What are the Pros and Cons of Self Funded Group Health
Jason Stolz CLTC, CRPC
Self-funded group health insurance allows employers to take control of their healthcare costs instead of paying fixed premiums to an insurance carrier. Under this model, the employer pays employee medical claims directly and typically purchases stop-loss insurance to protect against large or unexpected claims. While self-funding offers flexibility and potential savings, it also introduces new risks and responsibilities that every business should understand before making the switch.
This page outlines the major advantages and disadvantages of self-funded health plans—helping small business owners decide whether it’s a good fit for their team. For background on how these plans work, start with What Is Self-Funded Group Health Insurance?.
Considering a Self-Funded Health Plan?
Compare self-funded, level-funded, and fully insured plans to see which offers the best value for your business and employees.
The Advantages of Self-Funded Group Health Insurance
Self-funding gives employers greater control and potential cost savings by tailoring their benefits plan directly to employee needs. Key benefits include:
- Cost Control: You pay only for actual claims, not inflated insurance premiums. In good years, your business keeps the savings.
- Cash Flow Flexibility: Instead of prepaying fixed monthly premiums, funds stay within your business until claims are incurred.
- Customizable Plan Design: Employers can choose what benefits to cover and exclude—something not possible in standard insurance pools.
- Transparency: Access to claims data helps employers identify cost drivers, manage chronic conditions, and promote preventive care programs.
- Fewer Mandates: Self-funded plans are governed by federal ERISA laws rather than varying state mandates, offering consistent administration across multiple states.
To understand how these benefits compare to other options, see Group Medical Insurance for a fully insured alternative.
The Disadvantages and Risks of Self-Funding
Despite its potential rewards, self-funding comes with real financial exposure and administrative complexity. Employers should be prepared for:
- Claim Volatility: A single large claim can significantly impact cash flow without adequate stop-loss insurance.
- Upfront Risk: Employers must be financially stable enough to cover claims while waiting for reimbursements from stop-loss coverage.
- Administrative Complexity: Managing third-party administrators (TPAs), compliance, and reporting can require more oversight.
- Regulatory Requirements: Employers must comply with ERISA and HIPAA laws, which can add additional legal and reporting responsibilities.
- Limited Suitability for Small Employers: Very small groups (fewer than 25 employees) may find self-funding less predictable or cost-effective compared to level-funded plans.
For a more predictable hybrid option, explore Small Employer Group Health Insurance.
Self-Funded vs. Fully Insured Plans at a Glance
| Feature | Self-Funded Plan | Fully Insured Plan |
|---|---|---|
| Cost Structure | Pay claims as they occur; potential savings if claims are low. | Fixed monthly premiums; less risk but higher long-term cost. |
| Flexibility | Highly customizable benefits and funding options. | Limited plan design choices based on carrier offerings. |
| Risk Level | Higher exposure without stop-loss protection. | Minimal employer risk; carrier assumes liability. |
| Administrative Effort | Requires claims management and TPA coordination. | Carrier handles claims and compliance. |
Who Should Consider a Self-Funded Plan?
Self-funded plans can be a great fit for mid-size businesses with stable cash flow and a healthy employee base. They’re especially effective for:
- Companies with 25–500 employees seeking long-term cost control.
- Employers interested in wellness incentives or custom preventive programs.
- Organizations that want transparency in claims and utilization data.
If you’re a smaller firm, a 2-Person Group Health Insurance plan or a Small Business Group Health Insurance model may be a better first step.
Find Out if Self-Funding Is Right for You
Our advisors can compare self-funded, level-funded, and fully insured options to help you build a sustainable group health strategy.
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FAQs: Self-Funded Group Health Insurance
How does a self-funded health plan work?
The employer pays employee medical claims directly instead of paying premiums to an insurance carrier, using stop-loss coverage for protection against large claims.
What is stop-loss insurance?
Stop-loss insurance limits financial exposure by reimbursing the employer for claims that exceed a set dollar threshold.
Can small employers self-fund?
Yes, but smaller businesses typically use level-funded plans, which blend self-funding flexibility with fixed monthly costs.
What are the main advantages of self-funding?
Greater flexibility, potential savings, transparency in claims data, and customizable benefits design.
What are the downsides of self-funding?
Higher financial risk, administrative complexity, and claim volatility, especially for small groups without sufficient reserves.
