Self-Funded vs Fully Insured: An Employer’s Guide to Medical Claims

Self-Funded vs Fully Insured: An Employer’s Guide to Medical Claims. When an employee experiences a medical emergency that lands them in the ER, their health and recovery take center stage. But for employers, there’s another layer running silently in the background: the claims process. What happens before, during and after the claim depends on whether your organization offers a self-funded or fully insured health plan.

Both models aim to deliver care and control costs—but they operate in very different ways. As we head into Benefits Architecture: Learn the framework. Elevate the design, let’s walk through a common scenario—an emergency appendectomy—and explore how the two models handle the claim process from start to finish.

From symptoms to claims: where the journey begins

Whether an employee has a self-funded or fully insured plan, the medical journey begins the same way. An employee goes to the emergency room with concerning symptoms, and a doctor performs a physical exam, usually followed by lab work and imaging. When appendicitis is diagnosed, treatment is started, and surgery may be needed.

While the clinical team focuses on the patient, the administrative and financial processes are in motion behind the scenes—eligibility is verified, plan details are reviewed, and if required, a preauthorization for the appendectomy is submitted. After surgery, diagnosis codes, procedure notes, and billing charges are compiled to create a formal claim. And this is where the difference between self-funded and fully insured models becomes clear.

Let’s say the total cost for an appendectomy (before any discounts or network rates) is $30,000. Here are some differences between each plan type and how the claim might play out under each:

Fully Insured: A Traditional Approach

In a fully insured plan, the employer pays a fixed premium to an insurance carrier (like Blue Cross, UnitedHealthcare, etc.). In return, the carrier takes on all the financial risk and pays for employees’ medical claims, no matter the cost. Key features of a fully insured plan:

• Predictable monthly premiums
• The insurance company assumes the risk
• Less financial volatility, but less transparency
• State-regulated and often more standardized

Here is how the claim process may look:

• The employee visits an in-network surgeon and hospital.
• The provider submits the bill to the insurance carrier.
• The carrier pays the negotiated rate (say $18,000 after network discounts).
• The employer doesn’t directly pay this claim—it’s covered by the carrier, which has already collected monthly premiums to fund it.
• The employee pays their deductible or coinsurance, if applicable.

Even if claims are low during this year, the employer’s monthly premium remains the same—and may still increase at renewal based on overall risk. This model provides simplicity and predictability but can be more expensive over time due to hidden costs and limited flexibility.

Self-Funded: Control with Responsibility

With a self-funded plan, the employer assumes the financial risk for providing healthcare benefits to employees. Instead of paying a flat premium to a carrier, the employer pays medical claims as they are incurred—often with the help of a third-party administrator (TPA) and stop-loss insurance to protect against high-cost claims. Key features of a self-funded plan:

• Greater flexibility in plan design
• More control over cost and data
• Stop-loss insurance helps cap risk
• Not subject to most state mandates

Here is how the claims process may look:

• The employee goes to the same in-network provider.
• The provider submits the bill to the TPA.
• The TPA applies network discounts (still $18,000 in this example).
• The employer pays the $18,000 out of the health plan trust or claim fund.
• If the claim exceeds a certain threshold (e.g., $15,000), stop-loss insurance may reimburse the excess.
• The employee pays their portion of the cost-sharing.

If the plan had a good claims year overall, the employer keeps the savings and may use the data to drive future cost reductions. This model can provide employers with greater visibility into claims data, enabling more informed and strategic decisions. Self-funding offers the opportunity to reduce costs and tailor benefits—but it requires a level of financial readiness and risk tolerance. 

Two models. Two financial pathways

While the experience in the hospital and the surgical outcome may look the same regardless of the delivery type, the financial pathway behind the scenes is entirely different—before and after the claim.

Fully insured plans offer simplicity and predictability, a monthly premium, minimal administrative burden, and can be less affected by unexpected high-cost claims. But that predictability can come at the cost of transparency and flexibility. Self-funded plans, on the other hand, can demand more involvement but create greater control.

What’s right for your organization?

Employers who are ready to take a more active role in managing their healthcare spend often find that self-funding opens the door to innovative solutions and real savings–but it isn’t for everyone.

If you’re wondering which model might be right for your organization, a good first step is evaluating your current claims performance and reviewing options with an experienced consultant. If you have questions, don’t hesitate to reach out.