Some employers do not contract with an insurance company to insure their employees, but they have enough employees to do risk pooling like an insurnace company would. These employers are called "Self Insured." During the past couple decades, the number of employers who have switched to self insurance has increased dramatically, starting with employers with many employees and spreading to those with fewer employees. For employers with few employees, risk pooling does not work very well and the employer still has significant risk for high health care expenses. Smaller employers have an option that larger employees do not; they can offer their employees Medical Savings Accounts (MSAs) that we will discuss later. Since self insurance does not involve a contract between an insurance company and an employer, it is not subject to state insurance regulations (by federal ERISA legislation). Avoidance of state insurance regulation is one reason for the increase in self insurance.

There are various degrees of self insurance. Some employers do everything themselves. Other employers fund losses as they occur, but pay a "Third Party Administrator (TPA)" or "Administrative Services Only (ASO)" organization to administer claims processing. Contracted services performed by a TPA or ASO can include: claims processing; marketing; premium collection; claims review; accounting; computing; and consulting. The organization providing ASO services may happen to be a traditional insurer, but there is no insurance involved without transfer of risk. Pure self insurance leaves the employer with all the risk of possible losses. One way of reducing the risk of very high losses is insurance for very high losses called "Stop-Loss Insurance." Stop-loss insurance for employers is similar to catastrophic insurance for individuals.

Some advantages of self insurance for an employer include: avoiding state premium taxes on the difference between the full premium and the stop-loss premium; avoiding state insurance regulations concerning specific mandated benefits; avoiding contributions to the state high-risk insurance pools; avoiding insurance reserve requirements; access to their own funds between the time premiums would have been collected and the time bills are paid (particularly during the first year); lower health care costs if a firm's expected costs are lower than those reflected in past insurance premiums; no longer pay insurer's profit; greater control over costs; better access to data on workers' utilization and costs; and more flexibility in plan design.

Some disadvantages of self insurance include: unpooled risk; less incentive for a third-party administrative to control costs compared to an insurer since they are not liable for risk; less economy of scale if the employer is relatively small compared to the volume of people pooled by an insurer; higher health care costs if a firm's expected costs are higher than those reflected in past insurance premiums; the risk that the employer will lose reasonably-priced stop-loss insurance; and no cushion from irate employees (no insurance company to blame for problems).

Labels can be misleading. Some employers that are labeled "Self Insured" or "Uninsured" are effectively insured because they have stop loss insurance with a deductible that is lower than the lowest likely amount for their expected health care costs. On the other hand, some employers that are labeled "Insured" are effectively uninsured. To the extent that this year's premium is experience-rated and will be retroactively adjusted based on this year's costs, their premium is not really fixed. In the extreme, if this year's premium is retroactively adjusted to reflect this year's claims dollar for dollar, then there is no risk transfer and no insurance. The supposed "insurer" is really providing ASO, not risk protection. Although this extreme situation is unlikely, many real-world phenomena such as one-year lag insurance can come very close to it, especially when evaluated over several years. Thus, an organization that may look insured at first may be effectively self-insured.