Two-thirds of covered workers are in plans where the employer pays the claims. Who holds the risk determines who can change anything.
The single most important fact about any employer health plan is who pays the claims, because that determines who has the authority and the incentive to change anything.
The two arrangements
Fully insured. “An employer can purchase coverage from an insurer to cover their employees for a set premium. In this ‘fully-insured’ arrangement, the insurer bears the financial risk if that group of employees ends up costing more than expected; these plans are regulated by the state.”
Self-funded. “Employers can also use a ‘self-insured’ (also often referred to as ‘self-funded’) arrangement where the employer assumes the financial risk by directly paying all covered claims.”
Self-funding dominates, and it scales sharply with employer size. In 2025, 67 percent of covered workers were in self-funded plans, but that splits into 27 percent at firms with 10 to 199 workers and 80 percent at firms with 200 or more.
What self-funding actually looks like
A self-funded employer rarely builds an insurance operation. It typically retains a carrier or a third-party administrator under an administrative services only arrangement to process claims and provide network access, and buys stop-loss coverage to cap its exposure on catastrophic individual claims and on aggregate spending.
The finance course covered stop-loss in detail, and the logic here is identical. An employer with 500 employees cannot absorb a single $3 million claim, so it transfers the tail while retaining the predictable middle of the distribution.
The consequence is a split that shapes everything downstream:
| Function | Who holds it |
|---|---|
| Financial risk for claims | The employer |
| Negotiated rates with providers | The carrier or administrator |
| Claims data | The administrator, released to the employer under contract |
| Plan design and vendor choices | The employer |
Worth remembering: self-funded employers bear the risk of prices they did not negotiate and often cannot see. That single misalignment explains most of what Module 4 covers. The employer holding the risk has every incentive to reduce spending, but the entity setting the prices is a separate organization whose own revenue does not fall when the employer’s costs do. Gaining access to the data, and then acting on it, is the whole substance of employer-led reform.
Why the distinction is worth checking first
When someone proposes a value-based arrangement in the commercial market, the first question is which arrangement the employer is in. A fully insured employer can change carriers and change plan design, but it cannot contract directly with a health system for its own population, because it does not hold the risk or the claims. A self-funded employer can do both, subject to its administrative services agreement.
That is why nearly every innovation described in this course, from direct contracting to centers of excellence to onsite primary care, appears at large self-funded employers first.
Key takeaways
- In a fully insured plan the carrier bears claims risk and the state regulates the plan.
- In a self-funded plan the employer bears claims risk and pays claims directly.
- 67 percent of covered workers were self-funded in 2025, rising to 80 percent at firms with 200 or more workers.
- Self-funded employers typically retain a carrier for administration and network access and buy stop-loss for the tail.
Sources
Check your understanding
In a self-funded arrangement, what role does the health insurer typically play?
In self-funding the employer assumes the financial risk by directly paying covered claims. The carrier is usually retained under an administrative services only arrangement for its network and claims processing, which means the employer holds the risk but not the negotiating relationship.