Bringing captive strategies into the medical stop loss conversation
Pete Dalpiaz (pictured), director of captives at Hylant, looks at possible captive options for health insurance issues.
The annual health insurance renewal process feels frustratingly familiar to middle-market company leaders. Premiums invariably increase, the explanations for the jump aren’t completely clear and carriers rarely offer a path to meaningful cost control. It’s even worse when the past year involved several excess claims.
As business leaders grow increasingly weary of a system with little visibility into the true drivers of their healthcare spend, many explore alternatives to traditional fully insured plans. That’s understandable, but several approach the challenge from a limited perspective, focused primarily on finding cheaper coverage in the short term.
Achieving a longer-term strategy for protecting both employees and the budget requires developing a fundamentally different risk management philosophy.
Historically, most mid-size employers have approached employee benefits much as they would any other major purchase. They issue RFPs, compare pricing and benefits and select the option that appears to offer the best value. That’s not surprising when dealing with a marketplace that doesn’t deliver much insight into claim activity and other cost drivers. So they hand the risk over to a carrier, negotiate as best they can and hope next year’s renewal won’t be quite so jarring.
Those who shift their thinking from short-term premium reductions to taking strategic control of long-term cost handling gain access to powerful risk management options. Among the most effective are self-funding approaches that combine the use of a captive insurer with commercial stop loss coverage.
Taking that step demands a much different mindset, built upon long-term risk management, claim performance, employee engagement and sustainable cost control. The conversation moves from simply trying to buy the cheapest plan to actively managing the risk.
Some leaders who have heard about group captives assume the transition is all about accessing cheaper coverage through collective purchasing power. There’s no question that economies of scale deliver that advantage, but the real long-term value comes from changing the way those leaders begin to approach every aspect of employee benefits. That’s particularly true for employers who will make their first move from a fully insured environment into self-funding.
One of the first things company leaders need to learn is how a self-funding approach changes the relationship they have with their health plan – and with their employees. Instead of counting on an insurance carrier to make the key decisions and absorb the cost of care, they’ll find themselves having to dig deeply into factors such as claim data, trends in utilisation of benefits and treatment outcomes. Rather than base their decisions on their industry’s workforce population, they’ll begin to analyse their risk tolerance, choose their partners and make strategic business decisions based on the unique and specific needs of their employees and covered family members.
At every step of this highly customised process, considerations about the nature of their industry, the demographics of their workforce, geography and access to care and, most of all, their company culture will influence the design and long-term viability of their benefits strategy.
For most, medical stop loss insurance coverage will play a central role in making that strategy both practical and sustainable. Stop loss coverage creates a financial ceiling that protects against catastrophic claims, helps company leaders gain some control over volatility and delivers the many advantages associated with self-funding.
One way to visualise the relationship is to think of risk in layers. The employer retains a portion of predictable claim costs through a self-funded plan. A captive might then assume an additional layer of risk that would otherwise be transferred directly to the insurance market. Above those layers sits medical stop loss coverage, which protects against catastrophic claims that exceed predetermined thresholds. Stop loss serves as the ultimate financial backstop, while the captive helps the employer manage and finance a portion of the risk in a more strategic and cost-effective manner. That creates a structure that balances risk retention, financial protection and long-term cost control.
Like most aspects of effective risk management, creating the ideal stop loss structure isn’t a one-strategy-fits-all exercise. The decisions for each employer depend on a long list of factors, among them financial strength, cash flow, reserves, budgeting preferences and the company’s comfort level with claim variability.
Depending upon the company and the nature of its workforce, the process might involve detailed financial modeling and a formal analysis of risk capacity. Some questions address practical operational aspects. For example, how much claim volatility can the business absorb every month? How much budget predictability does leadership expect to see? How flexible is the company’s financial structure?
The process frequently reveals surprises for the employers. Some discover they’re retaining more risk than they realise, so a potential solution is to move to a captive arrangement to reduce their exposure. Others find they’re transferring more risk to the marketplace than they need, so they can safely retain additional risk, thereby achieving greater long-term financial efficiency.
Captives are inherently flexible tools. Depending upon the situation, a captive might absorb a layer of risk the company has been assuming. In other scenarios, a captive can allow a company to retain a larger share of risk before turning to the traditional insurance market to cover the rest. Put simply, a well-structured captive isn’t just another insurance product. It’s a strategic financial tool.
Group captives are particularly appealing to companies that lack access to their own sophisticated healthcare management solutions. Some vendors behind those solutions don’t work directly with mid-size and smaller employers because the economics don’t justify it. Employers might not even be aware of cost-containment or care-management programmes because they lack insight into how their claims are handled in a traditional fully insured environment.
Participating in a captive changes that dynamic by giving those companies access to the data and solutions they need to take control of their plan. Joining a larger group of similarly situated employers through a group captive can give them access to programmes, vendors and strategies that might otherwise be unavailable or prohibitively expensive. It could allow them to use sophisticated systems that would normally be beyond their resources – such as advanced claim analytics, specialty care management, pharmacy strategies and cost-containment tools that can improve both financial outcomes and employee access to quality care.
For example, a manufacturer with 500 employees might discover that specialty pharmacy claims are driving a disproportionate share of healthcare costs. Through a captive structure, the employer gains access to pharmacy management tools that would otherwise be unavailable, helping control costs while maintaining employee access to needed medications.
Some employers might worry that the role of captive is to deny care or shift unreasonable costs back to their employees. Nothing could be further from the truth. The objective of this type of captive is to deliver the right healthcare benefits more efficiently, so both employer and plan participants enjoy better outcomes. That’s harder to accomplish within a fully insured environment, where employers typically have little incentive to improve claim performance because they rarely see a measurable return. Any savings usually flow to the insurance carrier.
But with a self-funded, captive-centered strategy, employers see direct impacts of a better approach to risk management. They rack up measurable financial gains through improved claim performance, more efficient care utilisation and better employee engagement. As the performance of their captive insurer improves, they may also receive financial benefits from dividends, retained earnings and reduced reliance on the volatile traditional market. Compounding over years, those gains provide a significantly more stable long-term strategy.
It’s critical to remember that a captive is never a quick fix for frustration with traditional approaches. Nor is the strategy appropriate for every organisation. Achieving satisfaction with a captive strategy demands education, commitment and realistic expectations. Yes, employers can gain a host of opportunities, but those also come with the responsibilities of assuming greater control over the company’s healthcare risk.
The most uncomfortable aspect of that responsibility is the reality that the company is likely to face unfavourable years. Captives can help to reduce claim volatility, but they can’t eliminate it. Attaining long-term success requires consistently disciplined decision-making and the recognition that the company can’t just respond to a bad claim year by scrapping the captive and returning to the traditional insurance market. Captive success requires honest conversations, especially on the front end.
In fact, exit strategies are an important consideration from day one. Organisations need a clear understanding of what needs to happen if future leadership chooses to transition back to the commercial marketplace. Without proper planning, such an exit might create unexpected (and unnecessary) financial and operational complications.
All these considerations help to explain why the best recommendation for a particular company might be that a captive strategy isn’t the right fit. They also underscore the value of working with trusted advisers with extensive experience in establishing captives. Leadership is responsible for asking those advisers questions, even ones that are difficult or uncomfortable, such as honest assessments of finances, readiness, leadership commitment and long-term objectives. Transparency, education and long-term planning are key to success.
The many advantages both group and single-parent captives offer explain the consistent growth in the strategy, and medical stop loss plays an increasingly important role in that evolution. As companies seek greater transparency and control over healthcare spending – while being able to offer the type of benefits that draws and retains valuable employees – conversations about captives are a wise first step.
The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.
Pete Dalpiaz is director of captives at Hylant. He can be contacted at: pete.dalpiaz@hylant.com
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