Self-Funded vs. Fully Insured

Fully Insured Plan:

In a fully insured arrangement, the employer purchases a group health policy from an insurance carrier such as UnitedHealthcare, Aetna, Cigna or Blue Cross Blue Shield.

• The employer pays a fixed monthly premium.
• The insurance company assumes full financial risk for claims.
• The carrier manages claims processing, provider networks, compliance, and administration.
• Premiums are typically set for 12 months and are based on underwriting and claims history (if applicable).

In short: The employer pays a predictable premium, and the insurer pays the claims. There is a full transfer of risk from the employer to the insurance carrier.

Self-Funded (Self-Insured) Plan:

In a self-funded plan, the employer pays employee healthcare claims directly using company funds, and they protect themselves from catastrophic claims by utilizing stop-loss insurance.

• The employer sets aside money to cover expected claims.
• A third-party administrator (TPA) often handles claims processing and network access.
• The employer purchases stop-loss insurance to protect against catastrophic claims.
• Monthly costs fluctuate based on actual claims experience.

In short: The employer pays claims as they occur and retains the financial risk (with stop-loss protection).

Fully Insured Premium Includes:

• Expected claims
• Administrative fees
• Carrier profit margin
• State premium taxes (typically 2–4%)
• Risk charges
• ACA insurer fees (where applicable)

Self-Funded Costs Include:

• Actual claims paid
• TPA administrative fees
• Stop-loss premiums
• Network access fees
• Compliance costs

Self-funded plans avoid state premium taxes and certain carrier risk charges, which can result in 5–15% cost savings for well-performing groups.

Fully Insured:

• Limited customization
• Carrier controls plan options
• Renewal rates determined by insurer underwriting

Self-Funded:

• Greater customization of benefits
• Access to detailed claims data
• Ability to implement targeted wellness or cost-containment strategies
• Greater transparency into healthcare spending
  

• Small groups (under 50 employees): Typically fully insured due to risk stability concerns.
• Mid-size groups (50–250 employees): Increasingly moving to level-funded or hybrid models.
• Large groups (250+ employees): Commonly self-funded due to financial capacity to absorb risk.

Fully Insured is typically best for:

• Employers wanting predictable costs
• Smaller companies with limited cash reserves
• Organizations preferring minimal administrative involvement

Self-Funded is typically best for:

• Employers with stable cash flow
• Companies wanting cost transparency
• Groups with favorable claims experience
• Organizations seeking long-term cost control

Fully Insured Plans:

• Governed by state insurance laws
• Must follow state benefit mandates
• Regulated by state insurance departments

Self Funded Plans:

• Governed primarily by federal law under Employee Retirement Income Security Act of 1974 (ERISA)
• Exempt from most state insurance mandates
• Subject to federal compliance (ACA, HIPAA, COBRA, etc.)

Implication: Self-funded employers gain flexibility in plan design but assume greater fiduciary responsibility.