Self-insurance (or self-funding as it is also referred to) is an alternative risk financing strategy used by many employers across the country to finance their group health care and workers' compensation liabilities. Self-insurance has grown in popularity in recent years due to the rising costs associated with health care and workers' compensation commercial insurance.

The mechanics of self-insurance are quite simple. The underlying group health plan will function exactly the same way that it does under a fully insured arrangement, it is simply the financing of the plan that is different. In a self-insured group health plan the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, the employer pays for each - out of pocket expenses - as they are incurred instead of paying a fixed premium to an insurance carrier as in a fully insured plan. Today, there are many variations of how much liability an employer can choose to retain ranging from a fixed monthly cap to an unlimited aggregate. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims. There are many reasons why an employer would choose to self-fund their group health plan such as:

1. The employer can customize the plan to meet the specific health care needs of its workforce, as opposed to purchasing a 'one-size-fits-all' insurance policy.

2. The employer maintains control over the health plan reserves, enabling maximization of interest income - income that would be otherwise generated by an insurance carrier through the investment of premium dollars.

3. The employer does not have to pre-pay for coverage, thereby providing for improved cash flow.

4. The employer is not subject to conflicting state health insurance regulations/benefit mandates, as self-insured health plans are regulated under federal law (ERISA).

5. The employer is not subject to state health insurance premium taxes, which are generally 2-3 percent of the premium's dollar value.

6. The employer is free to contract with the providers or provider network best suited to meet the health care needs of its employees.