Group captives: A cost-effective alternative to traditional health insurance
For many employers, providing health insurance to their employees is their second highest cost behind payroll. It is also their fastest rising cost and the one they feel they have the least control over.
For employers and their advisers, there is endless frustration with a system dominated by the BUCAs (Blues, United, Cigna, Aetna). A system that requires them to choose a health plan based on very little information, with limited real variation in products and, in many cases, at an annual cost that increases at a double-digit pace.
For decades, health insurers have shown almost no ability to control costs or provide transparency in a health insurance market they, in large part, created. PPOs, HMOs, POSs and ACOs have been introduced over the years and touted as the solution to the health care cost crisis, but not one has delivered a sustained positive result. Unfortunately, those hurt the most are small to mid-sized businesses and their employees. Both continue to struggle with hefty premium increases, higher deductibles and copays and more government regulation.
Business owners do have an alternative to traditional, fully-insured health insurance. Group captives are an opportunity for these businesses to partially self-fund their health plans and realize the advantages that large corporations have enjoyed for years: transparency, flexibility and greater control over costs.
Spurred by the requirements of the Affordable Care Act, group captives are a small, but rapidly growing segment of the health insurance market. Self-funding in general is gaining momentum, which has induced the BUCAs to introduce level-funded programs that offer some of the same benefits. Those plans, however, fall far short of what a group captive offers.
A group captive is designed to address the biggest concerns of employers when considering self-funding—volatility and risk. By pooling together a group of like-minded employers, these smaller businesses collectively achieve the economies of scale and increased predictability that make self-funding the choice of large employers.
When employers are fully insured, their plan costs are 100% fixed. If you have low claims, the insurer keeps the profit; if you have high claims, you get a big renewal increase. What a racket. Under a captive solution, employers will see their fixed costs fall as low as 20% to 35% of their total healthcare spend, while depending on their size variable claim payments make up the remaining 65% to 80%. In other words, employers have the opportunity to retain up to 80 cents of every dollar.
By thinking outside the box, employers in a group captive find they now have the transparency they’ve longed for with their medical spend. This allows them to make informed decisions about how to how to manage their program. Plan design is more flexibility and employers can control their spend through an assortment of innovative cost-containment strategies.
Finding the Right Solution
At its core, a group captive minimizes the volatility of self-funding by allowing similar-sized employers to pool their risks. Participation provides a “shock-absorber” against a year with high claims. Unlike many of the self-funded plans from the BUCAs, unused premium dollars are returned to the captive members as a surplus dividend, and the members retain the profit…not their insurance carrier.
Many fully-insured employers have legitimate concerns about self-funding. Typically, these have to do with fears of taking on excessive risk or that the company might be too small to go it alone. Both of these are addressed by a group captive solution.
A captive is really just an insurance company. Licensed by the jurisdiction in which it operates, regulators treat it the same as any other insurance company. The game changing difference is that the captive insurance company is owned by the members that form the captive group. These are generally employers with 25-1,000 covered employee lives.
Since most employers aren’t looking to get into the insurance business, a captive manager is retained to oversee the captive’s operations and finances, perform underwriting services and procure reinsurance. While these mirror those of the BUCAs, the captive manager is employed by the captive members and its compensation for services performed is completely transparent.
Health care claims are made up of three layers of risk in a captive program. Lower risk, higher volume claims are the responsibility of each employer under their own plan population. Those claims are limited to a specified annual amount per member: e.g. a $50,000 annual cap on combined claims for all employees and their dependents.
Claim payments in excess of the individual employer limit are risk-shared among all the captive members. Generally, these are the larger claims that occur less frequently, and in any given year, employers with fewer outsized claims help fund those who are experiencing a greater number than normal. This is based on the understanding that most employers will have many more good years than bad ones, and the “help” they provide in the years when they incur fewer excessive claims will be returned when during those years when they incur more. This is the “shock-absorber” that insulates captive members from the claims volatility that smaller plans experience.
For truly catastrophic claims and to protect the financial integrity of the captive itself, the captive protects itself with reinsurance. While the claims exposure at this level is the highest, the frequency of such claims is also the lowest, so the captive’s reinsurance premiums are minimal, which helps keep the program’s fixed costs low. Collectively, the captive members are able to take on more risk and reap additional reinsurance premium savings than any individual member could do on its own.
An old adage states that while unsuccessful businesses make decisions based on their current predicament, the decisions made by successful companies are based on how they can sustain that success over the long-term. In other words, addressing healthcare costs with a long-term perspective is vital to any successful business. For the smaller to mid-sized employer, a group captive may just be the perfect solution.