Insurance: Self-funding vs. fully insuring your healthcare costs

By John Foley
For many companies, the decision whether to self-fund or fully insure healthcare is a complex one. A fully funded health plan is the more common option, but many companies elect to self-fund for a variety of reasons. It is important to understand the differences between the two when choosing how to set up the best health plan for your business.
A fully-insured health plan is the more traditional way to structure an employer-sponsored health plan. With a fully-insured health plan:

  • The company pays a premium to the insurance carrier.
  • The premium rates are fixed for a year, based on the number of employees enrolled in the plan each month.
  • The monthly premium only changes during the year if the number of enrolled employees in the plan changes.
  • The insurance carrier collects the premiums and pays the health care claims based on the coverage benefits outlined in the policy purchased.
  • The covered persons (employees and dependents) are responsible to pay any deductible amounts or co-payments required for covered services under the policy.

Under a fully insured health insurance plan, the employer has a set annual premium. If the employers’ claims for the year are less than that amount, the carrier retains the “profit.” If the claims are greater than the premium amount, the account is considered to have not performed well and that will be reflected in the next year’s premiums.
With a self-insured (self-funded) health plan, employers play a greater role in the decisions as opposed to purchasing a fully-insured plan from an insurance carrier. Employers choose to self-insure because it allows them to save the profit margin that an insurance company adds to its premium for a fully insured plan. However, self-insuring exposes the company to much larger risk in the event that more claims than expected must be paid. These risks are mitigated through the purchase of specific and aggregate stop loss insurance.
With a self-funded health plan:

  • There are two main costs to consider: fixed costs and variable costs.
  • The fixed costs include administrative fees, any stop-loss premiums, and any other set fees charged per employee. These costs are billed monthly by the Third Part Administrator (TPA) or carrier, and are charged based on plan enrollment.
  • The variable costs include payment of health care claims. These costs vary from month to month based on health care use by covered persons (employees and dependents).
  • To limit risk, most employers use stop-loss or excess-loss insurance, which reimburses the employer for claims that exceed a predetermined level. This coverage can be purchased to cover catastrophic claims on one covered person (specific coverage) or to cover claims that significantly exceed the expected level for the group of covered persons (aggregate coverage).

In my experience, the Northeast leans more heavily towards fully insured as opposed to self-funding. I believe a number of factors have played a role in this:

  • The physician and hospital networks, or lack of networks, that TPAs have developed in our region – however, this is changing.
  • The contractual negotiated claim discounts that TPAs have developed are not as strong as fully insured carriers — again, though, this is changing.
  • The lack of name brand associated with TPAs vs fully insured carriers (Blue Cross, Harvard Pilgrim, etc.).

Many of these issues are in the past, and employers should investigate a self-funded healthcare option with their benefit brokers.
Self-funded healthcare programs are much more competitive than they were even five years ago, for a variety of reasons:

  • Fully insured carriers are now becoming claim administrators for self-funded programs.
  • This allows for stronger negotiated claim discounts and a better result in a self-funded program.
  • This also allows for the member (the employee) to have a brand name insurance card, and that comfort level plays a role at the decision stage.

One of the decisions that employers need to make if they are investigating a self-funded option is the overall health of their employee population. If historically they have always had large claims and high utilization, self-funding may not be a good decision until they can get the claims under control.
Self-funding your health insurance program can be a great decision, but thorough evaluation and communication must precede any decision.
John Foley is Vice President, Employee Benefits at Rogers & Gray Insurance. He can be reached at or (508) 258-2217.
This article was published in the May 2017 issue of Cape & Plymouth Business.