Joe Parrilli, Captive Resources
Driven by continually rising healthcare costs, smaller and mid-sized companies are increasingly looking to leverage the benefits of self-funded plans using captives, says Joseph Parrilli of Captive Resources.
While many smaller companies lack the scale to completely self-fund their health programmes, there is another way to achieve similar benefits. Medical stop-loss group captives, which allow smaller and mid-sized companies to combine their buying power to build self-funded health insurance programmes as a group, have never been more popular.
Soaring healthcare costs
As healthcare costs continue to rise in the US, employers struggle with how to make coverage affordable for employees and their families. Cutting employee benefits or increasing employee contributions to their healthcare benefits have long been viewed as the only ways for employers to control health insurance plan costs.
In recent years, the evolution of medical stop-loss group captives has allowed middle-market employers to regain some degree of control over these costs, which continue to soar and significantly outpace inflation in the middle market.
A dilemma for employers
Health insurance is considered one of the top benefits by potential employees considering a new job. That is understandable, given that healthcare costs have more than tripled for a family over the last 20 years, according to the Kaiser Family Foundation. Yet employers realise that it is a key benefit they must offer if they’re to attract and maintain top talent.
The growing Millennial segment of the workforce is seeking high-value benefits, without the high cost. Employees rank their health insurance as their most important benefit. For employers, this makes health insurance much more than a low-cost decision.
An increasingly popular solution
The US Patient Protection and Affordable Care Act (ACA) 2010 has pushed a number of middle-market employers away from the fully insured market and into self-funding their medical plan with stop-loss insurance.
The following chart provides data from the Kaiser Family Foundation that illustrates this shift in the small and middle market over the last three to four years.
This transition has given employers an element of control by:
Reducing costs associated with ACA requirements
Providing transparency of their healthcare claims data
Allowing for greater plan design flexibility
Borrowing from a proven model
Group captives have long been used for commercial property and casualty insurance, allowing companies that share ideals to come together and mitigate exposures. One of the many benefits of a group captive is that it gives companies the ability to actively participate and share with other like-minded organisations, to the benefit of other members of the group.
The growth in the medical stop-loss group captive space has brought those same economies of scale and similar protection against market volatility, which are enjoyed by casualty group captive members. The captive provides individual employers a more significant element of control and greater financial stability for their medical plans.
Basics and benefits
A group captive is a member-owned and controlled reinsurance company. The group captive enters into an agreement assuming a predetermined layer of risk from a defined insurance company. This “captive layer” brings greater transparency to the employer to manage its claims with more efficiency.
Additionally, a group captive provides companies with the ability to recoup unused underwriting dollars in the form of a dividend when excess losses are less than projected with accrued investment income. On the other hand, traditional stop-loss insurance carriers typically retain any such dollars as profit or in a larger pool to pay for other insureds’ medical claims.
“The predictability of renewal underwriting helps provide another element of stability for the member companies.”
A medical stop-loss captive programme also helps bend the renewal curve compared to what is experienced in the traditional stop-loss market. The predictability of renewal underwriting helps provide another element of stability for the member companies into the future.
Members in the captive are underwritten individually, instead of as part of a pool. Renewals are calculated based on the known performance of each member company. The captive’s overall performance helps keep the reinsurance line item under control.
Flexibility and health risk management
Medical stop-loss group captives provide employers the flexibility to determine the structure of their company’s medical plan (including deductibles, co-pays, and out-of-pocket maximums), and choose their third party administrator and network. This flexibility allows companies to join a group captive with little disruption, since plan elements that the employees experience as key parts of their insurance can remain in place.
Additionally, a group captive programme should focus on helping its member companies progress down the path of improved health risk management by introducing and facilitating adoption of new strategies. Each member company has the ability to develop its own strategic plan to fit the needs and culture of its organisation.
The diversity and adaptability of these health risk management strategies allows member companies to share with others what has worked and what hasn’t worked within their organisations. This sharing of ideas contributes to a proactive approach, which enables individual employers to create best practice strategies and bring stability to their everyday claims.
Total healthcare spend
Many companies view increasing their stop-loss deductible as one of the only ways to control their specific stop-loss premium. Instead, this opens up a company to greater risk as it has now increased exposure below its deductible for everyday healthcare claims. Controlling total healthcare spend is key and inclusive of two components of medical stop-loss: specific and aggregate coverage.
The captive provides individual employers the ability to retain their predictable plan risk—a main focus of controlling total healthcare costs—and also a layer of insulation against larger claims.
Captive members will continue to learn innovative new approaches and will have the flexibility to implement the strategies that best fit their company culture. Implementing these strategies and engaging employees are driving factors in gaining control of total healthcare spend. Companies that have good performance within the captive layer will also earn dividends.
The continual implementation of new cost control strategies designed to impact the aggregate spend, together with dividend dollars, helps captive members level their total spend year over year.
The decision to join a group captive comes down to the transition from a passive buyer of stop-loss insurance as a commodity, to an active owner of a reinsurance company focused on controlling total spend for the company’s health plan. The group captive mentality does not fit every company, and much of the success of the captive is dependent on making sure the right companies join. The power of a medical stop-loss group captive is in the participation and engagement of all its member companies.
A group captive should not be seen as a one-year gamble. Instead, the programme should focus on helping its members evolve down a path of strategic health risk management solutions to stabilise healthcare costs over the long term, while providing financial rewards when an individual company outperforms the actuarial specific stop-loss underwriting.
Joining a medical stop-loss group captive can help member companies stabilise healthcare costs year over year and create a benefits package that will attract the workforce talent they need.
Joseph Parrilli is a senior vice president at Captive Resources. He can be contacted at: firstname.lastname@example.org
Captive Resources, Joe Parrilli