Self-funded vs fully-insured medical plans: which is right for your clients?

Self-funded vs. fully-insured medical plans: which is right for your clients?

Selecting the right health insurance plan is one of the most important—and oftentimes daunting—financial decisions an employer can make. As a broker, helping your clients navigate and understand the spectrum of offerings between fully-insured and self-funded plans is critical for mitigating financial risk, ensuring employee needs are met, and containing healthcare costs.

From fully-insured—lower on the risk continuum—to self-funded—higher on the risk continuum—each funding method offers different levels of financial predictability, flexibility, and administrative burden for the employer. Understanding the nuances of these plan types will allow you to better guide your clients toward the option that best fits their unique set of needs.

What are self-funded medical plans?

Traditionally, a self-funded medical plan simply means the employer assumes responsibility for their employees’ healthcare costs, paying for claims as they arise rather than paying fixed monthly premiums to an insurance carrier.

Alternatively, a level-funded plan—a type of self-funded arrangement—involves paying a set monthly amount to cover claims and stop-loss insurance, as well as various administrative costs.

Why employers choose self-funding

For many employers, self-funding provides an opportunity to take greater control over their healthcare costs and benefit offerings. Unlike fully-insured plans that come with set premiums and limited customization, self-funded plans allow companies to tailor coverage to better meet the unique needs of their workforce. This approach is especially appealing to businesses that want greater insight into their healthcare expenditures, along with the flexibility to adjust their plan structure as needed. However, self-funding also comes with greater financial risk, thus requiring strong financial reserves and the ability to absorb fluctuations in claims over time. Overarchingly, groups interested in exploring self-funded plans are drawn to:

• Cost containment: Employers who want to manage long-term healthcare expenses and avoid excessive premium increases may opt for self-funding.
• Customization: Companies that require flexibility in plan design, provider networks, and covered services benefit from the ability to tailor their offerings.
• Data transparency: Self-funded employers gain direct access to claims data, allowing them to analyze trends, adjust benefits, and manage costs more effectively.
• Risk tolerance: Organizations with stable employee health trends and strong financial reserves can mitigate unexpected claims costs.

Recent data highlights the growing adoption of self-funded plans, particularly among larger employers, with 63% of employers opting to pursue self-funded plans in the United States (KFF data). Many companies are drawn to the financial flexibility and cost-saving potential of self-funding, especially in an environment where healthcare expenses continue to rise year over year.

Breakdown by company size:

• Small firms (3-199 employees): 36% level-funded, 20% self-funded
• Large firms (200+ employees): 79% self-funded

Key considerations for employers:

• Financial risk: The employer assumes financial responsibility for claims.
• Financial flexibility: Limited cost predictability, requiring reserves for fluctuations.
• Plan design: Greater customization and flexibility.
• Administrative burden: Higher, including claims processing and compliance.
• Regulatory compliance: Subject to ERISA, HIPAA, COBRA, PCORI fees, and more.

What are fully-insured medical plans?

A fully-insured medical plan transfers all financial risk to an insurance company, with the employer simply paying a fixed monthly premium on behalf of their employee population.

Why employers choose fully-insured plans:

For some employers, the predictability and simplicity of fully-insured plans make them the preferred choice. Unlike self-funded models that expose companies to fluctuating healthcare costs, fully-insured plans provide a fixed monthly premium, which affords employers financial stability as well as ease in budgeting. This makes them particularly attractive to businesses that prioritize cost certainty over flexibility. Additionally, fully-insured plans require minimal administrative involvement, as the insurance carrier manages claims processing and regulatory compliance. Employers who lack either the resources or risk tolerance for self-funding often find that fully-insured plans provide peace of mind and operational efficiency. Generally, groups interested in exploring fully-insured plans are drawn to:

• Predictable costs: Employers looking for consistent, fixed costs without worrying about claims fluctuations prefer fully-insured plans.
• Minimal administrative burden: Since the insurance carrier handles claims processing and compliance, fully-insured plans require less internal management.
• Lower risk exposure: Employers who want to completely avoid financial unpredictability or lack the ability to manage large claims expenses may opt for a fully-insured approach.
• Scalability: Small and mid-sized businesses with fewer employees benefit from fully-insured plans as they do not have the risk tolerance or resources needed to manage claims.

Key considerations for employers:

• Financial risk: Fully transferred to the insurance carrier.
• Financial predictability: Fixed, predictable costs.
• Plan designs: Limited to carrier offerings.
• Administrative burden: Lower; claims processing and compliance handled by the insurer.

Placing medical benefits: challenges brokers face

Helping clients transition from fully-insured to self-funded plans can present unique challenges to brokers. While self-funding offers financial and strategic advantages, many employers struggle with the added complexity and administrative requirements. As a broker, your role is to educate clients on the nuances of self-funding, helping them understand not just the potential cost savings, but also the increased responsibility that comes with assuming more financial risk.

One of the biggest hurdles brokers face is bridging the knowledge gap for clients who are accustomed to fully-insured plans. Many employers underestimate the time and resources required to manage a self-funded plan, from analyzing claims data to handling compliance and reporting requirements. Additionally, employers must weigh the tradeoff between flexibility and stability—self-funding allows greater control over benefits design and cost management, but it also exposes employers to fluctuations in claims expenses. It’s essential to help clients assess their long-term goals, risk tolerance, and operational capacity before making the switch to self-funding.

When should you advise clients to choose self-funded vs. fully-insured?

Two key factors drive the decision:

1. Number of employees – Self-funding is typically more viable for employers with 1,000+ employees.
2. Financial risk tolerance – Clients must be prepared for fluctuating healthcare costs and willing to invest in stop-loss insurance for protection.

How ThreeFlow supports brokers’ benefits placement processes

A Benefits Placement System like ThreeFlow simplifies decision-making for brokers and their employer clients by offering:

• One platform for renewals & RFPs – Standardized workflows across segments and regions for efficient collaboration.
• Clients over spreadsheeting – Automated quote comparisons ensure accurate and streamlined analysis.
• Complete data for smarter decision-making – Actionable insights improve carrier relationships and optimize plan selection.
• Cutting-edge technology – AI-assisted workflows and API integrations reduce manual data entry and drive efficiency.

In 2025, brokers will be able to place level-funded and fully-insured medical benefits within ThreeFlow. On the horizon for 2026, self-insured medical benefits will also be supported, providing a unified platform for all funding arrangements. As the market evolves, leveraging the right technology solutions will enhance broker efficiency and client decision-making, ensuring the best medical benefits strategy for every employer.

Want to explore how ThreeFlow can simplify medical benefits placement for your clients? Contact us today to get started!