(FORTUNE Small Business) – There's another solution for small businesses with health insurance woes: Do the job yourself. Self-insuring--collecting payments from employees monthly and paying medical professionals directly--has been more prevalent among larger companies; small businesses have seen more potential danger than benefit. But entrepreneurs are starting to take another look at self-insuring.

Make no mistake: The plans can be risky. While large companies spread costs over a wide base of workers, making it easier to handle a few catastrophic claims, a ten-employee firm can be devastated if one worker requires, say, an organ transplant. According to a survey by the Kaiser Family Foundation, 10% of employees at small firms (with three to 199 people) were covered by a self-insurance plan in 2003, down from 17% in 2001. That trend is expected to change: Jim Sourbeer, a managing director at insurance services firm Marsh Inc., estimates that over the next two years 10% of the small businesses now covered by an outside insurer will switch to self-insurance.

For the right employer, that could be a smart decision. Donald Kling, president of General Finance, a brick manufacturer in Concordia, Kan., spent seven years evaluating whether he could replace his company's PPO with a self-insured plan. Ultimately he decided that he was overpaying; his employees' medical claims cost just 60% of the company's total health insurance payments on average. (In 2003 those payments were $535,000.) He also calculated his employees' average age (a relatively young 46) and considered their medical histories (no significant problems).

Kling, 53, requested bids from third-party administrators, which handle the paperwork for self-insured businesses, and bought stop-loss insurance, which kicks in if any individual employee has medical bills higher than $25,000 in a year. He made the switch in January. The cost of insurance and paperwork fees this year: $147,000. After adding on an estimated $374,000 for medical claims--25% of which he collects from his employees--he set aside a total of $521,000 for health expenses this year. He hopes he'll save about 10% under the new plan, but he won't really know until January, when all the claims have been filed. Kling's employees haven't seen any change in costs or structure. They have the same deductibles, monthly premiums, $20 co-pay, and preferred network benefits as they had under the PPO last year.

Herrington's, a building-materials firm in Hillsdale, N.Y., moved to a self-insured plan in January 2003, after Fred Hickman, 37, the company's CFO, saw annual health insurance premiums rise 20% for several years running and realized that the costs would soon exceed employee wages. The company has already seen positive results. Although two employees out of 165 had high medical bills last year, Hickman estimates that the company still saved about 15%, compared with traditional coverage. And he hasn't had to worry about rising premiums. In 2004 the insurance and paperwork fees were roughly the same as in the previous year, about $210,000.