What Makes Up a Self-Insured Health Plan? The 4 Core Components Employers Should Understand

 

More employers today are moving toward self-insured (or self-funded) health plans—or at least evaluating whether it’s the right direction. But while the term gets used often, the structure behind a self-insured plan is not always clearly understood.

More employers today are moving toward self-insured (or self-funded) health plans—or at least evaluating whether it’s the right direction. But while the term gets used often, the structure behind a self-insured plan is not always clearly understood.

At its core, a self-insured health plan is built on four main components. Each one plays a distinct role in managing risk, delivering care, and controlling costs.

WATCH: What Makes Up a Self-Insured Health Plan? The 4 Core Components Employers Should Understand

1. Stop Loss Insurance: The Risk Protection Layer

Stop loss insurance protects employers from catastrophic claims. In a self-insured model, the employer is taking on the financial risk of claims—but stop loss acts as a safety net.

There are typically two types:

  • Specific stop loss (protects against high-cost claims for one individual)

  • Aggregate stop loss (protects against total claims exceeding a set threshold)

This layer is critical for financial predictability and risk management.

2. The Third-Party Administrator (TPA)

The TPA is the operational engine of the plan. They handle:

  • Claims processing and payment

  • Eligibility management

  • Plan administration and compliance support

In short, the TPA ensures the plan actually runs day to day. Their performance directly impacts both cost efficiency and employee experience.

3. Provider Network

Most self-insured employers still use a contracted network of doctors and hospitals to deliver care at negotiated rates.

However, some plans use a reference-based pricing model, where reimbursement is tied to a benchmark instead of a traditional carrier network.

This component plays a major role in access to care and overall cost structure.

4. Pharmacy Benefit Manager (PBM)

The PBM manages prescription drug benefits—one of the fastest-growing cost areas in healthcare.

They are responsible for:

  • Drug pricing and rebates

  • Formulary design

  • Pharmacy network management

Because pharmacy spend can significantly impact total plan costs, PBM strategy is a key lever in self-insured plan performance.

Bringing It All Together

A self-insured health plan is not just a funding arrangement—it’s a coordinated system built on these four pillars. Understanding how stop loss, TPAs, networks, and PBMs interact is essential for employers evaluating cost control, flexibility, and long-term strategy.

Over time, each of these components deserves deeper attention, because small decisions in each area can have a meaningful impact on both cost and employee experience.

 
Alyssa Johnson