Despite growing popularity, self-funded health plans remain largely misunderstood

In the United States, approximately 28.3 million adults (around 11.5% of the adult population) currently smoke cigarettes. That is less than a third of the people participating in a self-funded health plan, and yet, I’d wager that more Americans can explain the hazards of smoking tobacco than describe what a self-funded health plan is.

Is it safe to say that self-funded health benefits may be one of the most widely used, yet unknown, things in the United States of America?  In this article, I will hypothesize on why this may be the case, and how this ignorance has a negative effect on employers and plan participants alike. 

Looking first at why self-funded health benefits are not widely understood by the general public, despite impacting one in every three Americans, we must first decide whether this ignorance is intentional, unintentional, or a little bit of both. 

Intentional

The history of employer-sponsored health benefits in the U.S. is a story of gradual development, driven by a confluence of factors including industrialization, labor laws, competition, creativity, capitalism and the desire to attract and retain workers. As industrialization brought with it more hazardous work, employers responded by offering means for obtaining health care. When unions emerged and demanded more consideration, employers had to offer things of value in addition to salary when the dollars ran short. When wages were frozen during World War II, alternative forms of compensation were a must, and when an influx of talent returned from the front lines, better health plans were the difference makers when salaries were comparable. 

Regardless of their funding status (whether the plan is self-funded by the employer and employees — meaning the employer and employees pool contributions into a trust and pay medical bills with their own money, or, fully insured — meaning the employer and employees pay premiums to a carrier who then pays medical bills with the carrier’s money), the employees likely didn’t know (or care) – as long as they knew they had “insurance” that would be accepted by their providers. 

Somewhere along the way, someone — either employers, brokers, or third-party administrators — made assumptions about what matters to employees and their families.  The assumptions were likely that people wouldn’t understand the difference between self-funding and insurance, or that if they did understand the difference, their confidence in a plan whose foundation is based on their employer’s financial health felt “shakier” than relying on the financial health of a nationally renowned insurance company.  Perhaps there was an assumption that employees would rather have a faceless, unknown insurance entity analyze their health conditions and claims, than someone with whom they work every day. 

Perhaps there was also an assumption that people would assign more value to a famous logo.  Indeed, there is no denying that prior generations couldn’t wait to come home and enjoy a bowl of Campbell’s Chicken Soup, a bottle of Budweiser, and a scoop of Breyers vanilla ice cream. These generations placed value on brand names with national reputations.

Leveraging this mentality, entities seeking to maximize the perceived value of their plan offerings no doubt scrambled to secure well-known logos for their health plans.  It makes sense that for these, and any number of other reasons, it made sense to “hide” a plan’s self-funded status, generate confidence based on the presence of a well-known logo, and allow self-funded plan members to falsely believe that they had “insurance” with the company whose logo appeared on their card. 

Yet, today’s young professionals are eating organic free range chicken soup hand crafted with love by the neighborhood potager, alongside a quadruple IPA they home-brewed in their bathroom, followed by a scoop of vegan garlic clove and peanut butter ice cream-ish.  Do the same attitudes permeate today’s working population as they did in generations past?  Or, might the time be right to emphasize, educate, and lean into our plans’ self-funded status?   

Humor aside, it is actually possible that the very real value self-funded plans once enjoyed by emphasizing their network’s logo and thereby camouflaging their self-funded status may be diminished.  The value new, younger employees and prospective employees place on brand names — especially when it comes to insurance carriers – may be reduced.  Looking at an admittedly horrific piece of evidence, in the wake of the December 2024 murder of Brian Thompson, UnitedHealthcare’s CEO, social media was rife with despicable messages in support of the suspected killer, and other anti-health insurance sentiment.  

This should come as no surprise, as throughout pop culture, media, and general discourse, health insurance is routinely cast as the villain. Politicians, when running short on ideas, find it is easy and bipartisan to bash health insurance. Whether it is accusing carriers of wrongfully denying claims, delaying life-saving care, or raising costs for no reason other than to drive up profits and enrich shareholders, it is easy (and often lazy) to cast health insurance as the “bad guy.” 

While there can be no doubt that employees and their families have always wanted to know that their health benefit plan is financially secure and robust in its coverage, the bygone mentality that in and of itself a large carrier’s logo stands as a guarantee of those sought after features is no longer presumed.  Regardless of whether a plan features such a logo or not, and regardless of whether a plan is insured or self-funded, participants want detailed assurances and more information regarding how their plan functions, and why they can rest assured that they are adequately protected.  

Related: Self-funded plans grow as fully insured plans shrink

Unintentional

Heretofore, I’ve indicated that participant ignorance of self-funded status was an intentional byproduct of controlled plan marketing.  Yet, it is just as likely that self-funded mechanics and benefits are often less understood compared to traditional fully insured plans for entirely benign and unintentional reasons.  These could include, but are not limited to, self-funding’s complexity, past limitations to large employers, lack of transparency at the employee level, lack of public education in general, and hyperfocus on coverage, benefits and network adequacy. 

Complexity: Self-funding involves a greater degree of financial risk for employers and more intricate administrative tasks, even when employing third-party administrators (TPAs). This complexity can be challenging to grasp for individuals unfamiliar with the intricacies of health plan management.  As a result, if one didn’t “need to know” how the plan operates, they could avoid wasting time learning the ins and outs. 

Historical focus on large employers: Self-funding has historically been associated with large companies, which could shoulder the financial risk of covering employee health claims. This perception has contributed to a lack of awareness among smaller employers and the general public that it's increasingly accessible to a wider range of businesses.  Indeed, along with the employees, many employers themselves are unaware of their self-funded status, or how that type of plan works — relying entirely on generalized summary advice provided by broker advisors, and taking a leap of blind faith accordingly.

Lack of employee involvement in the funding model: With other types of insurance (such as renter’s insurance, home owner’s insurance, and automobile insurance) employees typically interact directly with the insurance carrier (i.e. pay premiums directly to the carrier, shop around for carriers and policies, and submit claims directly to the carrier). And with very few exceptions, these are fully funded insurance policies; not self-funded plans.  As a result, participant’s personal experience is almost exclusively with insurance and not self-funding.   

Less emphasis on public education: Unlike traditional insurance models with widespread marketing and public campaigns (think cavemen, lizards, large birds, deep voiced actors, trouble making villains, and women in aprons), there has been little to no widespread public education on the specifics of health insurance, and in particular, self-funded plans. 

Focus on benefits and features, not funding structure: Most employee communication about health benefits focuses on the coverage details, networks, and cost-sharing, rather than the underlying funding mechanism, further minimizing public understanding of the self-funded model.  

Why it matters

Having dissected why so few Americans are aware of their self-funded plan status and why nearly no one understands what self-funded health benefits are, we should now discuss why this ignorance is harmful. 

Contemplate this all-too-common scenario: A person visits the emergency room to get a rash looked at. The ER physician takes a look and determines that it’s harmless and will go away on its own. While there, a nurse asks the patient if anything else is bothering them. The patient mentions they have a headache. The nurse offers to grab the patient a couple Tylenol pills. The patient says, “Thanks but no . . . I have some at home. I’ll grab them once I get back.” The nurse responds, “Don’t be silly!  Save those for later and take these. Please. That’s what insurance is for.”  The patient smiles and agrees that this is indeed what insurance is for. After all, the greedy “insurance company” has been “stealing” her salary for years. If they don’t pay for this Tylenol, the money will just end up going to their profits anyway. She takes the Tylenol. The hospital subsequently charges the patient’s self-funded health plan $50 for the two pills. The plan uses money that comes directly from this employee and her colleagues to pay that bill — along with other wasteful bills — before being forced to increase how much the employees need to contribute the following year, to adequately fund the plan. 

Had the patient known that her plan is self-funded, and that the bills would be paid with her money, might she have passed on the Tylenol? This isn’t a hypothetical question.  Examples exist of plans where employees are well aware of their health plan’s self-funded status. In addition to understanding how their actions help or harm the plan, and how that impacts their own financial wellbeing, those employees are also provided with tools and resources to facilitate educated health care consumerism. 

In other words, those employees are provided with tools to help them determine not only what various providers charge for their services, but also, which providers provide the best quality care.  In these instances, patients make informed choices and often opt to pursue less costly options without reducing the quality of their care.  The result is consistent cost savings shared by the plan and participants.

By educating plan members about self-funding, their self-funded status, and how it impacts them, health care costs are better controlled.  Additionally, concerns over bias, conflicts of interest, and financial weakness once feared by those who opted to hide their self-funded status are no longer as relevant, as these concerns today permeate the entirety of society insofar as the health insurance industry is concerned.  The time is right to implement transparency and educate plan participants – and the one-hundred million Americans insured by self-funded benefit plans on what self-funding is, and how their actions can improve outcomes.