What does self-funded mean in health insurance?

Self-funded means the employer — not an insurance carrier — directly pays employee medical claims. The employer sets aside funds to cover expected claims and purchases stop-loss insurance to protect against catastrophic costs.

Who administers a self-funded health plan?

A third-party administrator (TPA) handles claims processing, network access, utilization management, and member services. The TPA does not bear any financial risk — that stays with the employer.

Foundation

What Is Self-Funding? How Self-Insured Health Plans Work

In a self-funded (self-insured) health plan, the employer pays employee medical claims directly — rather than paying a fixed monthly premium to an insurance carrier. It's the dominant model among mid-size and large employers for good reason: it's cheaper, more transparent, and gives you control that fully insured plans simply don't offer.

The core mechanics

In a fully insured plan, you pay a fixed premium every month regardless of how many claims your employees file. The carrier keeps the difference if claims are low; you pay the same if claims are high. You own none of the data and have no visibility into what's driving costs.

In a self-funded plan, you pay claims as they occur. You set aside funds to cover expected claims, purchase stop-loss insurance to cap catastrophic exposure, and hire a third-party administrator (TPA) to process claims and manage the plan. In a good year, the surplus stays with you.

The three components of a self-funded plan

Claims fund: The employer's money used to pay medical claims as they are incurred. Usually held in a dedicated trust or account.

Stop-loss insurance: Protects against catastrophic individual claims (specific stop-loss) and total plan costs exceeding projections (aggregate stop-loss).

Third-party administrator (TPA): Processes claims, manages the provider network, handles utilization management, and provides member services — without bearing any financial risk.

Who self-funds?

According to the KFF 2025 Employer Health Benefits Survey, 65% of covered workers are enrolled in self-funded plans. Among employers with 200 or more employees, that number rises to 83%. Self-funding is not a niche strategy — it's the mainstream model for employers large enough to absorb claims variability.

Most advisors recommend self-funding for groups of 100 or more employees. Smaller groups face more claims volatility, though level-funded plans (a hybrid model) can provide some of the same benefits with more predictable monthly costs.

What self-funding is not

It's not going without insurance: Stop-loss insurance is a critical component. Self-funding without stop-loss is reckless — the goal is to take on manageable risk, not unlimited risk.

It's not more administrative work for HR: The TPA handles day-to-day administration. HR's workload is similar to a fully insured plan; the difference is in the financial structure and data access.

It's not only for large employers: Groups as small as 50 lives can self-fund with the right TPA and stop-loss structure, though the risk-reward tradeoff improves significantly at 100+ lives.

ERISA preemption: the hidden advantage

Self-funded plans governed by ERISA are exempt from state insurance mandates. This means you can design a plan that covers exactly what your workforce needs — without being forced to include state-mandated benefits that may not apply to your population. It also means consistent plan design across all states, which matters for multi-state employers.

Related tools

Self-Funding Readiness Assessment

Answer 10 questions to see if self-funding is the right move for your group.

Self-Funded vs. Fully Insured Calculator

Model the financial difference between funding strategies for your plan.

Benefits IQ Score™

Benchmark your plan across 12 domains including Funding Strategy.

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