Self-Funded vs. Fully Insured Health Plans: What’s The Difference?

Did you know the cost of individual health insurance coverage has skyrocketed 84% since 2010?

It’s true: According to the Kaiser Family Foundation Employer Health Benefits Survey, individual premiums rose from $5,066 annually in 2010 to nearly $9,325 in 2025. Worse yet, family coverage increased 94% in that same period.

And guess what? Health benefit costs per employee are expected to rise an additional 6.7% in 2026, the highest increase in 15 years.

So it’s no surprise that businesses are always looking for ways to put a cap on the cost of employee benefits — without putting a cap on health coverage. As an employer, you have two options: self-funding your health plan or taking out a fully insured plan from an insurance carrier.

Let’s examine the pros and cons of each option and get to the bottom of your healthcare conundrum.

What are fully insured health plans?

A fully insured plan is a group health plan in which the employer or association purchases coverage directly from an insurance company. It is the traditional approach to employee benefits: You pay a monthly premium to the carrier, which covers your members’ medical claims.

Pros

Less financial risk: In a fully insured plan, the insurance company assumes all responsibility for providing health coverage — including the cost. Employers are protected from catastrophic claims running up an enormous medical bill.

More financial predictability: Premium rates are annually fixed, so employers don’t have to worry about large claims suddenly blowing a hole in their budget. It is easier for companies to forecast healthcare costs and remain financially viable.

Fewer administrative burdens: The insurance carrier takes the lead in providing administrative services like open enrollment or claims processing.

Cons

Little customization: Fully insured plans are more rigid and limited, with little room to tailor the plan design according to your members’ needs. It can be difficult for users to access certain healthcare services.

No cost savings: The plan sponsor won’t receive a refund from the insurance company for any leftover money not spent on medical claims during the year.

State laws and taxes: Fully insured plans are subject to state legislation and premium tax rates.

Working with an insurance company to fully fund your health plan is the traditional route. It offers financial protection but little freedom in the way of plan design.

What are self-funded health plans?

The government defines a self-funded plan (also called a self-insured plan) as one in which an employer directly collects premiums from enrollees. In other words, the plan sponsor takes on the responsibility of paying medical claims.

Pros

Freedom to customize: Because you’re not limited to what your insurance carrier offers, you have more flexibility to build a health plan that works best for your members. You create a better employee benefits experience by giving members access to the services they’re looking for, such as mental health counseling or disease management programs.

Cost savings: The healthier your members, the less you spend on medical claims. At the end of the year, your monthly costs are reviewed against the total claims paid out. The amount left over is generally returned to the employer.

Lower taxes: Employers don’t have to pay costs associated with traditional health insurance coverage, like taxes on gross premiums, administrative and underwriting costs.

Compliance: Self-funded plans are exempt from state legislation because they are preempted by the Employee Retirement Income Security Act (ERISA).

Cons

More financial risk: As a plan sponsor, the employer assumes all responsibility for providing health insurance and paying health care costs out of pocket. However, stop-loss insurance can protect you from catastrophic claims by reimbursing you for expenses that exceed a set amount.

Administrative burden: Self-funding means all administrative duties are also the responsibility of the employer, unless they outsource tasks to a third party administrator (TPA). This work can be a lot to handle and may distract employers from core business operations.

Despite its financial risk, self-funding is a much more tailored approach to employee benefits that also opens the door to tremendous cost savings over the long term.

To better understand how these two approaches differ in practice, it helps to compare them across several key factors.

Key Differences Between Self-Funded and Fully Insured Health Plans

While self-funded and fully insured health plans both provide comprehensive coverage for employees, they differ in how costs are paid, how financial risk is managed, and how much flexibility employers have over plan design. Understanding these differences can help employers evaluate which approach best aligns with their organizational goals, workforce needs, and long-term benefits strategy.

Below is a high-level comparison outlining some of the most important distinctions between self-funded and fully insured health plans.

Feature	Self-Funded Health Plans	Fully Insured Health Plans
Cost Structure	Employers pay medical claims as they are incurred and may benefit from lower overall costs when claims experience is favorable.	Employers pay fixed monthly premiums to an insurance carrier, regardless of actual claims activity.
Financial Risk	Employers assume claims risk but typically limit exposure through stop-loss insurance.	Insurance carriers assume claims risk.
Cash Flow	Costs can fluctuate month to month based on claims, creating potential variability but also opportunities for savings.	Costs remain predictable throughout the plan year due to fixed premium payments.
Plan Flexibility	Employers have greater ability to customize benefits, provider networks, and cost-sharing arrangements.	Plan design and coverage options are largely determined by the insurance carrier.
Regulatory Oversight	Primarily governed by federal regulations, including ERISA.	Subject to both state insurance regulations and applicable federal requirements.
Best Fit For	Employers seeking greater cost transparency, plan customization, and long-term control over healthcare spending.	Employers that prioritize simplicity and predictable monthly costs.

Frequently Asked Questions About Self-Funded vs Fully Insured Health Plans

What is the difference between self-funded and fully insured health plans?

The primary difference between self-funded and fully insured health plans is how costs and risk are managed. With a self-funded plan, the employer pays medical claims as they occur and assumes financial risk, often with protection from stop-loss insurance. With a fully insured plan, the employer pays fixed premiums to an insurance carrier, which assumes the claims risk.

Are self-funded health plans risky for employers?

Self-funded health plans do involve a higher level of financial responsibility for employers, but risk is commonly managed through stop-loss coverage and careful plan design. For many organizations, self-funding provides greater transparency and cost control when paired with experienced third-party administration.

Can small or mid-sized employers self-fund a health plan?

Yes, small and mid-sized employers can self-fund a health plan, particularly when they have a stable workforce and appropriate risk mitigation strategies in place. Advances in stop-loss coverage and plan administration have made self-funding more accessible to a broader range of employers.

Can employers switch from fully insured to self-funded coverage?

Many employers transition from fully insured to self-funded coverage as their workforce grows or as they seek greater flexibility and control over healthcare spending. Evaluating claims data, financial readiness, and administrative support is an important part of making this transition.

How does level funding compare to self-funded and fully insured plans?

Level-funded plans combine elements of both self-funded and fully insured health plans. Employers pay a fixed monthly amount, similar to a fully insured plan, while retaining some of the transparency and cost advantages of self-funding. This approach can serve as a stepping stone for employers exploring self-funding options.

MagnaCare: A smart way to self-fund your plan

Ultimately, there’s no magic formula when it comes to health insurance. You have to decide what’s best for you and your members, which is why so many businesses choose to self-fund their coverage. In fact, 67% of covered persons in the United States are in a self-funded plan.

Self-funding does have administrative challenges, however. That’s where a third party administrator like MagnaCare comes into play.

As one of the nation’s leading TPAs, we help you take the pain out of self-funding and design a health plan that meets your members’ expectations and lowers your costs — all while providing you access to a robust network of high-quality providers.

From claims processing to enrollment and everything in between, we’ve got you covered.

Want to learn more about MagnaCare’s TPA services? Contact our team today.