Self-Funded Health Plan

A self-funded health plan is one where the employer pays its employees' medical claims out of its own money instead of paying a premium to an insurance company to take on that risk. The employer hires a third-party administrator to process claims, rents a provider network, and buys stop-loss insurance to cap how bad a year can get. The employer is the insurer; everyone else is a vendor.

About two-thirds of American workers with employer coverage are on a self-funded plan, and the share climbs with company size — over 80 percent at employers with 200 or more workers. The appeal is simple: in a good year the employer keeps the money a carrier would have kept as margin, typically 3 to 8 percent of premium, and it avoids state premium taxes and most state benefit mandates because the plan is governed by federal ERISA law instead. The risk is just as simple. A 150-life employer expecting $1.5 million in claims can see $2.2 million, and the stop-loss contract decides how much of that lands on the company. Level-funded plans are the hybrid for smaller employers who want the upside without the open-ended exposure.

The takeaway: if you're self-funded, every claim is your money. Ask for the claims data by facility and procedure, because the same knee replacement can cost your plan $22,000 at one hospital and $38,000 at another across town. The plan pays that difference, not the carrier.