Self-Funded vs. Fully Insured Health Plans: What to Know

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Table of Contents

Why This Decision Matters More Than Ever What Is a Fully Insured Health Plan? What Is a Self-Funded Health Plan? Self-Funded vs. Fully Insured: Side-by-Side Comparison How Does Self-Funded Insurance Work? Is Self-Funded Insurance Good for Employees? Pros and Cons for Employers: Fully Insured Plans Pros Cons Pros and Cons for Employers: Self-Funded Plans One Way to Reduce Claims: Add Primary Care What Other Health Plan Funding Models Exist? Level-Funding The Individual Coverage Health Reimbursement Arrangement (ICHRA) Which Plan Is Right for Your Business? Key Takeaways Frequently Asked Questions Sources

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written by

Katherine Torres

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10

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Picking a health plan for your team is one of the biggest decisions you'll make all year. Two of the most common options are fully insured plans and self-funded plans. But what's the difference? And which one makes sense for your business?

This guide breaks it all down in plain language, backed by recent data.

Why This Decision Matters More Than Ever

Health insurance is getting expensive fast.

According to KFF's 2025 Employer Health Benefits Survey , the average employer-sponsored family premium hit $26,993 in 2025. That's a 26% increase over the last five years, faster than the rate of inflation.

Employers are feeling squeezed. And more of them are looking at alternatives to traditional fully insured plans.

Here's what the data shows: 67% of covered workers in the U.S. are now in self-funded health plans, according to KFF's 2025 survey. That includes 80% of workers at large firms and a growing share of small businesses, too.

So what does that mean for you? Let's start with the basics.

What Is a Fully Insured Health Plan?

A fully insured plan is the traditional way employers buy health coverage.

You pay a fixed monthly premium to an insurance company. The insurer covers your employees' medical claims. You know exactly what you'll pay each month during your plan year—no surprises.

The insurer takes on all the risk. If your employees have high claims throughout the year, the insurer absorbs the cost of those claims. If they have low claims, the insurer keeps the difference between the premiums you pay in and the claims they pay out.

Key features of fully insured plans:

Fully insured plans are common among small businesses. They're simple and predictable, but that simplicity can come at a cost.

What Is a Self-Funded Health Plan?

A self-funded health plan (also called a self-insured plan) works differently.

Instead of paying an insurance company take on the risk of covering employee claims, you pay your employees' medical claims directly. You set money aside each month to cover those costs. When an employee gets care, you pay the bill.

Most self-funded employers partner with a third-party administrator (TPA). The TPA handles paperwork, processes claims, and manages day-to-day operations. But the financial responsibility stays with you.

To protect against catastrophic claims, most self-funded employers also buy stop-loss insurance. This kicks in when costs spike above a set threshold.

Key features of self-funded plans:

Self-Funded vs. Fully Insured: Side-by-Side Comparison

How Does Self-Funded Insurance Work?

To understand how self-funding works, let's look at an example.

Say you run a company with 150 employees. Under a fully insured plan, you might pay $700 per employee per month toward insurance premiums. That's $105,000 per month, no matter what happens.

Under a self-funded plan, you set aside $580 per employee based on expected claims. If your employees are healthy, you spend less. If claims spike, you spend more.

If you have stop-loss insurance and your employee claims spike above a certain dollar amount, that's where it kicks in. It caps your exposure beyond your stop-loss limit. So, if you set a specific stop-loss limit at $50,000 per person per year. and an employee exceeds that, your liability is capped. The stop-loss carrier covers the rest.

Here's the basic flow:

  1. Employee gets medical care
  2. Provider sends the claim to your TPA
  3. TPA processes the claim and pays the provider
  4. You reimburse the TPA from your claims fund
  5. Stop-loss coverage kicks in if costs exceed your threshold

The key insight: in a good year with few claims, excess money stays with you. In a fully insured plan, the insurer keeps it.

Is Self-Funded Insurance Good for Employees?

This is one of the most common questions, and a fair one.

For employees, the day-to-day experience often looks identical to a fully insured plan. They still get an insurance card. They still visit their doctors. Claims still get processed.

But there are real differences worth knowing.

Potential benefits for employees:

Potential drawbacks for employees:

Overall, self-funded plans can be excellent for employees, especially when the employer uses the flexibility to build a better plan rather than just cutting costs.

Pros and Cons for Employers: Fully Insured Plans

Pros

Cons

Pros and Cons for Employers: Self-Funded Plans

Pros

Cons

One Way to Reduce Claims: Add Primary Care

Here's something many employers don't realize: a major driver of high claims is employees who can't access timely primary care.

When employees skip a doctor visit because of cost or access, small problems become big ones. A missed blood pressure check becomes a stroke. A skipped annual exam becomes a late-stage cancer diagnosis. Both are devastating for the employee, and very expensive for your self-funded plan.

That's where employer-sponsored primary care comes in.

A growing number of self-funded employers are adding a direct primary care membership—like Vitable Primary Care—as a layer on top of their health plan. For a flat monthly fee per employee, every worker gets unlimited access to everyday care. No copays, no deductibles, no barriers. Adding this enhancement can reduce overall health costs for both employers and their employees.

The data backs this up. An independent actuarial analysis by Windsor Strategy Partners—a healthcare actuarial firm serving self-funded plans, captives, and insurers—found that Vitable  Primary Care reduces aggregate claims by an average of 10.1%.

The analysis modeled reductions of 20% in ER utilization, 50% in urgent care visits, and 50% in primary care claims–all redirected to Vitable Primary Care.

For self-funded employers, this can have a significant financial impact. Every claim you don't pay is money that stays in your plan fund.

What Other Health Plan Funding Models Exist?

If a fully insured plan sounds too rigid, but self-funding sounds too risky, there are other options. We'll cover two of them below.

Level-Funding

With both self-funding and level funding, you take on more risk than a fully insured plan. But the two have some key differences.

With self-funding, you own your claims fund and pay claims directly as they come in. Stop-loss insurance kicks in if any one claim—or your total claims—cross a set threshold. If it's a healthy year and claims stay low, you keep every dollar that's left.

With level funding, you pay a fixed monthly premium to a carrier or TPA, like you would with a fully insured plan. The carrier or TPA holds your funds in a separate account and uses them to pay claims and cover stop-loss premiums. If claims come in lower than expected, you may get a refund at year-end.

Think of it this way: with self-funding, the money is yours until you spend it. With level funding, you're handing it to someone else to manage and hoping to get some back.

According to the 2025 KFF survey, 37% of covered workers at small and mid-size firms are now enrolled in level-funded plans. These plans are one of the fastest-growing options in the market because they make self-funding accessible to smaller employers.

The Individual Coverage Health Reimbursement Arrangement (ICHRA)

There's one more option worth knowing about, especially if you want maximum cost predictability with minimum claims risk.

An ICHRA lets you give employees a fixed monthly allowance to buy their own individual health insurance—the same fully insured, community-rated plans available on the ACA Marketplace.

Here's why this is a big deal:

ICHRA adoption is growing fast. According to the HRA Council, ICHRA adoption grew 34% among large employers from 2024 to 2025, and 18% among small employers. More than 83% of employers that adopted an ICHRA in 2025 hadn't previously offered health coverage at all.

Vitable Health administers ICHRAs for employers who want the predictability of a defined contribution with the flexibility to offer employees individual market choice—and the ability to layer on additional benefits like primary care.

Which Plan Is Right for Your Business?

The right choice depends on a few key factors.

Consider a traditional self-funded plan if:

Consider a level-funded plan if:

Consider an ICHRA if:

Consider a fully insured plan if:

Key Takeaways

Want to explore whether a self-funded, level-funded, or ICHRA plan is right for your team— and whether adding Vitable Primary Care could reduce your claims? Talk to a Vitable Health advisor.

Frequently Asked Questions

What is the difference between self-funded and fully insured health plans? In a fully insured plan, you pay a fixed premium and the insurer covers all claims. In a self-funded plan, you pay claims directly and take on more financial risk, but also get more control and can save money when employees are healthy.

What is self-funded health insurance? Self-funded health insurance is a plan where the employer pays employees' medical claims. Most employers buy stop-loss insurance to protect against high-cost claims and work with a TPA to manage day-to-day administration.

Is self-funded insurance good for employees? It can be. Employees often get more personalized benefits and better wellness support. The key is whether the employer uses the flexibility to build a better plan and not just cut costs.

How many employees do you need to self-fund? Traditional self-funded plans work best for 100 or more employees. Level-funded plans make self-funding accessible for employers with as few as 10–25 employees.

What is a level-funded health plan? A level-funded plan is a hybrid option. You pay fixed monthly amounts like a fully insured plan, but if actual claims come in under budget, you get a refund at year-end.

What is an ICHRA and how does it relate to self-funding? An ICHRA is a type of self-funded benefit where the employer sets a fixed monthly allowance and employees use it to buy their own fully insured individual plans. Unlike traditional self-funding, there are no claims to manage and no surprise costs.

Can I add primary care to a self-funded plan? Yes, and it's one of the smartest ways to reduce claims. Employer-sponsored primary care memberships remove barriers to routine care, which prevents the costly ER visits and hospitalizations that drive up self-funded plan costs.

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