The majority of Americans receive their health coverage through some type of employer-based insurance, and there are two main types of plans: fully insured and self-funded. Fully insured plans offer health insurance in the more conventional sense, where an employer and its employees pay monthly premiums to an insurer, who then covers the cost of medical treatment provided by its network of professionals.
In contrast, employers can also choose to set up a self-funded plan where traditional insurance companies merely provide access to their network of providers and perform the administrative services relating to claims adjudication. With self-funded plans, the employer acts as the insurer for the medical expenses of its employees, paying for these costs directly out of a specific fund. The principal benefit of self-funded plans is avoiding the mark-up insurance companies build into their premiums to generate a profit. In a typical year, this will allow employers operating a self-funded plan to save money by not paying any excess premiums to insurance companies. Because medical expenses do not accrue with the uniformity or consistency of other business expenses, however, self-funded plans exhibit significantly more variability than premium-based coverage plans.