No matter what size your company is, you've probably wondered if you could profit from self-funding your health insurance.

It's no secret that higher deductibles on other insurance products can reduce your fixed costs and give you a chance to be in control of your own claims destiny. Will it work for health insurance, too? Be sure to look before you leap.

Smaller companies should seriously consider self-funding, but this option is underutilized by them. Unfamiliarity with the concept, their brokers' inexperience or a fear of large claim losses...whatever the reason employers fear self-funding, they should give it serious consideration.

Important questions

Here are 14 questions to ask when mulling the self-funding option.

What are the advantages of self-funding? You're practically guaranteed to save money the first 12 months. Your claim payments will start in the second or third month, so you save 12 months' premiums while only paying 10 or 11 months' claims. You, not the insurer, keep the money for the "incurred but unreported claims."

Unlike what you're currently doing, you don't pay premium taxes on your total premium. You only pay taxes on the stop-loss premium, which is less than half of your current premiums.

You can change your benefit provisions to make your plan specific to your group's particular needs. You can profit directly from disease management and similar programs.

But is self-funding for me? Your employee demographics will tell you. Are they healthier, thinner and younger, with fewer smokers than average? Are you a risk-taker by nature? If either or both are true, self-funding could be attractive for you.

What makes self-funding worth consideration? You've heard of the 80/20 principal: you get 80% of your results from 20% of your efforts. It applies in health insurance, just as in everything else. The healthy 80% overpay and effectively subsidize the sickest 20%. If you're willing to carry more of the risk for your group, and your group alone, self-funding can help you profit from that willingness.

What pitfalls should I watch for? Your cash flow can fluctuate significantly, so be sure to maintain adequate reserves.

Moreover, make sure your broker understands the aggregate and specific stop-loss policies' contractual provisions. His or her stupidity can cost you more than planned. Some brokers try to make self-funding look good by providing limited-protection policies, which reduces fixed costs, but increases risk.

What do you mean by self-funding? Actually, the correct term should be partial self-funding. You're not going to pay all of your company's health claims. Rather, you partner with a stop-loss insurer. You pay the small, frequent claims, and the carrier pays the larger, infrequent and unaffordable claims.

Do many companies self-fund their health insurance? One study suggested that 90% of companies with more than 200 employees would profit from self-funding their health insurance. However, only 75% of such companies take advantage of it. Another survey showed only 41% of companies with 100 to 250 employees self-funded. But of those who use self-funding, more than 70% have done so for multiple years. It must be working for them.

Do I need to be a large company to self-fund? No, companies as small as 25 employees can potentially self-fund, and even smaller companies can create a "do-it-yourself" self-funding.

Does self-funding involve a lot a risk? Not if you use stop-loss insurance policies to limit your risk to a level that you're comfortable with.

What are the components of self-funding? You establish a claims account and authorize a third-party administrator to draw money from it to pay claims. So you pay claims plus their fee.

You also purchase stop-loss insurance to cover claims above a certain level. When any given claim reaches a trigger level, called the stop-loss point, the administrator begins paying with insurance company money instead of your money.

Is self-funding complicated? No, but it's different, and you have to familiarize yourself with new terms and risks. If your broker is knowledgeable, it's no more complicated than traditional insurance.

What if someone gets seriously and expensively ill? Oh, they will, sooner or later. It's called a shock claim for a good reason. But that's why you bought that stop-loss insurance policy. It will cover those catastrophic claims and stop one person's misfortune from ruining the entire plan's results.

What if a lot of people get sick? If lots of people get sick, you'll certainly pay more. But besides buying specific stop-loss insurance for catastrophic claims, you can also purchase an aggregate stop-loss policy, which will protect you against the cumulative cost of many smaller claims. Doing so always lets you know in advance exactly how much your plan will cost in both the worst-case and best-case scenarios.

Will I save money every year? Unfortunately, no. However, you'll probably either save money or break even in four out of five years. Typically, you'll save about 15% to 30% of your fully insured plan's cost in the good years. In the very worst year, you may spend 15% to 20% percent more than a fully insured plan would have cost.

What if self-funding doesn't work out? You return to traditional funding. There are some terminal costs (called runout) that typically recapture all the money you saved in the initial three-month period, but you're not generally going to lose coverage.

When you properly plan for it, self-funding can work for companies of surprisingly small size. Evaluate your alternatives carefully. This is a tool you shouldn't ignore.

Jim Edholm is a benefits broker and president of Business Benefits Insurance (BBI), an employee benefits planning firm in Andover, Mass.