Self-Funding Out-patient Benefits vs. Insurance: A Costly Gamble?
For companies looking to control employee benefits and staff health insurance costs, the idea of self-funding out-patient benefits can seem like an attractive option. Rather than paying premiums to an insurer, the company assumes the financial risk for employees’ medical expenses, either handling claims internally or using a Third-Party Administrator (TPA) to process reimbursements.
While self-funding may work in some situations, it’s crucial to weigh the risks, costs, and administrative burdens against the potential savings. Below, we break down the numbers and key considerations to help you decide whether self-funding out-patient benefits is a smart strategy.
The Cost Breakdown: Insurance vs. Self-Funding
Let’s compare the numbers for a company with 50 employees, considering two different approaches:
With Insurance: Predictable Costs and Risk Transfer
To keep things simple, let’s assume that a company purchasing an insurance plan with a US$5,000 limit per person might pay around US$1,000 per person per year in additional premium compared with a plan that only covers in-patient treatment.
- For 50 employees, the total annual premium would be US$50,000 (50 × US$1,000).
- The insurance company absorbs all claims (up to the US$5,000 limit), providing financial certainty.
With Self-Funding: Potential Cost Savings, But Unlimited Risk
Instead of paying an insurer, the company decides to cover all out-patient claims (also up to US$5,000) directly — essentially acting as its own insurer.
- If every employee maxes out their US$5,000 out-patient limit (which could happen), the company would be on the hook for US$250,000 per year (50 × US$5,000).
- Even if only half of the employees hit the limit, the cost would be US$125,000, which is almost double the cost of traditional insurance.
- Claims volume is unpredictable — you might have a good year where total claims are low, but one bad year can completely erase any perceived savings.
- Many companies hire a TPA (third-party administrator) to handle claims processing, adding an additional 13-18% of claims volume to the cost.
| Model | Out-patient cover per employee | Total company cost (50 employees) | Notes/Consdiderations |
| Buying health insurance | US$5,000 | US$50,000 (50 x US$1,000) | Fixed, predictable cost |
| Self-funding | US$5,000 | US$250,000 (50 x US$5,000)* | Max. financial exposure if all employees use full benefit |
| Self-funding with a TPA | US$5,000 | US$287,500 (US$250,000 + 15% TPA fee)* | Added costs for claims processing |
| Self-funding lower limit | US$1,000 | US$50,000 (to match insurance model) | Employees receive significantly lower benefit |
This comparison also highlights a key advantage of insurance: risk pooling. With an insured model, the company pays a fixed cost (in the example, US$1,000 per employee) to provide a US$5,000 benefit per person. In contrast, under a self-funded model, the same budget (US$50,000) would only allow for a US$1,000 limit per person.
That’s the power of insurance — leveraging pooled risk to provide higher coverage at a lower per-person cost.
The Risks of Self-Funding
While eliminating insurance premiums may sound appealing, self-funding exposes a company to significant risks:
- Financial Uncertainty: With insurance, costs are fixed and predictable. With self-funding, expenses fluctuate depending on how much employees claim. One bad year could drastically increase costs.
- Administrative Burden: If managing claims in-house, HR teams must handle reimbursements, fraud prevention, and compliance — taking valuable time away from core operations.
- Cost of Using a TPA: Many companies turn to a Third-Party Administrator (TPA) to process claims, but TPA fees (typically 13-18% of claims volume) add a significant cost — often eliminating any potential savings.
- No Leverage for Negotiations: Insurers negotiate discounted rates with hospitals and clinics due to their size and purchasing power. A single company self-funding its plan loses access to these discounts, leading to higher medical costs.
Why Some Companies Still Self-Insure
Despite the clear risks, some companies still opt for self-funding out-patient coverage. Some of the reasons include:
- Perceived Cost Savings: Companies think they can save money by cutting out insurer margins and only paying for actual claims. However, medical costs are unpredictable — as mentioned above, one bad year can wipe out any savings.
- More Flexibility in Benefit Design: Self-insuring allows companies to customize their benefits more freely without being locked into an insurer’s standard policies. But with more control comes more responsibility — including handling fraud detection, cost containment, and compliance.
- Frustration with Insurer Pricing: Some companies believe that insurers inflate renewal premiums, making self-funding seem like an attractive alternative. However, without an insurer negotiating costs, companies can end up paying more per claim.
- Large Organizations Can Absorb the Risk: Multinationals with large financial reserves may feel comfortable taking on claims risk. Some mitigate the risk by limiting benefit amounts, but that defeats the purpose of offering competitive health benefits in the first place.
- Limited Insurance Options in Some Markets: Certain industries (mining, oil & gas, NGOs, for example) and markets have fewer competitive health insurance options, making self-funding a necessity.
The ASO Model
In some cases, larger organizations with substantial financial reserves may opt for Administrative Services Only (ASO), using a TPA to process both in-patient and out-patient claims while assuming the financial risk themselves. However, even in this model, companies need to assess:
- Can they handle the volatility of medical claims? If a company is self-insuring in-patient treatment, a single high-claim year could wipe out anticipated savings.
- Are they comfortable absorbing large, unexpected expenses? If multiple employees need extensive out-patient care, the company must cover costs up-front.
- Do they have strong cost controls in place? Without an insurer managing utilization, companies must implement strict monitoring to prevent misuse.
- Would they need stop-loss insurance? Many self-funded plans purchase stop-loss insurance to cap high claims, which adds back a layer of insurance costs.
For most companies, ASO only makes sense when coupled with rigorous claims monitoring, financial buffers, and experienced healthcare cost management. Without these, the risks often outweigh the potential savings.
Why Most Companies Eventually Return to Insurance
Despite the perceived advantages, many companies that self-fund their out-patient plans eventually revert back to traditional insurance after encountering problems such as:
- Higher-than-expected costs due to unpredictable claims usage
- Significant administrative burdens in processing and managing claims
- Difficulty in securing competitive pricing from hospitals and clinics
- Unmanageable risk exposure from high-cost claims or high utilization
For these reasons, most organizations find that traditional insurance remains the best long-term strategy.
That said, the hybrid approach — where companies self-insure small routine benefits (like dental or wellness) but insure higher-risk benefits (like out-patient and inpatient medical care) can sometimes be a viable compromise.
The Bottom Line: Insurance Provides More Value
When weighing insurance versus self-funding, the key takeaway is value. With insurance, companies pay a fixed, manageable fee for comprehensive coverage, ensuring employees get better benefits at a lower personal cost. Self-funding, on the other hand, places all financial risk on the company, with no guarantees of cost savings.
If you’re considering self-funding your out-patient plan, ask yourself:
- Are we financially prepared for unexpected spikes in medical claims or higher than expected utilization?
- Do we have the internal resources to manage claims efficiently?
- Would self-funding actually provide the same level of benefits for the same budget?
For most companies, the answer is no. And in that case, outsourcing risk to an insurance provider remains the smarter, safer choice.
Michael Pennington, Customer Experience Director, One World Cover – [email protected]
