This paper presents a risk analysis of two funding mechanisms for employee health benefits an insured experience-rated program and a self-funded program. The paper analyzes in detail how the experience-rated program smooths employee health benefit costs and derives formulas for the mean and variance of the probability distribution of experience-rated cost. The paper also describes briefly the self-funded program and demonstrates the relationship between the probability distributions of self-funding cost and the experience-rated program cost. Included in the paper is a discussion of the effects of hospital third party reimbursement on the choice between these two plans. Given the two probability distributions, the paper shows how an expected utility analysis can be used to choose between the two funding mechanisms. The methodology is then applied to the choice between two such programs currently offered by Blue Cross/Blue Shield of Michigan. Introduction A number of recent articles in the health care literature have stressed the potential savings hospitals might generate by considering alternative ways of providing health benefits to their employees. Alternate risk instruments such as Administrative Services Only (ASO) health insurance plans [12] and workers' compensation self-insurance programs [2] are examples. With a few exceptions, e.g., see [5], these papers do not help hospital analysts actually evaluate alternative risk instruments for a given program, because they concentrate on the advantages and disadvantages, legal aspects, and general economic characteristics of these programs. They tend to gloss over problems in analytically evaluating the programs, and they completely ignore applications of risk analysis in program evaluation. This paper presents the methodology that the author used at Henry Ford Hospital in Detroit to analyze two competing funding mechanisms for the basic portion of the employee health benefit program (i.e., excluding master medical, prescription drug, optical, dental, etc.) The first option is an experience-rated premium program that Blue Cross/Blue Shield of Michigan (BCBSM) has offered since 1977, the second is an Administrative Services Only self-funded program offered by commercial insurers and recently introduced by BCBSM. The form of experience rating contract analyzed here Douglas D. Gregory is Director of the Center for Applied Research at Henry Ford Hospital. He earned his Ph.D. in Managerial Economics from Northwestern University. Acknowledgment: This paper has benefited from the helpful suggestions of anonymous referees, the editor, and Robert Sigmund, Senior Advisor, Blue Cross of America.