The self-funded health plan strategy midsize employers can’t afford to ignore

In a self-funded health plan, the employer pays the actual cost of healthcare rather than a fixed premium to an insurance carrier. 

Most Fortune 500 companies are self-insured. Why? Because it gives them greater control, data transparency, and lower fixed costs.  

In the past, midsize employers have been slower to adopt self-funding because they didn’t have the scale to absorb the volatility of large claims.  

ParetoHealth pioneered a new model to give midsize employers all the advantages of self-funding while adding the stability of a powerful community that lowers volatility and protects against large claims. That’s why thousands of employers have confidently moved to self-funding with ParetoHealth.

Key takeaways 

When midsize employers self-fund with a ParetoHealth captive they:  

• • Receive all the benefits of self-funding plus the scale to reduce volatility and address the root causes of large claims.  

• • Gain protections to absorb volatility including a cap on stop-loss renewal increases and guaranteed no new lasers.   

• • Experience predictable costs, proven savings, and turnkey implementation.  

What is self-funded insurance?  

With a traditional fully insured health plan, the employer pays a fixed premium to an insurance company. The insurer pools that money with other companies’ premiums, pays medical claims from that pot, and keeps whatever’s left over. 

Because the insurer takes on the risk of paying large claims, they build in extra cushion to protect themselves. That’s why traditional health insurance has high fixed costs. The employer is paying for the traditional health insurance company’s safety net and administrative inefficiency, not just the actual cost of healthcare. 

In a self-funded health plan, employers set aside funds to pay claims directly, as they occur. This funding model provides the potential for healthcare cost savings because of lower fixed costs, employers pay only for the healthcare their employees actually use, and self-funded employers have more levers to lower healthcare spend.

How does self-funded insurance work?  

Self-funded health plans rely on three essential components: 

1. 1. Benefits administration

Third-party administrator (TPA) + pharmacy benefit manager (PBM) 

A self-funded employer partners with a third-party administrator (TPA) to handle the medical side of the health plan. The TPA manages day-to-day operations: 

• • • Processing medical claims 

• • • Issuing ID cards 

• • • Answering employee questions 

• • • Managing provider networks and eligibility 

On the prescription side, a pharmacy benefit manager (PBM) oversees pharmacy claims, determines which medications are covered (formulary management), and negotiates pricing with pharmacies and drug manufacturers. 

1. 2. Claims funding

Employers pay the actual cost of employee healthcare

Instead of paying fixed premiums to an insurer, self-funded employers pay for the actual cost of smaller medical and pharmacy claims; such as doctor visits, prescriptions, surgeries, and other covered services, incurred by employees and their families.  

1. 3. Stop-loss insurance

Protection against large or unpredictable claims
Self-funded employers purchase stop-loss insurance coverage to cap their financial exposure to large unexpected claims. 

Specific stop-loss insurance limits the cost of any single individual’s claims. 

Aggregate stop-loss insurance limits the employer’s total claims liability across the entire population for the plan year. 

Click here to learn how stop-loss insurance works.

Fully insured vs. self-funded with ParetoHealth comparison 

What makes self-funding with a ParetoHealth captive different than traditional self-funding? 

Self-funding works best as a long-term strategy. But traditional self-funding can expose small and midsize employers to volatility, especially with the rising size and frequency of catastrophic claims.  

That’s what’s different about going self-funded with a ParetoHealth captive. ParetoHealth unites thousands of employers into one strong community that shares risk and uses scale to unlock industry-leading protections and savings.

By self-funding with a ParetoHealth captive, you keep the upside of self-funding and gain the stability of scale. Instead of managing through reactive annual cycles of unexpected traditional health insurance premium increases, employers who self fund with a ParetoHealth captive can redirect those efforts into building and executing on a multi-year strategy to reduce healthcare costs. 

The Self-Insurance Institute of America (SIIA) notes that employee benefits captives are now the fastest-growing self funding model among midsize employers. ParetoHealth pioneered the employee benefits captive model in 2011 and is the largest and fastest growing community of its kind.  

What is a captive?  

A group self-insurance arrangement owned by Members. Members pool resources to self-insure collectively. Pooling risk means that one Member’s high claims are offset by others’ with lower claims, reducing year-to-year cost volatility for all Members.  

Because the captive is Member owned, profits (if any) from the risk pool are reinvested or returned to Members, creating added value beyond typical insurance. Losses are also shared by the Members. 

What is an employee benefits captive?  

An employee benefits captive is a captive owned by employers to manage and finance their employee benefit programs.

What is the difference between a P&C captive and employee benefits captive?

The main difference is the type of risk that each covers. A property and casualty captive (P&C captive) manages physical liability risk such as property, auto, or workers comp. An employee benefit captive (EB captive) manages employee-related costs such as medical costs, disability, or life.

Some P&C captive companies may attempt to diversify with an EB captive structured as an A/B fund model. The A fund is the individual captive layer and the B fund is a shared pool. The A/B fund model forces employers to pre-fund both individual and shared layers, plus post collateral, while leaving the employer exposed to as much as 150% of premium before stop-loss kicks in. Surplus returns aren’t guaranteed and the A/B fund model structure creates volatile renewals instead of true protection.

ParetoHealth avoids these pitfalls by eliminating unnecessary pre-funding, requiring less capital, and offering long-term contract protection with predictable renewals and comprehensive cost containment.

What are the advantages of self-funding with a ParetoHealth captive? 

The advantages of self-funding with a ParetoHealth captive include our unmatched scale, the ParetoHealth Risk Shield, the ParetoHealth Savings Engine, data transparency, and the ParetoHealth community. 

Unmatched scale
When you join ParetoHealth, you’re joining the largest and fastest-growing community of its kind. This scale unlocks risk protection and negotiation leverage that midsize employers can’t get on their own. 

ParetoHealth Risk Shield
ParetoHealth’s Risk Shield offers the best protections on the market include a cap on rate increases and a guarantee of no new lasers. This eliminates healthcare cost volatility and makes costs predictable year over year. 

ParetoHealth Savings Engine
ParetoHealth’s Savings Engine addresses the root causes of high-cost claims. Backed by data, analytics, and in-house clinical experts, the ParetoHealth Savings Engine delivers curated programs and multiyear strategies that lower costs over time.

Data transparency
When employers join a ParetoHealth captive, they gain access to claims data and pharmacy rebate transparency. This means they can see exactly where their healthcare dollars are going and address cost drivers directly.

The Pareto community
ParetoHealth brings midsize employers together to solve what they can’t solve alone—unpredictable, rising healthcare costs. As one like-minded community, Members share insights, attend exclusive strategy events, and benefit from collective savings, when one Member takes action to lower costs, every Member benefits.

Rethink what’s possible with ParetoHealth 

Thousands of midsize employers have already left traditional insurance behind to join the ParetoHealth community and the movement is only growing. 

ParetoHealth consistently outperforms traditional insurance, empowering small and midsize employers with a long-term solution to eliminate volatility and lower overall healthcare spend. 

A multiyear claims-based study found that employers who moved from fully insured plans to ParetoHealth reduced healthcare costs by 7.5% in the first year and by an additional 16.5% annually by year three.

Midsize employers don’t have to feel stuck in traditional health insurance. With ParetoHealth, employers are taking control of their healthcare spend. 

Learn more about how an employee benefits captive works.  

Written by: The ParetoHealth team

Sources: Self-Insurance Institute of America (SIIA). Employee Benefits Captives: A Growing Solution for Employer Health Plans. Self-Insurance Institute of America, Inc. (2024). https://www.siia.org