What a Self-Funded Health Plan Actually Means for Your Company

A self-funded health Plan means your company pays employee medical claims from its own funds instead of paying fixed premiums to a carrier. You take on the claims risk, you buy stop loss insurance to cap it, and you keep what you don’t spend. The trade is predictability for control.

That trade is getting easier to justify. The average annual premium for employer-sponsored family coverage reached $26,993 in 2025, 6% higher than the year before, according to KFF’s Employer Health Benefits Survey, which also puts self-funded enrollment at 67% of covered workers and 80% at larger firms. Employers surveyed by the International Foundation of Employee Benefit Plans project a median cost increase of 10% for 2027. One point deserves stating up front, though: the funding change by itself doesn’t lower your cost.

What is a self-funded health Plan?

A self-funded health Plan is a group health Plan where the employer pays covered medical claims from its own assets rather than buying insurance to cover them. A third party administrator processes claims and pays providers. The employer sets the design and carries the risk.

A few terms that get used loosely:

• Self-funded Plan. The employer pays claims from its own funds. Also called self-insured.
• Fully-insured plan. The employer pays a fixed premium, and the carrier pays claims and keeps any surplus.
• Third party administrator, or TPA. The vendor that adjudicates claims and administers the Plan. A TPA doesn’t take claims risk. The employer does.
• Stop loss carrier. The insurer that reimburses the Plan once claims pass an agreed threshold. It’s a separate contract from the TPA and a separate renewal.

Totem isn’t a TPA or a carrier. We’re a fee-only, carrier-independent benefits consultant, so our healthcare approach is helping you choose and manage those vendors rather than selling you our own.

Does switching to a self-funded health Plan save money by itself?

No. Changing the funding arrangement changes who holds the risk, who sees the claims data, and who keeps a surplus at year end. It doesn’t change what care costs. Employers who self-fund and change nothing else land near where they started. The savings come from what you do once you can see the claims.

Three moves do most of the work:

• Independent TPA. A claims administrator that isn’t owned by or bundled with the carrier or the PBM. Independence removes the conflict between administering your Plan and selling you the network and pharmacy contract attached to it.
• Pharmacy carve out. Contracting the pharmacy benefit separately from the medical Plan, usually with a transparent, pass-through PBM. It pulls drug spend out from under the medical contract so it can be priced on its own terms.
• Point solutions. Targeted vendors layered onto the Plan for specific spend categories, such as care navigation, centers of excellence, or specialty drug sourcing.

None of this is available inside a fully-insured arrangement, where you’re buying the carrier’s assembled package. Self-funding makes the components separable, which is why the funding decision is the starting point rather than the strategy.

How much risk does a self-funded health Plan actually carry?

Less than most CFOs assume, because the risk gets capped on purpose. Stop loss insurance reimburses the Plan once claims pass a set threshold, so a catastrophic claim doesn’t become an unbudgeted liability. Two terms set where that threshold sits, and they’re the two worth understanding before any renewal conversation.

• Specific Deductible. The dollar threshold above which stop loss reimburses the Plan for a single member’s claims in a Plan year. Set it low and you pay more premium for less volatility. Set it high and you keep more risk.
• Aggregating Specific Deductible. A shared corridor the Plan absorbs across all claims that pierce the Specific Deductible, before stop loss reimburses. It lowers premium in exchange for a defined layer of risk.

The real risk usually isn’t the funding. It’s going in without a stop loss structure matched to your claims history, your cash position, and your tolerance for a bad quarter. Some employers spread that risk further through a group captive.

Self-funded vs fully-insured vs level-funded: what’s the difference?

The three arrangements differ in who holds the claims risk and who keeps the surplus. Self-funding puts both with the employer, along with the ability to unbundle the Plan. Full insurance puts both with the carrier and keeps the package assembled. Level funding sits between them.

• Level-funded plan. The employer pays a fixed monthly amount covering expected claims, administration, and stop loss premium. If claims run under, some or all of the surplus can come back. If they run over, the maximum liability was known going in.

Level funding gives you a look at your claims without full exposure. What it doesn’t give you is the ability to unbundle the Plan, which is where the cost work happens.

What can you do with a self-funded health Plan that you can’t do with a fully-insured one?

You can spend on quality instead of paying for volume. A fully-insured plan comes as the carrier built it, priced on the carrier’s book rather than yours. A self-funded health Plan lets you build around where your money actually goes, and reward the members who help you spend it well.

• High-performance health plan. A Plan design that steers members toward providers with measurably better outcomes, usually through network design, incentives, and care navigation, on the premise that better care costs less over the full episode.

This is where the CHRO conversation starts. Design the Plan thoughtfully around high-performance elements and it gets richer and cheaper for the member at once. Put someone with a serious diagnosis in front of a top center for that condition and cover it generously, because better care at the right site costs the Plan less across the full episode.

Taken far enough, that’s the long term goal: richer benefits at $0 out of pocket for the member. Steer someone to a provider the Plan has vetted, and the Plan can waive their cost share entirely, because the episode still costs less than it would somewhere the Plan didn’t choose. A fully-insured plan can’t be built that way. The carrier sets the design and prices it against its own book, so there’s no mechanism to trade site of care for member cost. For a CHRO recruiting and keeping people, that’s the argument, and employees feel it faster than a premium change.

What does it take to run a self-funded health Plan well?

Consistency, real reporting, and knowing what you’ve taken on. Employers who do well with self-funding treat it as a multiyear strategy with data behind it, not a funding switch they revisit every renewal. They read their claims, hold vendors to their terms, and keep a Plan design in place long enough for it to work.

Compliance is the other half, and it gets underestimated. Self-funding moves responsibility for the Plan onto the employer, including fiduciary responsibility a fully-insured arrangement largely leaves with the carrier. Knowing what you’ve taken on, and documenting how you select and monitor the vendors who touch Plan assets, is part of running the Plan. Your counsel should define that scope.

The rest is the vendor stack: an independent TPA, a pharmacy carve out, and the point solutions that fit your claims, re-tested at every renewal.

Across Totem’s engineered health benefits programs, we publish annual savings of 8% to 29%. What any one employer sees depends on its claims experience, its Plan design, and how far it’s willing to go on quality steerage.

If you’re weighing self-funding, or you’re already self-funded and can’t get a straight answer about where your spend is going, let’s talk. We’ll walk your data with you and tell you what we see, including when the answer is that self-funding isn’t the right fit. Be there for everyone starts with being straight.

FAQ

What does self-funded mean for a health Plan?

It means the employer pays covered medical claims from its own funds rather than buying insurance that pays them. A third party administrator handles claims processing. The employer sets the design, carries the risk, buys stop loss insurance to cap it, and keeps any surplus.

Is a self-funded health Plan cheaper than a fully-insured plan?

Not on its own. Self-funding removes carrier margin and premium tax and gives you claims data to act on, which creates the room to lower cost. Using that room takes an independent TPA, a pharmacy carve out, and point solutions matched to your claims.

What is a high-performance health Plan?

A Plan designed to steer members toward providers with measurably better outcomes, through network design, incentives, and care navigation. The long term goal is richer benefits at $0 out of pocket for members who use those providers, because better care at the right site costs the Plan less.

What is stop loss insurance?

Coverage that reimburses a self-funded health Plan when claims exceed a set threshold. The Specific Deductible sets that threshold per member per Plan year, keeping a single catastrophic claim from becoming an unbudgeted liability.