Fully insured to self-funded: the step-by-step guide HR leaders actually need

Every year, millions of employers renew their health plan, accept whatever rate increase their carrier hands them, and move on. There's an alternative, but it comes with a reputation.

Self-funding is widely described as the "risky" option. But consider what you're actually accepting when you stay fully insured: your carrier can reprice your plan at renewal based on factors you can't see, using data you don't own, and your only real option is to pay it or shop around for a different carrier that will do the same thing next year.

The risk of self-funding is visible and manageable. Stop-loss insurance caps your exposure to catastrophic individual claims. Your spend reflects what your employees actually used. And when costs go up, you have the data to understand why — and the ability to do something about it.

The harder question for most HR leaders isn't whether self-funding makes sense. It's where to start. The transition involves new vendors, new financial structures, and a level of plan ownership that most organizations have never had to think about. This guide walks through it step by step.

What does "self-funded" actually mean?

A self-funded health plan, also called a self-insured plan, is one where the employer assumes financial responsibility for employee health claims rather than paying a fixed monthly premium to an insurance carrier.

Instead of a guaranteed cost, your spend each month reflects what your employees actually used. That means lower costs in healthy years, and exposure to high claims in difficult ones. Most self-funded employers manage that risk through stop-loss insurance, which caps the company's liability at a defined threshold.

Fully insured vs. self-funded: the key difference

With a fully insured plan, you pay a fixed premium per employee to a carrier. The carrier assumes the risk. You get predictability, but no visibility — the carrier keeps the claims data and the surplus if costs come in under budget.

With a self-funded plan, you pay claims as they occur. Your TPA (third-party administrator) processes those claims, and you own the data. You take on more financial risk, but you also keep the savings when costs come in under projection.

Where level-funded fits in

Level-funded plans sit between fully insured and self-funded. You pay a fixed monthly amount (like a premium), but at the end of the year, if claims come in under budget, you get a portion of the surplus back. Level-funded plans are often the right first step for employers who aren't ready to take on full self-funding risk but want a path toward it.

For many organizations, the realistic journey looks like this: fully insured → level-funded → self-funded, over a period of two to four years. That progression lets you build experience with claims data and plan management before taking on full financial exposure.

Is self-funding right for your organization?

Self-funding isn't the right move for every employer, and moving too soon creates more risk than reward. Before you take any steps, it's worth pressure-testing your readiness honestly.

Signs you're a good candidate for self-funding

• You have 100+ enrolled employees. Self-funding works on the law of large numbers. Smaller groups can self-fund, but claims volatility is harder to absorb. Level-funding is often a better fit below 100 lives.
• Your claims history is accessible and relatively stable. If you've been with a carrier who shares data, that history is your foundation for modeling future costs.
• You have cash flow to absorb a bad claims month. Self-funded plans require liquidity. You need reserves — or a strong stop-loss structure — to handle a high-cost month without disruption.
• Your leadership is aligned on a longer-term strategy. This isn't a one-year experiment. It works best when HR and finance are thinking about plan design and cost management as an ongoing practice.

When to wait (or start with level-funded instead)

• Your current carrier doesn't share claims data, so you're flying blind on cost drivers.
• Your workforce is small, older, or has a claims history that suggests high volatility.
• Your organization is in a high-growth or high-transition period (a lot of hiring, an acquisition, significant headcount changes).
• Your leadership team wants cost predictability above all else.

None of these are permanent disqualifiers. They're signals to build toward self-funding rather than jumping directly to it.

The building blocks of a self-funded plan

Before you walk through the process, it helps to understand what you're actually assembling. A self-funded plan is not a single product — it's a structure built from several components that need to work together.

• Stop-loss insurance: Protects the employer from catastrophic claims. Specific stop-loss covers individual high-cost claimants above a set threshold. Aggregate stop-loss caps your total annual exposure across all claims.
• Third-party administrator (TPA): Processes and pays claims on your behalf. Your TPA is the operational backbone of a self-funded plan. Choosing the right one matters enormously.
• Network: Provides access to in-network providers at negotiated rates. Some TPAs come with network access; others let you choose independently.
• Pharmacy benefit manager (PBM): Manages prescription drug benefits, formulary design, and pharmacy network access. PBM costs are one of the fastest-growing line items in health spending and warrant close scrutiny during vendor selection.
• Plan document: The legal document that defines your plan's benefits, rules, and coverage. Unlike a fully insured plan (where the carrier's certificate of coverage controls), self-funded employers own and control their plan document.

Your broker should be involved from step one

The most common mistake employers make when exploring self-funding is treating it as a procurement exercise — identifying vendors, getting quotes, picking the cheapest option. That approach misses the point.

Self-funding is a financial and strategic decision that touches plan design, vendor relationships, employee communication, and long-term cost management. Getting it right requires a broker who has done this before and who understands your organization's specific goals, risk tolerance, and trajectory.

A good benefits broker is not just a vendor selector. At this stage, they should be your strategist — helping you decide whether to move, when to move, and how to structure the transition.

Specifically, your broker should be:

• Mapping your current state. Analyzing your existing plan, claims history (if available), workforce demographics, and cost trends to build an honest picture of where you stand.
• Modeling your options. Running scenarios across fully insured, level-funded, and self-funded structures so you can see the financial implications of each — not just in year one, but over a multi-year horizon.
• Building a phased roadmap if needed. If you're not ready for full self-funding today, a great broker helps you build a path toward it. That might mean moving to level-funded this renewal cycle, with a plan to transition to full self-funding in 18 to 24 months once you've built claims history and organizational readiness.
• Leading vendor selection. Evaluating TPAs, stop-loss carriers, PBMs, and network options requires market knowledge that most HR teams don't have and shouldn't need to develop from scratch. This is where broker relationships and expertise matter.

At Nava, this strategic planning work is central to how we work with clients. We don't just help employers make the switch — we help them figure out whether the switch makes sense, design the right structure, and build the vendor relationships that make the plan work long-term.

How to make the switch: a step-by-step process

Step 1: Start with your broker

Before you pull a single data report or call a TPA, get aligned with your broker on what you're actually trying to accomplish. This sounds obvious, but a lot of transitions go sideways because HR and the broker are operating with different assumptions about goals, timeline, and risk appetite.

The questions you should answer together at this stage:

• What's driving the interest in self-funding: cost control, data access, plan design flexibility, or some combination?
• What's your organization's true risk tolerance? What would a bad claims year actually mean for the business?
• What's your target timeline? Are you trying to move at the next renewal or building toward a transition over the next two to three years?
• Is level-funding a better first step given your current size, data access, or claims history?

This conversation sets the foundation for everything that follows. If you and your broker aren't aligned here, you'll make decisions downstream that don't hold together.

Step 2: Pull and review your claims history

To model whether self-funding makes financial sense, you need data. Request at least 24 to 36 months of claims experience from your current carrier — ideally broken out by medical and pharmacy, with some visibility into high-cost claimants (anonymized to comply with HIPAA).

Your broker should help you interpret what you're looking at. Key things to understand:

• What are your total annual claims relative to premiums paid? If claims are consistently well below your premium, you've been subsidizing other groups in the carrier's pool.
• Are there one-time, high-cost events in your history that inflated a particular year, and are those likely to recur?
• What do your pharmacy costs look like? Specialty drug spend is increasingly the largest cost driver for self-funded employers and warrants a separate look.

Not every carrier will share this data. If yours won't, that's useful information too — and another reason level-funding (where data access is often a built-in feature) may be the right first step.

Step 3: Align leadership and finance

Self-funding changes how health plan costs appear on the balance sheet, from a fixed, predictable premium line to variable monthly claims. That shift has implications for budgeting, cash flow management, and financial reporting that your CFO and finance team need to understand and sign off on before you move forward.

Your broker can be a real asset here. They've had this conversation with finance teams before, they can model worst-case scenarios alongside expected scenarios, and they can explain the stop-loss structure in terms that make the risk profile legible to non-benefits specialists.

Come to this conversation with:

• A side-by-side cost comparison of your current fully insured plan vs. projected self-funded costs (expected and stressed scenarios)
• A clear explanation of how stop-loss insurance limits downside exposure
• A cash flow model showing what monthly claims funding looks like, including any required reserves

Step 4: Map your funding strategy and timeline with your broker

This is where your broker earns their keep. Based on your claims history, organization size, risk tolerance, and renewal timing, they should develop a specific recommendation for how and when to transition — not a generic playbook.

Key decisions at this stage include:

• Full self-funding vs. level-funding first. For many mid-size employers, a level-funded plan is the right starting point, with full self-funding as the target state 12 to 36 months out.
• Stop-loss structure. Your broker should model different specific and aggregate deductible levels to find the right balance between premium cost and risk protection.
• Transition timing. Aligning the move with your plan renewal date is critical. Mid-year transitions are complicated and generally not recommended.

Step 5: Select your vendors

Vendor selection for a self-funded plan involves more moving parts than renewing a fully insured plan, and the decisions you make here have long-term implications. Your broker should be leading this process, not just handing you a list.

TPA selection is the most consequential decision. Your TPA processes every claim, handles member inquiries, and produces the reporting you'll use to manage costs. Evaluate TPAs on: claims accuracy and turnaround time, reporting capabilities, network access options, and their experience with employers of your size and industry.

Stop-loss carrier selection involves evaluating financial strength, specific stop-loss deductible options, lasering practices (the ability to exclude high-risk individuals from coverage), and renewal history.

PBM selection deserves more scrutiny than it typically gets. Pharmacy costs are growing faster than medical costs for most employers, and PBM contract terms — spread pricing, rebate transparency, formulary design — can have a significant impact on your total plan cost. An independent PBM audit is worth considering.

Step 6: Build your plan document

Unlike fully insured plans, self-funded employers own and control their plan document — the legal document that defines coverage, exclusions, and member rights. This is both an opportunity and a responsibility.

Work with your broker and a benefits attorney to draft a plan document that reflects your intended benefit design. Key decisions include covered services, prior authorization requirements, cost-sharing structure, and any plan-level cost management programs (centers of excellence, reference-based pricing, etc.).

This document also needs to comply with ERISA, ACA requirements, and applicable state laws, though one of the benefits of self-funding is that self-funded plans are generally governed by federal ERISA rules rather than state insurance mandates, which can provide more design flexibility.

Step 7: Communicate the change to employees

A self-funded plan can look identical to a fully insured plan from the employee's perspective — same network, same ID card, same cost-sharing structure. Or it can look very different, depending on your plan design choices.

Either way, the transition needs to be communicated clearly before it takes effect. Employees will have questions about whether their providers are still in-network, whether their benefits are changing, and what the new plan means for them practically.

Your broker should be able to provide communication templates and support. The core messages to cover:

• What is changing and what is staying the same
• How the new plan works from the employee's perspective
• Who to contact with questions (typically your TPA's member services line)

Step 8: Establish your reporting and claims review cadence

One of the biggest advantages of self-funding is access to your own claims data. But that data is only valuable if you actually use it — and most employers don't, at least not systematically.

Work with your broker to establish a regular reporting cadence. At minimum, that looks like:

• Monthly claims summaries: Track spend against projections and catch unusual activity early
• Quarterly trend reviews: Identify patterns in utilization, high-cost claimants, and pharmacy spend
• Annual deep-dive before renewal: Use a full year of data to inform plan design decisions for the coming year

In each of those reviews, you're looking for opportunities to act:

• High-cost claimants: Are care management programs in place to support them and reduce downstream costs?
• Specialty drug spend: Are there therapeutic alternatives or manufacturer assistance programs worth exploring?
• Network utilization: Are employees using high-cost facilities when lower-cost, equally effective options are available?

The employers who get the most out of self-funding are the ones who treat their claims data as a management tool, not just a report. This is where the long-term value is realized.

What to watch out for

Even well-planned transitions can run into problems. The most common ones:

• Underestimating cash flow needs. Self-funded plans require liquidity. A month with several high-cost claims can create real financial pressure if you haven't built adequate reserves or aligned your stop-loss structure appropriately.
• Underbuying stop-loss. It's tempting to set a high specific deductible to lower your stop-loss premium. That trade-off can make sense, but only if your organization can genuinely absorb a large individual claim. Model the actual financial impact before making that call.
• Choosing the wrong TPA. A TPA that produces poor reporting, pays claims inaccurately, or delivers bad member service will undermine your plan from day one. Reference checks and a careful RFP process matter.
• Neglecting employee communication. Employees who don't understand how their plan works — or who feel like something was taken away — disengage from benefits and lose trust in the company. Communication is not an afterthought.
• Launching without a data review plan. Getting access to claims data is a huge benefit of self-funding. If you don't have a plan for how to use it from the start, you'll end up with a self-funded plan that performs like a fully insured one, except with more operational complexity.

Frequently asked questions

What is a self-funded health plan?

A self-funded (or self-insured) health plan is one where the employer pays for employee health claims directly, rather than paying a fixed premium to an insurance carrier. The employer assumes financial risk for claims costs, typically with stop-loss insurance in place to limit exposure to catastrophic events.

How do self-funded health plans work with stop-loss insurance?

Stop-loss insurance protects self-funded employers from unexpectedly high claims. Specific stop-loss covers individual claimants who exceed a set dollar threshold (for example, $100,000 per person per year). Aggregate stop-loss caps the employer's total annual claims liability across the entire group. Together, they put a ceiling on how much the employer can spend in a given year.

How many employees do you need to self-fund?

There's no hard minimum, but most advisors recommend at least 100 enrolled employees before considering full self-funding. Below that threshold, a single high-cost claimant can represent a disproportionate share of total claims. Level-funded plans are often more appropriate for smaller groups because they offer some of the same benefits with more predictable cost structures.

Is self-funded insurance good for employees?

It can be. Self-funded plans give employers more flexibility to design benefits that actually fit their workforce, and cost savings can be reinvested into richer coverage. The risk for employees is that plan design is entirely in the employer's hands — which makes the quality of your broker and plan document more important, not less.

What's the difference between a TPA and an insurance carrier?

An insurance carrier in a fully insured arrangement both assumes financial risk and administers claims. In a self-funded arrangement, the employer assumes the financial risk, and a third-party administrator (TPA) handles claims processing, member services, and reporting — without taking on any insurance risk themselves.

How long does it take to switch from fully insured to self-funded?

A direct transition typically takes four to six months from decision to go-live, assuming you're aligning with a plan renewal date. A phased approach — moving to level-funded first, then transitioning to full self-funding — may take one to three years depending on your starting point and organizational readiness. Your broker should help you map a timeline that fits your specific situation.

Still have questions? Watch our alternative funding AMA

Ready to explore self-funding?

Nava's benefits advisors work with HR teams at every stage of this process, from initial readiness assessment through vendor selection and beyond. Talk to a Nava advisor.