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

One of the most effective methods for attracting top talent is providing stellar benefits packages — especially those with great healthcare. Highly qualified candidates pursuing their next career move will usually look twice at a company with great health benefits.

To do this, many companies use the traditional fully insured model, where the company pays a third-party insurance provider to issue benefits for their employees.

But healthcare in the United States is expensive. Even though employees at large corporations tend to get discounts on premiums, providing healthcare as an employer will still cost you several thousand dollars per month.

Healthcare is also complicated. No matter how you administer it, the maze of paperwork, legal jargon, and pricing structures can be a real headache for any business owner or HR professional. Trying to customize a fully insured model isn’t worth the effort most of the time.

That’s why many companies are choosing a different option: self-insured health plans. A self-insured health plan is managed and administered by the company itself, and it offers plenty of advantages. At the same time, this kind of plan won’t work for every company.

So, which model is the most effective? The answer depends on your goals, your company, and how much work you’re willing to put in. Let’s examine the pros and cons of health insurance plans to determine which can benefit your talent acquisition and retention efforts the most.

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

Before examining the advantages and disadvantages of each model, it's essential to understand their differences:

Fully Insured

A fully insured model is a more traditional form of benefits management. In this model, the employer partners with a third-party insurance provider (e.g. United, Anthem, Aetna, etc.) to offer health benefits to employees. The employer pays fixed premium rates to the insurer, who then assumes the responsibility of covering all enrolled employees' medical claims.

Many employers primarily choose this model because it is predictable and poses a lower administrative burden on the employer.


With self-insured (or self-funded) health plans, the employer directly assumes the financial risk of providing health care benefits to employees. Rather than paying predetermined premiums to an outside insurer, the employer pays for individual claim costs directly as they arise. This is supplemented by fixed costs such as stop-loss insurance premiums and administrative fees.

Perhaps the clearest benefit of this model is its flexibility. Since the employer owns the plan and assumes the risk, they have more freedom to customize the plan to their liking. However, while this option offers potential cost savings, it also carries more risk and administrative burden.

Fully Insured Health Plan: Pros and Cons

Here are some reasons you might (or might not) use a fully insured health plan:


  • Security and Predictability: Because the insurance company is assuming the risk, a fully insured plan provides a safety net. Likewise, insurance companies have predictable cost structures, making budgeting for health benefits much easier and more straightforward. Plus, many insurance companies have been providing these kinds of benefits for years. Their experience and size can offer more stability against the volatility of healthcare claims. If you value this kind of peace of mind, a fully insured plan may be best for you.
  • Simplified Administration: With another company owning the responsibility for the benefits, it takes less work for you to offer a fully insured health plan. Administrative responsibilities like claims processing, enrollment, and compliance with regulations are all handled by the insurance provider. This offloads a significant operational burden from you and saves on high labor costs (for employees managing these plans).


  • Higher Costs and Taxes: Fully insured plans often carry higher or unpredictable premium costs. Prices are influenced by market rates, state regulations, and the provider's pricing policy. Costs may even fluctuate based on changing demographics within your workforce. Employers using this model may also face higher taxes and fees, which contributes to the overall expense of offering health benefits.
  • Limited Flexibility and Control: With a fully insured plan, employers are bound by the terms, conditions, and plan options set forth by their insurance provider. If you want to offer employees a different type of coverage, you’ll need to try and find it elsewhere. So, if you want to customize health benefits for a certain demographic within your organization, or you want to offer unique plans to your employees, a fully insured plan might not give you the best options.

Self-Insured Health Plans: Pros and Cons

Self-insured health plans offer more freedom, but are they worth the extra work? The answer can be complicated. Here are some reasons you might or might not choose this model.


  • Potential Cost Savings: As an employer, directly funding your own health plan can help you avoid extra costs. Since insurance companies are for-profit businesses, they build profit margin into the premiums. If you fund these benefits yourself, you save that cost. In turn, this can lead to lower overall costs and savings on certain taxes and fees that often apply to fully insured plans. However, self-insured plans are usually only viable for larger companies — those with about 500 or more employees.
  • Enhanced Flexibility and Customization: With self-insured plans, you have the autonomy to design and adjust your health benefit plans to meet the unique needs of your workforce. You can create tailored benefits packages that more effectively attract and retain top talent. For instance, you might want to offer coverage for fertility assistance, chiropractic services, or even pet insurance. If you can’t find an insurance company that provides all of those benefits in a single plan, a self-insured model could be the solution.


  • Increased Risk and Responsibility: By assuming the role of insurer, employers also take on all the risks associated with their employees' health claims. Because healthcare needs within the workforce can cause considerable financial strain, employers often purchase stop-loss insurance as protection against excessively high individual or aggregate claims. However, the cost and complexity of managing these policies should be factored into your decision.
  • Administrative Complexity: Self-insuring your benefits requires a robust administrative framework to manage and process claims. You’ll need to design benefit plans and maintain compliance with relevant laws and regulations like the Employee Retirement Income Security Act (ERISA). This work can get very complicated, which is why employers often develop in-house expertise or outsource these functions to third-party administrators. This can introduce additional costs and management challenges.
  • Potential Ethical and Legal Pitfalls: When employees experience significant health issues, employers with self-insured plans face difficult decisions. While it is illegal and unethical to terminate an employee based on a health condition, the financial pressures of funding their health benefits can lead to strained relations and questionable decisions. That’s why ethical management and compliance with legal standards is so important. However, you can also avoid those pressures entirely by simply not using the self-insured model.

Alternatives to Fully Insured and Self-Insured Plans

For organizations seeking a middle ground between fully insured and self-insured options, level-funded plans and Health Reimbursement Arrangements (HRAs) offer compelling alternatives.

Level-Funded Plans

A level-funded plan is essentially a hybrid model, where you typically pay a fixed monthly fee for health coverage for all your employees. This fee covers both a portion of the expected claims costs and the administrative expenses. Any unused funds designated specifically for claims may be refunded at the end of the plan year (depending on several factors).

This model offers some cost-saving customization benefits as well. Depending on your state, you may have lower premium taxes. Plus, with level-funded plans, you can access detailed reports about claims data. This helps prevent your carrier from over-charging your company, giving you more control over the costs.

With this in mind, level-funded plans may not work well for teams that have high-utilization of health benefits. If you aren’t able to predict utilization levels for your health plan with reasonable accuracy, you may end up losing a lot of money with this model.

Health Reimbursement Arrangements (HRAs)

An HRA is a variation of a self-funded plan that has built-in cost control measures. HRAs are employer-funded plans that reimburse employees for qualified medical expenses up to a certain amount. This model has significant flexibility, as you can set the funding levels and define what expenses are eligible for claims. It also means you don’t need to worry about premium price increases every year, since you (the employer) fund the arrangement.

However, HRAs are limited by the IRS to only reimburse expenses related to medical and dental services that are deemed “necessary.” This limits what the employer can offer in a health plan, since things like chiropractic services, massage therapy, and even teeth whitening might not be considered necessary.

How To Structure and Administer Benefits Packages

Creating and managing a benefits package that meets the needs of your employees is a lot of work. Aligning packages with your organization's financial and strategic goals requires even more careful planning and execution. Here are some strategies to consider:

Customizing Your Self-Insured Health Plan

Flexibility is a primary advantage of self-insured health plans. You can design plans that offer unique value to your employees, such as coverage for wellness programs, mental health services, and alternative therapies that may not be readily available in standard insurance packages. Tailoring these offerings to the preferences and needs of your workforce can significantly enhance their job satisfaction and retention.

Luckily, self-insured plans allow you to update and improve your benefits packages over time. For the best results, survey your employees to see which benefits matter most to them.

Ensure Transparent Communication

No matter which model you choose, it is crucial to be clear as you communicate with employees about their available benefits. Ensure they know how to access benefits and any changes to their plans. You should also provide comprehensive resources and support to help employees make informed decisions about their health care options. The more informed your team members are, the more valuable the benefits.

Using Technology To Administer Benefits

Human Capital Management (HCM) solutions play a critical role in streamlining the administration of health benefits. An HCM can help you design, track, and adjust benefits offerings with ease, ensuring that plans remain both competitive and compliant. In essence, a great HCM platform makes it easier to craft and administer benefits packages for your employees.

Criterion's HCM solution offers a configurable, intuitive platform that supports the creation and management of custom benefits packages. The platform also helps you facilitate efficient enrollment processes, manage claims and documentation, and provide valuable analytics to inform decision-making.

Final Thoughts

The decision between fully insured and self-insured health plans (or one of their alternatives) depends on a variety of factors. Your organization's size, risk tolerance, and financial capacity will help determine what is right for you.

The specific needs and preferences of your workforce also matter. When choosing the right benefits package, listen to what your employees need.

By carefully evaluating these considerations and leveraging advanced HCM solutions like Criterion, you can develop a benefits strategy that attracts, retains, and engages top talent for many years to come.

With Criterion, HR professionals can easily onboard new employees and connect them with the right benefits package in a custom workflow. Criterion also generates detailed reports that offer insights into employee demographics, plan utilization, and the impact of health benefits on retention and engagement. You can even integrate Criterion with your ERP and other key systems to sync all your data.

Put your employees at the center of your operation. Book a Criterion demo today to discover how our HCM can streamline all your HR, payroll, and talent engagement processes.

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