There is seemingly a lot of uncertainty in our lives now. That said, one thing that has been certain for many years is health insurance costs continue to rise. In most cases, the cost of health insurance has outpaced corporate revenue growth, and certainly household income has not been able to keep up with the average payroll deduction for health insurance.
For employers too small for traditional self-funding, there have been two primary strategies when the annual health insurance renewal increase is delivered by their broker: change carriers or shift cost to employees through a combination of higher copays/deductibles and higher payroll deductions. However, a newer version of self-funding is emerging as an increasingly popular health plan funding strategy; it is known as a Health Insurance Captive.
Before diving a bit deeper into Captives, let’s take a step back to quickly review why many employers self-fund their health plans. First, self-funding gives employers more flexibility and control in terms of designing the health plan. Additionally, data transparency is significantly better on a self-funded platform, meaning employers get to see what types of claims are driving their experience and can then use that data for future health plan design initiatives. There is also a reduction in premium taxes, fixed costs, and insurance carrier profit which is a positive impact to a company’s bottom-line. With these factors at play, it is no surprise that, according to a study by the Kaiser Family Foundation, more than 80 percent of employers with at least 1,000 employees choose to self-fund their health plan. But what about smaller employers? Well, that same survey found that nearly half of employers with 200 to 999 employees self-fund their health plan. So why don’t smaller employers self-fund? The most common response is being financially unprepared for higher than expected claims, especially large claim volatility. And this is where a Captive can be an answer: a Captive is a “shock absorber” for large claims.
In short, a Captive is a medium for taking risk. Because it is a form of self-funding, employers get the benefits of transparency and control, but they also get the stability from being a participant in a Captive. A Captive program removes the typical risk and volatility associated with large claims. The employer is left with their own smaller claims which they can begin to control. A Group Captive can be made up of companies in the same industry or different industries. Captives are ideal for organizations with 100 to 500 employees that have at least 50 participants in their health plan. The organization should be financially stable, and its leadership should be willing to embrace wellness programs that are designed to be effective for their organization.
Getting started in a Captive requires working with your broker/consultant to identify the right Captive for your organization. Once identified, a Third-Party Administrator (TPA) should be selected. The TPA is responsible for processing the claims incurred by employees and their dependents under the health plan (which is designed by the employer in conjunction with their consultant). TPAs are aligned with one or more healthcare provider networks so that there is minimal disruption from the fully insured plan. In fact, some fully insured carriers also function as claims administrators on a Captive platform. In this case, employers could choose to offer the same network as they did under their fully insured plan.
An essential component to a Captive is stop loss protection (reinsurance). If claims exceed a specified dollar amount for any specific employee/dependent (e.g. $30,000) or in the total claims for the year, the stop loss policy provides the necessary protection by covering the amount above the established thresholds. As mentioned, a Captive is a “shock absorber” for large claims. This means that the large claim volatility is spread across the fellow members of the Captive. This translates to more consistency in stop loss insurance renewals. Without this protection, smaller employers who self-fund their health plan may find themselves looking at a stop loss renewal higher than 30 percent. Of course, the tradeoff is employers in a Captive that might be deserving of a 5 percent stop loss renewal increase may see an increase of 9 percent (as an example) because a fellow Captive member had several large claims. It is worth noting that the Captive member with poor experience would get an increase higher than the better performing members, but it would be flattened a bit.
Participation in a Captive requires a capital contribution. This amount is typically about 3-4 percent of the equivalent fully insured premium, which makes it less than what would have been the first month’s premium had the employer remained fully insured. The capital contribution can be returned to the employer (partially or in full) based on the performance of the Captive.
To be clear, a Captive should not be viewed as a guaranteed savings approach, especially in year one. Because it is a form of self-funding, a Captive member could spend more in any given year. With fully insured plans, it is easy to get caught up in the “renewal fight” each year and not see the big picture, but projecting long-term health plan costs is essential to the financial health of any organization. And this is where a Captive pays off. A reasonable expectation of savings in a Captive is 5 percent when compared to a fully insured plan. While that may not sound significant, it is worth considering the cumulative value of that savings over a multi-year period. Can you afford not to?
For questions or help determining if a Health Insurance Captive makes sense for your business, feel free to reach out to us at info@bondbenefits.com or give us a call at 585-248-5870.