Self Funding

Self Funded Group Health Insurance provides a spectrum of options that give employers greater clarity and control

Self Funded Group Health

There are several Self Funded Group Health strategies that organizations can implement to improve their Healthcare cost and utilization.  Historically it was mostly larger organizations who used these methods, but that has changed.  Now, there are methods that can help smaller employers utilize these alternative funding strategies to benefit their organizations.  The results include clarity in claims data, behavior based financial results, and greater flexibility in coverage.


The Self Funded plan design has been used for many years.  Originally, the term referred to one specific approach.  Now, the term refers to an ever-growing group of strategies that use similar principles.

The basic principle:  The employer calculates their expected health claims and allocates funds to apply to those costs.  Additionally, the employer will purchase a Stop Loss insurance layer to absorb the shock of any catastrophic claims.  Typically, the employer also pays a Third-Party Administrator (TPA) to manage the detailed administrative work of receiving, paying and even auditing of employee healthcare invoices. 

These Self-Funded Strategies Include:

  • Partially Self- Funded – The employer allocates funds to pay for healthcare claims up to a certain threshold, and then purchases a Stop-Loss Insurance policy to handle claims that exceed the designated limit.
  • Fully Self-Funded – The employer allocates funds to pay for all healthcare claims.  They utilize a Third-Party Administrator (TPA) to manage the day-to-day process of reviewing and paying health claims.  This method is typically only used by the largest employers.
  • Level-Funded – The employer funds claims up to a certain amount.  The insurance company provides the administrative services, manages the claim fund, and pays for claims that exceed the claim fund.
  • Group Health Captives – A Captive is like a mini insurance company formed by like-minded employers.  Each employer pays the claims for their own group up to a specified limit.  Claims that exceed that limit are paid from resources pooled by the entire group.  The Captive purchases Stop-Loss Insurance to pay for catastrophic claims that exceed the pooled resources of the Captive.


With traditional group health insurance, the costs for all the services provided by the insurance company within a single policy are bundled into one final premium.  The costs of the individual components are not itemized.  With the Self-Funded model, the costs are “un-bundled” into their respective parts.  This allows for a more a-la-carte method of purchasing the needed pieces.  Rather than all the pieces being provided by the insurance company, it is possible to use multiple different vendors.  The goal is to gain both transparency and savings.

When an employer “un-bundles” these services they must outsource certain duties and take on other aspects of administration themselves. The roles that must be addressed are typically payment of claims, access to networks, pharmacy management, purchasing a stop loss layer of insurance, and general administration.  By removing the administrative cost of an insurance company the employer can potentially gain savings.  In addition, the hidden costs of insurance company profits are greatly reduced or even eliminated.  Lastly, by using a 3rd party to manage claims, greater insight into claim data can be achieved.


The Benefits of Self Funding

Claim data

Since most claims are being paid by the employer and managed by a TPA, there is direct access to the claim data.  Claim data gives invaluable insight into the group’s healthcare utilization.

In this context, “healthcare utilization” includes the types of treatment received, the type of facility where treatment is received, and pharmacy spend.  For example, it may identify ongoing medical issues that will continue to affect costs in the future.  With that information, the budget can be adjusted accordingly.  Similarly, the data may uncover a trend of seeking care for minor things at the emergency room, simply because it’s close to home or close to the office.  If the same treatment was received in a doctor’s office or urgent care setting, costs would be greatly reduced.  Lastly, the cost for the exact same prescription can vary widely from pharmacy to pharmacy, even with the same insurance.  Many employees are not aware that prescription drugs prices vary or that it is possible to find compare pricing ahead of time.

Behavior Change

Employers must ensure that there is a commitment to utilizing the data and containing costs to achieve savings.  Data is only as helpful as the change it produces.  The end goal of changing your insurance program to one that provides greater transparency is to have the information and tools to incentive behavior changes.  Providing this education at the employee level does take time and effort.  But the payoff is worth it.  Over time, behavior change can reduce the price tag of healthcare claims and ultimately reduce insurance premiums.