PEO vs. Self-Funded Health Plans: Why Sub-250 Companies Lose (and When They Don’t)

By: Dinsmore Steele — The Strategic PEO Advisory™ · Date: 11/26/2025

Evan Morales thought he’d cracked the code.

His 120-person SaaS firm in Austin had finally hit triple digits — that magic moment when brokers start using words like “leverage” and “control.”
At the last renewal, they told him what every CFO eventually hears:

“Once you hit 100 employees, you’re big enough to self-fund.”

It sounded grown-up.
Sophisticated.
Cheaper.

And for a while, it was.

Claims ran low, cash flow was clean, and Evan began using phrases like “risk diversification” in board meetings.

Then came the Slack message that ruins every CFO’s morning.

“Hey — urgent. NICU claim. Can we talk?”

By 7 a.m., Evan was staring at a billing portal that looked like it had been built to test his blood pressure.
$47,000.
$61,000.
$93,000.

Each refresh added another zero.
The baby would survive.
The budget might not.

The stop-loss policy triggered — but the deductible alone was $40,000, plus another $200,000 in mid-sized claims from the rest of the team.
By the end of the month, their “savings strategy” had become a cautionary tale.

He leaned back in his chair, watching the Texas heat shimmer outside the window.
Everything out there looked stable.
Inside, he was learning how fragile stability really was.

The 100-Employee Mirage

Every CFO has heard the same line: “Once you hit 100, you’ve graduated.”
It travels from broker decks to LinkedIn think-pieces like gospel — the milestone where small companies “grow up” and start self-insuring.

The problem is, in healthcare math, 100 people isn’t a company.
It’s a sample size.

At that scale, one or two catastrophic claims can swing total costs by 20 or 30 percent.
Actuarially, you’re not managing risk — you’re hosting it.

“Crossing 100 employees doesn’t make you a Fortune 500,” says Rodney Steele, CEO of Dinsmore Steele.
“It just means your roulette table has a few more seats.”

According to the Kaiser Family Foundation, only 18% of small firms — those under 200 employees — self-fund their health plans.
The rest know better: the law of large numbers doesn’t apply when your whole “risk pool” fits in a company-wide Zoom call.

So yes — hitting 100 employees feels like progress.
But when one medical event can wipe out two years of margin, that’s not leverage.
That’s luck.

The Math of Volatility: Why Sub-250 Companies Always Lose the Second Year

Evan’s first year as a self-funded company had been smooth — almost suspiciously so.
Claims came in under projections.
The broker congratulated him on “beating the market.”
Someone even floated the word “refund.”

He started to believe it.

Until the NICU bill hit.
Then the cancer claim.
Then the renewal quote that made last year’s spreadsheet look like fiction.

That’s the thing about self-funding — it works until it doesn’t, and when it doesn’t, it hurts.

The Law of Large Numbers — and the Small Company Problem

Insurance is just math with manners.
It works because risk spreads out across thousands of people.
Good years offset bad ones, and everyone pays roughly what they should over time.

But for a 50-, 100-, or 200-person company, there is no smoothing.
You’re the entire pool.
When someone gets sick, everyone gets a raise — in premiums.

“The law of large numbers doesn’t care about optimism,” Steele says.
“When you only have a hundred people, one medical event isn’t a blip. It’s a budget.”

KFF data backs it up:
small-group claim volatility can swing 20–30% year over year — even with stop-loss in place.
For every company that saves $200,000 one year, another pays double the next.

Actuaries call it variance.
CFOs call it a bad month.

The Second-Year Spike

The irony is that self-funding almost always starts well.
Healthy team, low claims, clean renewal.
Then year two happens.

Stop-loss premiums jump.
Laser clauses appear on sick employees.
The “rough year” becomes the new baseline.

“Self-funding has a rhythm,” Steele says.
“Year one feels brilliant. Year two feels like betrayal.”

A single million-dollar claim in a 100-person group adds $10,000 per employee to total cost — even after reimbursements.
Stop-loss pays back later.
The damage hits now.

Stop-loss is a seatbelt.
But if you hit the wall, you still feel it.

Variance You Can’t Budget For

Year	Expected Claims	Actual Claims	Total Cost	Result
2023	$1,000,000	$850,000	$1,050,000	Savings!
2024	$1,000,000	$1,300,000	$1,450,000	Surprise!
2025	$1,000,000	$1,100,000	$1,300,000	“Stabilized,” said the broker.

Over three years, the average cost exceeded the fully insured equivalent.
That’s not an outlier, it’s the pattern.

“For companies under 250 employees, variance is the villain,” Steele says.
“You don’t need three bad years to lose the game. You just need one.”

The Expertise Exception: When Self-Funding Actually Works

Not every self-funded story ends like Evan’s.
Some make it work — beautifully.
But those wins don’t happen by luck. They happen by literacy.

Self-funding is not a bad idea.
It’s just a dangerous one in the wrong hands.

“Self-funding isn’t reckless,” Steele says.
“It just has a very high skill threshold. Done right, it’s precision. Done wrong, it’s roulette.”

The Outlier That Got It Right

While Evan was watching his claims implode in Austin, a 300-person manufacturer in Ohio was thriving.
Their CFO had hired an actuary, built six months of reserves, and treated healthcare like a balance sheet.
Every claim was data. Every dollar was deliberate.

When a six-figure surgery hit, it barely dented their year-end report.
That wasn’t luck. That was infrastructure.

They didn’t gamble. They managed probability.

The Math Behind Mastery

Self-funding works when you understand three variables: frequency, severity, and volatility.

Frequency: How often people get sick.
Severity: How expensive it gets when they do.
Volatility: How unpredictable both will be next year.

Big employers smooth those variables across thousands.
Smaller firms can’t — unless they buy smoothing through stop-loss, captives, or cash reserves.

In a self-funded plan, a good year feels like profit and a bad year feels like punishment — but both are just variance disguised as performance.

“You can’t beat math,” Steele says. “But you can hire someone who speaks it fluently.”

According to Ethos Benefits (2024), fewer than 25% of companies under 250 employees achieve net savings from self-funding over five years.
The other 75% learn a more expensive lesson: expertise is the cheapest premium you can buy.

“Most CFOs don’t lose money self-funding,” Steele adds. “They lose sleep. And eventually, one of those costs more than the other.”

The Readiness Test

Question	If Yes	If No
250+ covered lives?	You can spread risk.	You are the risk.
3–6 months of reserves?	You can absorb shocks.	You’ll feel every tremor.
Access to actuaries?	You can price risk.	You’re guessing.
Compliance expertise?	You’re protected.	You’re exposed.
Can you stomach variance?	Maybe.	Not yet.

Evan had learned the math.
The other CFOs had mastered it.
And somewhere between those two realities lives the difference between risk and regret.

Self-funding isn’t the villain.
Ignorance is.

The PEO Counterweight: Why Pooling Wins Until You’re Ready to Play Alone

When Evan finally ran the numbers, the solution wasn’t radical.
It was arithmetic.

He didn’t need control.
He needed scale.

A PEO gives you exactly that — pooled strength that acts like gravity for risk.

“A PEO doesn’t remove risk,” Steele says. “It just makes risk behave like it does for a bigger company.”

Inside a PEO’s master plan, your $1 million claim becomes statistical background noise.
The spikes flatten. The stress subsides.

Healthcare gets boring again — and that’s the goal.

Scale Is Strategy

A PEO master plan transforms small companies into large buyers.

That scale unlocks three quiet advantages:

Price Protection. Large-group pricing and less volatility.
Renewal Stability. 6–9% average renewals vs. 15–25% standalone swings.
Compliance Coverage. ACA, COBRA, ERISA, HIPAA — handled before you ask.

“It’s not glamorous,” Steele says. “No CFO brags about predictable benefits at a dinner party. But they all sleep better.”

Why Stability Is the Real Strategy

A PEO won’t stop healthcare inflation.
It won’t cure volatility.
But it ensures volatility belongs to someone else.

“In small-company healthcare, volatility is the tax you pay for independence,” Steele says. “A PEO is the tax shelter.”

Evan finally understood:
the goal had never been to outsmart insurance — it was to stop letting it surprise him.

Reader Mirror

If you’re still waiting for the “right year” to self-fund, ask yourself this:
Would you rather gamble on luck — or benchmark for certainty?

Because the real milestone isn’t headcount.
It’s clarity.

“In business,” Steele says, “uncertainty is inevitable. Paying extra for it isn’t.”

The Decision Framework & Conclusion — How to Choose Clarity Over Chance

By spring, Evan’s spreadsheets told a different story.
The panic was gone. The patterns were clear.

Self-funding hadn’t failed him.
He’d just mistaken complexity for competence.

That’s what data does when you finally stop fighting it — it humbles you into better math.

The CFO’s Decision Framework

Evan rebuilt his approach into five questions:

Do you have the scale?
If your pool fits in one room, you’re not managing risk — you’re hosting it.
Do you have the cash?
Three to six months of reserves buys you resilience. Anything less buys you anxiety.
Do you have the expertise?

If your benefits strategy relies on optimism, that’s not strategy. That’s improv.

4. Do you have the tolerance?
Could you handle a 25% swing in costs without blinking? If not, volatility owns you.

5. Do you know when to borrow scale?
Every company outgrows its PEO eventually. But first, it has to survive.

The Clarity Curve

Every company reaches the same point — where optimism outpaces math and confidence outpaces structure.

“You don’t have to own every lever to steer,” Steele says. “Sometimes the smartest move isn’t to manage risk — it’s to price it right.”

That’s what PEOs do: they price risk correctly until you’re ready to own it outright.
They’re not a forever strategy. They’re a growth bridge.

The Final Reflection

A year later, Evan’s board asked the inevitable question:

“Should we think about self-funding again?”

He smiled.

“Eventually,” he said. “When we can afford to be unlucky.”

He looked out at the same skyline that had once felt like risk and realized it hadn’t changed at all.
He had. The city still shimmered; the numbers finally made sense.

Your Turn

Every company hits this wall — the point where growth outpaces infrastructure, and optimism outpaces math.
The best leaders don’t ignore it. They learn from it.

A PEO isn’t perfection. It’s protection — a bridge until you’ve built the bench strength to go solo.

Today, fewer than one in five small firms self-fund — but nearly half think they should by the time they reach 100 employees.
That’s the gap Dinsmore Steele was built to close: ambition without blind spots.

“The job of a CFO,” Steele says, “isn’t to predict the future. It’s to make sure the future can’t bankrupt you.”

You don’t have to bet big to lead smart.
Benchmark first.
Then decide what kind of risk is worth the ride.

Outside, the sunlight hit the same skyline as before — but this time, it didn’t glare.
It glowed.

Benchmark Before You Bet

Ready to see how your health plan really stacks up?

Dinsmore Steele’s Strategic PEO Advisory™ benchmarks your PEO or self-funded plan against national averages — so you can see, in hard numbers, whether you’re buying savings or subsidizing risk.