The cost benefits of medical stop loss captives
As healthcare costs rise worldwide, companies continue to search for solutions that will improve risk management and reduce expenses. While the debate goes on within governments around the world, no more so than in the US, companies believe their only alternatives are to cut benefits or increase employee contributions.
Neither option is palatable to many human resources departments and risk managers. However, captive insurance may provide an option to customise a risk transfer method that improves the financial management of many employer-sponsored health plans.
Companies that self-insure are well aware of the most widely used alternative for managing an employee medical benefit plan: medical stop loss. Its benefit to pay as you go or pay on a pre-funded basis to finance the plan and purchase stop loss coverage can protect employers against bad experiences and large claims.
Companies that fully insure need to understand the migration from fully insured to self-insured. The concept of a self -insured retention (SIR) is similar to the deductible contained in fully insured policies. The employer retains a portion of the risk and transfers risk above a set retention amount. Figures 1 and 2 illustrate self-insured medical programme examples.
Figure 1: Sample structure for a medical programme
In Figure 1 the self-insured layer is the amount retained by the employer. Claims above the $25,000 retention are paid by the commercial insurance healthcare partner.
Large and small employers can avail themselves of the benefits of captive insurance while focusing on cost-containment strategies for their employees’ benefits.
For employers having similar risk, forming a group captive to share the health plan risk may be advantageous for numerous reasons. They maximise the financial leverage by pooling or sharing risk—for example, group captives insuring medical stop loss by implementing and following a defined wellness plan can help reduce and prevent claims.
In addition, groups typically employ a third party administrator (TPA) to ensure best-in-class case management. Large employers can also pool their health costs within an existing property and casualty captive to capture cost savings. Particularly for companies who already have their property and casualty risk in a captive, a health programme may diversify their risks in the captive which, under some regimes such as Solvency II or its equivalents, can allow for some opportunities in solvency requirements.
There are other similarities of purchasing stop loss from a captive insurance company. Neither purchase has an impact on plan participants. Also, attachment points will vary based upon each company’s specified retention, actuarial analysis of prior history, the financial goals of the captive and the appetite for risk partnering by the reinsurance stop loss carriers.
Types of captive options for medical stop loss programmes
- Single parent captive (typically larger companies)
- Group or association captives (typically affinity or smaller companies)
- Cell captives (typically smaller companies)
With the flexibility of structuring a programme which is suitable on a client-by-client basis, captives have the flexibility to design retentions appropriate for individual clients. Figure 2 shows a sample structure of what could be included within a single parent or group captive programme.
Figure 2: Sample structure for single parent or group captive
Cell captives provide flexibility and leverage
Sponsored cell captives are ideal for many types of alternative risk transactions, making them ideal for financing stop loss risk and lowering the cost of entry to middle-market companies, smaller companies and groups. For single-purpose reinsurance, a cell facility also provides easy access to reinsurance markets, particularly stop loss.
Ideal captive candidates for medical stop loss are employer groups that are willing to share the risks and rewards of their benefit plan liability while actively managing expenses for the best cost containment.
Captive participation can improve access to data and increase the ability to analyse and change behaviour and outcomes. Incorporating proactive risk management strategies to your medical cost drivers can also enhance organisational efficiencies and employee behaviour.
Anne Marie Towle is captive practice leader at JLT Insurance Management (USA). She can be contacted at: firstname.lastname@example.org