Insured vs self-funded group health plans comes down to who takes on the risk: in a traditional insured plan, the insurance carrier collects a fixed premium and takes on the financial risk of paying claims. In a self-funded plan, the employer pays employee medical claims directly out of company funds, using an insurer or third-party administrator only to process claims and manage the network. Most small businesses in New York use insured plans, but self-funding is worth understanding as your group grows.
How an Insured Plan Works
You pay a set monthly premium to the carrier regardless of how much your employees actually use the plan that year. For groups under 100 lives, New York’s community rating rules mean your specific group’s claims don’t directly drive your renewal pricing. Your rate follows statewide claims trends instead. Groups over 100 lives can be experience-rated, meaning the carrier does factor that group’s own claims history into renewal pricing.
This is the standard structure for the overwhelming majority of small businesses in New York, largely because community rating makes pricing predictable and the carrier, not the employer, carries the risk of a bad claims year.
How a Self-Funded Plan Works Differently
In a self-funded arrangement, the employer sets aside funds to pay employee claims directly, rather than paying a fixed premium to an insurance carrier. Most self-funded employers purchase stop-loss insurance as a backstop, which caps their exposure if claims in a given year run far higher than expected.
Self-funding gives an employer more control over plan design and access to their own claims data, something insured small group plans typically don’t provide because of the community rating structure. It also means the employer, not a carrier, bears the financial risk in a bad claims year, even with stop-loss protection in place.
Why Most Small Businesses Stick With Insured Plans
Self-funding generally makes financial sense once a group reaches a meaningful size, often cited around 75 to 80 employees or more, where claims experience becomes statistically predictable enough to model with confidence. Below that size, a single serious claim can create financial exposure that a small employer just isn’t positioned to absorb, even with stop-loss coverage in place.
Self-funding is also genuinely complicated, and it takes real discipline. If a group’s actual claims run below budget in a given year, that difference isn’t a bonus to spend, it needs to sit in reserve for the year claims run high, since no carrier is absorbing that risk anymore. Employers who treat early savings as cash instead of reserve are usually the ones who end up in trouble.
Switching back to a traditional insured plan afterward is harder than most employers expect, too. A group with a rough claims stretch while self-funded can face a real premium jump moving back, since the new carrier prices based on that claims history rather than community rating.
Common Questions About Insured vs. Self-Funded Group Health Plans
Is self-funding cheaper than an insured plan? It can be, for larger, healthier groups with predictable claims. But it shifts real financial risk to the employer, which is why it’s generally not recommended for small groups without stop-loss protection and careful modeling.
Does New York regulate self-funded plans the same way as insured plans? No. Self-funded plans are primarily regulated under federal ERISA law rather than New York state insurance law, and that changes which consumer protections and mandated benefits apply.
What is stop-loss insurance? Stop-loss insurance reimburses a self-funded employer for claims that exceed a set threshold, either for an individual employee or for the group’s total claims in a year, capping the employer’s worst-case exposure.
At what size should my business consider self-funding? There’s no fixed number, but most advisors point to groups of roughly 75 to 80 or more employees as the range worth modeling seriously. Note that groups over 100 lives can already be experience-rated under an insured plan, which is a separate question from whether to self-fund.
Can a small business switch from insured to self-funded and back? You can, but switching back is often the harder direction. A rough claims history while self-funded gets priced into your next insured premium, so this is a decision worth modeling carefully before the initial move, not after.
We’ve been doing business this way in the Hudson Valley for over 80 years. If you’re trying to figure out which structure actually fits your business, call us. No phone tree, no pressure, just a straight answer.