What Is Self-Insured Health Insurance?

When employers want to offer health insurance to their workers, they essentially have two options: A self-insured plan—also known as a self-funded plan—or a fully-insured plan. This article will explain what self-insured health coverage is and how it differs from fully-insured coverage.

What Is Self-Insured Health Insurance?

Self-insured health insurance means that the employer is using their own money to cover their employees' claims. Most self-insured employers contract with an insurance company or independent third party administrator (TPA) for plan administration, but the actual claims costs are covered by the employer's funds.

Fully-insured means that the employer purchases health insurance coverage from a commercial insurer and the insurance company then takes on the risk associated with the employees' health claims.

According to a 2022 Kaiser Family Foundation analysis, 65% of U.S. employees with employer-sponsored health insurance are in self-insured plans.

Most businesses with 200 or more employees are self-insured, with 82% of covered workers at these businesses enrolled in self-insured health plans. Among businesses with fewer than 200 employees, however, just 20% of covered workers are in self-insured plans (this is up from 13% in 2018, but a little lower than it was in 2020).

This makes sense, since larger businesses are generally the ones that have the financial ability to take on the risk associated with employees' medical claims. But for employers who are able to do so, self-insuring can provide financial savings as well as the option to tailor-make a health plan to suit the employer's and employees' needs.

And insurers and TPAs that contract with self-insured businesses are increasingly offering products that make it easier for smaller businesses to self-insure. These include stop-loss (also known as reinsurance) coverage that reimburses the employer in the event of a substantial claim, and level-funded coverage packages that eliminate the claims cost volatility that a self-insured plan could otherwise face.

How Self-Insured Plans Are Regulated

Fully-insured health insurance plans are mostly regulated at the state level, although there are various federal minimum standards (contained in laws such as HIPAA, COBRA, and the ACA) that also apply.

Each state has its own laws and regulations pertaining to health insurance, and state-regulated plans sold within the state are overseen by the state insurance commissioner. But state-based laws and regulations only pertain to fully-insured plans—they do not apply to self-insured plans.

So, for example, when a state imposes rules to require health plans to cover vasectomies or infertility treatment, the requirements don't apply to self-insured plans. And nearly two-thirds of people who have employer-sponsored health insurance are covered under self-insured plans.

This can sometimes cause frustration and confusion, especially when a person is in a state where a new insurance mandate or law generates significant excitement and media coverage, and residents with self-insured plans may not be aware that the new rules don't apply to their coverage.

This can be the case, for example, if a state starts to require state-regulated plans to cover something like infertility treatment, but then people with self-insured plans don't get that benefit unless their employer decides to offer it.

Regulations That Apply to Self-Insured Plans

There are some basic federal minimum standards that do apply to self-insured plans though. This includes things like the HIPAA rules that prohibit employer-sponsored plans from rejecting an eligible employee (or dependent) based on medical history, and the ACA rules that prohibit plans from imposing waiting periods for pre-existing conditions.

The Pregnancy Discrimination Act applies to all health plans with 15 or more employees, including self-insured plans. Along with various other nondiscrimination provisions, the law requires employer-sponsored health plans to include maternity coverage (the law doesn't require a small employer to offer coverage, but if they do, it must include maternity benefits).

Self-insured plans are also subject to COBRA (assuming the group has 20 or more employees), which means eligible employees and their dependents can opt to continue their coverage if a life change event would otherwise result in a coverage termination.

The Families First Coronavirus Response Act required nearly all health plans, including self-insured plans, to waive cost-sharing for COVID-19 testing during the COVID public health emergency, meaning that the enrollee didn't have to pay anything for the office visit or the test itself.

But the COVID public health emergency ended on May 11, 2023. So health plans are now allowed to charge cost-sharing for in-office COVID testing, and no longer have to cover the cost of at-home COVID tests. (Note that the rules are different for Medicaid, which will continue to cover the full cost of COVID testing, including at-home tests, until the summer of 2024.)

The federal No Surprises Act took effect in 2022, protecting consumers from most instances of "surprise" balance billing. It applies to self-insured as well as fully-insured plans.

Various states had already taken action to limit surprise balance billing, but state rules only apply to fully-insured plans; the new federal rule provides protection for consumers in states that hadn't yet taken action, and also protects people with self-insured coverage.

Several Affordable Care Act provisions apply to self-insured plans in the same manner that they apply to fully-insured plans. This includes:

• Out-of-pocket maximum limits (unless the plan is grandfathered).
• A requirement that dependents be allowed to remain on the plan until they turn 26, assuming the plan offers dependent coverage (this applies even if the plan is grandfathered).
• The requirement that non-grandfathered plans provide access to an internal and external review process if a member's claim or pre-authorization request is denied. (Note that even grandfathered plans are required to provide access to an external review if the claim is subject to the No Surprises Act.)
• The ACA's employer mandate requirements. So if the employer has 50 or more full-time equivalent employees, the coverage they offer has to be affordable and provide minimum value, regardless of whether it's self-insured or fully-insured coverage. Otherwise, the employer could be subject to a penalty.

Regulations That Do Not Apply to Self-Insured Plans

As described above, state-based laws and regulations generally only apply to fully-insured plans. Self-insured plans are not subject to them, although there is sometimes an option for self-insured plans to opt into these requirements.

There are also some federal requirements that do not apply to self-insured plans. Some examples are:

• Medical loss ratio rules do not apply to self-insured plans.
• Self-insured plans do not have to include coverage for the ACA's essential health benefits (with the exception of preventive care, which must be covered—with no cost-sharing—on all non-grandfathered plans). Any essential health benefits that they do cover cannot have annual or lifetime caps on the benefit amount. This is the same as the rules for large group health insurance plans, and most self-insured plans are also large group plans. Some employers that would otherwise have to purchase coverage in the small group market have chosen to self-insure, which means that they have the option to not include all of the essential health benefits in their coverage (in all but four states, "large group" means 51 or more employees; in California, Colorado, New York, and Vermont, it means 101 or more employees).
• Three to one premium limits (capping premiums for older enrollees at no more than three times the premiums for younger enrollees) do not apply to self-insured plans. They also don't apply to large group plans, and again, most self-insured plans are offered by large employers. If a small employer opts to self-insure, they are not subject to the ACA's limits on how much premiums can vary based on age.

Third-Party Administration

Most self-insured employers partner with a third-party administrator (TPA) to handle claims, network negotiations, and the overall administration of the plan (pharmacy benefits managers are a type of TPA).

TPA services can be offered by insurance companies or independent companies. Self-insured plans can rent network agreements from established insurance carriers, which is often a part of the services that the TPA provides.

Because of TPAs and network agreements, enrollees in self-insured health plans might not be aware that they're in a self-insured plan. Since enrollees' plan documents and ID cards might say something like Blue Cross, UnitedHealthcare, or Cigna, it's natural for enrollees to thus assume that the insurer listed on their ID card is providing their coverage and taking on the potential claims risk for the group. But if the plan is self-insured, the insurance company is only acting as an administrator, and is not using their own money to cover claims.

As noted above, to address the COVID-19 pandemic, the federal government enacted legislation that required nearly all health plans—including self-insured plans—to fully cover COVID-19 testing costs throughout the COVID public health emergency.

Soon thereafter, numerous insurers across the country announced that they would also waive cost-sharing for COVID-19 treatment, which is obviously much more expensive than testing. (Those provisions had mostly expired by early 2021, around the time COVID vaccines became widely available.)

But for self-insured plans administered by those companies, it was important to understand that the waived cost-sharing only applied if the employer opted in. This was an example of a point of potential confusion, given that people with self-insured plans administered by major insurers aren't always aware that their plan is self-insured.

As described above, the employer might also be paying the insurer for stop-loss coverage that will kick in if claims reach a certain point (you can think of that as an insurance policy for the insurance policy), or for a level-funding arrangement that helps to smooth out claims costs over time.

With all the blurred lines between fully-insured and self-insured plans, it's not surprising that even some small employers that use level-funding agreements aren't aware that their plan is self-insured.

Summary

Self-insured health coverage is the most common approach used by large employers in the U.S. Instead of purchasing health insurance from an insurance company, these employers use their own money to cover their employees' medical expenses. But in most cases, they contract with a third party—often a well-known health insurance company—to administer the coverage.

The rules and regulations that apply to self-insured health plans aren't always the same as the rules and regulations that apply to fully insured health plans. And employees are often unaware of whether their health plan is fully insured or self-insured.

A Word From Verywell

If you work for a large company, it's likely that your health coverage is self-insured. Your employer might have chosen to create a very robust benefits package to use as a recruitment and retention tool, and your coverage may well be more generous than it would be if the employer purchased coverage from a health insurance company.

But it's also important to understand that state-based health insurance mandates don't apply to self-insured plans. Depending on where you live, this might explain why your health plan isn't covering a service that your state requires health plans to cover.