5 October 2022ArticleAnalysis

The evolution revolution of MSL group captives

“The second and third gen captives distinguish themselves from their predecessors by providing a bundled platform of risk reduction and cost-control initiatives.”

Phillip Giles, MSL Captive Solutions

As the cost of providing medical benefits and health insurance continues to increase, the popularity of self-funding and medical stop loss (MSL) continues to be among the insurance industry’s most significant growth segments.The MSL market has grown tremendously over the past decade, going from a $7 billion market to a $26 billion market over the past 12 years. Expansion of the group MSL captive market has continued to accelerate and is now empirically estimated to represent about $5 billion of the overall stop loss market. It’s not unreasonable to project group captives accounting for 25 percent of the total MSL market within the next few years.MSL captives have evolved tremendously over the past few years. The new group captive programmes that we are building for our clients represent the third or fourth generation of MSL captive. These progressive captives are transcending the increasing commoditisation of their previous generations by delivering continually progressive risk control and cost-containment initiatives.The first generation of stop loss group captives were simply a conduit for sharing layers of risk between the stop loss carrier and the captive members and did very little in terms of risk mitigation or cost control other than employing a standard Preferred Provider Organisation (PPO) network and maybe some sort of pharmaceutical management initiative.Costs within the employer’s self-insured plan level were being somewhat controlled but the layers of risk within the captive’s retained risk layer were not receiving adequate attention.That may have been acceptable for a standalone self-funded plan where risk above the specific deductible is fully transferred, but it is essential for a captive programme to understand that it is in a true risk-sharing partnership with its stop loss carrier. Risk exposure from claims having the potential to penetrate a specific deductible—and into the captive’s retained risk layer—must be meaningfully reduced for a captive to achieve sustainable profitability.The second and third gen captives distinguish themselves from their predecessors by providing a bundled platform of risk reduction and cost-control initiatives. Offerings such as centres of excellence networks for complex medical conditions, specialty pharmaceutical management, large claim review and repricing now represent the minimum bar of entry for captive platforms.More progressive captives are incorporating elements such as reference-based pricing structures, direct negotiated provider networks, data analytics and predictive modelling. The current generation has progressed tremendously in the level of innovative sophistication and the ability to control risk. It is one thing to be able to respond to large claims after they occur, but captives are now incorporating technology to needed to identify and reduce medical claim risk before it occurs.

The next generation: provider-sponsored captives

The latest in evolutionary progression is coming by way of partnerships with regional health provider systems sponsoring group captives that feature deep procedural and facility discounting in addition to the mix of other cost-reduction initiatives.In a traditional PPO arrangement, insurers negotiate procedural and facility discounts that vary greatly from one insurer network to the next. In many instances, the networks are primarily concerned with demonstrating the “deepest discounts” from providers. The charges within the same facility can be completely different depending on the network agreement with each insurance carrier.Providers will charge different networks different prices which in turn receive different discounts. For example, a Blue Cross network could receive a 60 percent discount from billed charges and a competing Aetna network may receive only a 40 percent discount for the same procedure. However, the Aetna network may be charged only $5,000 for the procedure while the Blue Cross was charged $7,500 for the same procedure.Even though Blue Cross will have the deeper discount off billed charges, the end cost is the same for both. In some cases, the “smaller discount” might even work out to a lower end price.To put this in perspective, different people with same medical condition, who go to the same doctor in the same hospital, are likely to be assessed completely different charges for the same treatment simply because they have different medical insurance cards. The actual cost of healthcare is largely irrelevant as the insurance carrier will respond only to the pre-negotiated charge with the provider. There is no systemic consistency in terms of what hospitals and providers can charge for medical care.One of the most important elements affecting stop loss pricing is the provider network and the amount of actual (real) discounting from billed charges is provided from the network to the self-funded plan. Underwriters prefer Reference Based-Pricing (RBP) arrangements over PPO networks due to their deeper procedural discounting, consistency, and transparency. Plans adopting a good RBP schedule receive more favourable stop loss rates than plans using a traditional PPO arrangement.What happens when providers themselves create their own proprietary discounting schedule for self-insured plans participating in a captive they sponsor?Since the health systems control the procedural pricing, they can formulate in-network pricing schedules that feature deeper in-network discounting than can be provided by traditional PPO and most RBP platforms. Healthcare systems that have a strong presence in a particular geographic region are developing group captives specifically to serve self-funded employers within the health system’s service radius. The proprietary discounting translates into reduced stop loss rates and improved plan performance for captive members.

Evolve or dissolve

Group MSL captives need the agility to continually evolve in response to a frequently changing healthcare environment and competitive market conditions. The captive must present a solid value proposition predicated on continually progressive health risk management initiatives and reducing the cost of healthcare charges from providers.Historically, MSL captives have significantly outperformed traditional MSL in loss ratio and renewal persistency. Imperative to the success of any group captive is having a highly engaged and cohesive membership. Discerning membership selectivity and participation standards will enhance performance and lead to improved captive profitability.The members (and their brokers) must have a long-term focus and not just be looking for a quick reduction in premiums. Employer participation in risk assumption and collateralisation also enhances engagement, profitability, and persistency levels.In an increasingly competitive environment, it is essential for a top performing captive, or one having such aspirations, to present an adaptive platform and a value proposition strong enough to allow the captive to be highly selective in terms of membership. In this fast-changing world, captives that don’t continue to dynamically evolve will eventually dissolve.