for an entire group of employees rather than any one individual. Under this coverage, an employer is usually reimbursed when their expenses for all employees’ medical claims exceed the attachment point for the plan year.