An emerging mecca for medical stop loss
With its proximity to the US, and as one of the oldest domiciles, Grand Cayman has become the leading domicile for healthcare risks. Cayman has a well-established infrastructure both in terms of the stability of its regulatory environment and a mature abundance of necessary service providers such as insurance and asset managers, attorneys, auditors, and the like. Having a consistent and stable regulatory environment, especially one so familiar with the nuances specific to the healthcare industry, has been essential in helping to promote an increased level of stability and expansion for the captives domiciled there.
Healthcare risk centres—particularly large hospitals, healthcare systems and physician groups—have been among the earliest adopters of self-funding and establishing captives as a strategic risk-financing mechanism for their casualty exposures such as medical malpractice and general liability. Cayman also now has an emerging abundance of its hospital and healthcare captives expanding their writings to include medical stop loss (MSL) coverage for their self-funded employee benefit healthcare plans provided to employees of their parent organisations.
Especially effective for healthcare providers
Self-funding of employee benefit medical coverage is a particularly effective and efficient risk financing mechanism for larger hospitals and groups of healthcare entities due to the amount of intrinsic control they maintain over in-facility (domestic) claim charges incurred by employees. Domestic charges are the medical expenses incurred for services delivered to covered plan participants within the healthcare facilities being insured by the stop loss policy.
"The primary opportunities will be for healthcare employers that already have an established captive to which the stop loss can be added."
All hospitals maintain a “chargemaster” which is a listing of all procedural charges at the facility and serves as the starting point for billing charges assessed to the general, non-Medicare, insured public for treatment. A recent study found that the average hospital had an overall charge-to-cost markup ratio of 4.32, meaning the average hospital set a chargemaster price of $4.32 against a Medicare-allowable procedure cost of $1.
Healthcare providers that self-fund their employee healthcare coverage typically “discount” their domestic claims from employees by removing some percentage—if not all—of the normal profit margin that would be charged to the general insured public for treatment. Because the plan is self-funded, maintaining a normal profit margin for claims charged against the benefit plan would be redundant to the employer and would result in unnecessary high loss costs charged to the benefit plan.
There is a fairly wide swing in the rate at which self-funded healthcare entities discount their domestic claim charges. Most facilities tend to use 60 to 80 percent as the normal (discounted) reimbursement rate for medical expenses charged to the health plan. Some healthcare employers actually absorb the full cost of in-facility treatment charges incurred by their employees by assuming a zero (0) percent reimbursement for domestic charges against the self-funded health plan. Having the ability to discount the cost of domestic claim charges is an enormous advantage for self-funded healthcare providers in comparison to other employers for reducing the overall cost of employee benefits.
Structuring the stop loss
Discounting the reimbursement rate for domestic claim charges accruing within the self-funded plan will have a direct effect on the cost of the MSL insuring the employer. In addition to the rate of domestic claim discount, the amount of stop loss rate reduction will also be based on amount of services that are (can be) provided domestically. It may be helpful to think of this as an aggressive “in-network preferred provider organisation (PPO) discount” for employees.
Most stop loss carriers will not provide coverage to healthcare facilities requesting a 100 percent domestic reimbursement rate, which includes the facilities normal profit margins. This opens the potential for domestic claims submitted to the health plan—and subsequently the stop loss carrier for reimbursement—to actually become a source of revenue for the employer. Since MSL coverage is not intended to insure an employer’s profitability, most carriers will limit domestic claim reimbursement in one of two ways:
- Ground-up limit: This allows domestic claims to accrue to stop loss levels at a percentage other than 100 percent. The reduced percentage will apply from the first dollar of the incurred domestic charges.
- Excess-only limit: This allows domestic expenses to accrue to the stop loss at 100 percent of billed charges but reimbursed by the stop loss policy at a reduced (discounted) percentage.
As mentioned earlier, most self-funded healthcare entities typically discount their domestic claims to 60 to 80 percent from their normal public rate rather than seek a full 100 percent. It’s worth noting that entities electing to absorb the cost of all domestic claims (zero  percent reimbursement), also assume the full risk of large, catastrophic domestic claims as they would not be covered by the stop loss coverage. For this reason, most facilities elect to include some level of domestic claims at their actual cost (no profit margin) within the self-funded health plan.
Integrating the captive
In most cases, it won’t make enough economic sense to form a single-parent captive solely for MSL as the premiums, except for very large employers, are not typically large enough. The primary opportunities will be for healthcare employers that already have an established captive to which the stop loss can be added. Employers that have an existing captive are likely to be self-funding their employee healthcare benefits already; adding MSL is an easy augmentation for increasing the efficiency of an existing captive by expanding its utility.
Captive participation in an excess coverage (MSL) that insures a self-insured employer further amplifies the benefits that can be derived from self-funding. It’s almost a way of double-dipping to maximise cost savings on insurance. Formalising retained risk layers by converting them into MSL coverage through a captive, as opposed to simply paying claims within the same layers from general assets, allows the employer to more easily forecast claim liabilities, and recognise and deploy underwriting profit and investment returns attributable to these layers.
Surplus derived from the underwriting and investment return from the captive can be returned to the employer (ie, the captive parent) more efficiently in the form of dividend distributions or strategically deployed to offset future plan costs, expand benefits to employees or retained within the captive to smooth financial volatility associated with other lines of coverage. As many healthcare entities are already familiar with group risk-sharing arrangements, such as risk retention groups (RRGs), formation of group stop loss captives is also becoming increasingly popular among healthcare entities.
More than just medical stop loss
The premise of an MSL captive should not be just about trying to save money only on the MSL itself. The captive should be viewed as a contributing component within a larger strategy for reducing the overall cost of providing healthcare benefits to employees on a long-term basis. Because they have more control over the cost of their domestic claims, larger healthcare entities have even more to gain from combining their self-funded employee healthcare plan with a captive.
As the use of stop loss captives sponsored by healthcare entities increases, some larger healthcare facilities and groups of providers are recognising an innovation opportunity by exploring the formation of Accountable Care Organisations (ACOs) for employers located within their service radius. The premise of an ACO is to provide exceptional patient care from a closed network of providers on a capitated basis. A portion of the ACOs financial risk could be assumed within the captive.
The growth expectations for MSL captives are robust, and represent an especially greater opportunity potential for self-funded healthcare entities.
Phillip C. Giles is vice president, sales & marketing at QBE North America. He can be contacted at: email@example.com