It is simply business economics. Self-funding usually costs less, because any savings remain with the plan; they’re not kept by an insurance company. Self-funding’s main regulatory law, ERISA, requires strict reporting, so fees paid for administration (traditionally hidden within an insurance company) are clearly stated and the precise package of desired services is negotiated with a Third Party Administrator (TPA). As a result, instead of leftover money or savings going to pay for insurance company skyscrapers, self-funding lets unspent money remain as plan assets to help pay future costs.
Regulation is uniform nationwide, not like insurance which is state-by-state. In most self-funded plans, the over 1,000 state-mandated benefits do not apply. This is very important in the modern world of branch offices, telecommuting, out-of-state commuters & dependents, COBRA or other scenarios for broadly spread plan participants. Self-funding for corporate plans is regulated by ERISA (Employee Retirement Income Security Act of 1974), which was designed to be and remains the ultimate consumer-protection & transparency law. The employer/plan sees absolutely everything, because they are in charge. To laymen, it may seem overwhelming and demanding, but TPAs are experts. ERISA is a good discipline, and employee benefits have thrived under it. Even state & local government employee and religious worker plans that are not technically subject to ERISA tend to follow the ERISA format because it is such a win-win-win for all parties.
Self-funding is a health benefits plan custom-designed for each employer or workforce. It is not some standard insurance company policy. This can make a huge difference in cost as well as giving employers & workers what they most want and need. For example, a plan of veterinarians wanted excellent coverage for things like a rabies vaccine and other services related to working with animals. A metal manufacturer’s workers wanted toxic screenings and couldn’t care less about rabies coverage. A custom designed plan allows coverage & dollars to go to items wanted. That’s a win for both employers and workers…the most-wanted bang for the buck.