Self-funding for small businesses — with a twist

The Affordable Care Act is making sweeping changes to health insurance and health care. The fully insured small group market is under considerable financial strain with added cost pressure due to ACA rules and regulations. What can they do to mitigate these costs? There are many paths to consider and getting informed advice from knowledgeable brokers and consultants is imperative. Innovative, creative and cost conscious solutions are out there — perhaps the best way forward is to build a solution from the member’s eyes out rather than the rule-makers eyes down?

Every business has risks inherent in its operations — health care is a big one. Self-funding that risk can be an effective way to manage health care costs. The challenge is claim volatility, which can make self-funding less attractive to small- and mid-sized employers. That’s why you may want to consider an innovative financing solution that is self-funding with a twist — it’s called a captive.

Captives have been around since the 1950s and today there are more than 5,000 of them in the world. A captive is an elegant health care financing vehicle used by 90% of the Fortune 500. Bermuda is home to 20% of the captive market closely followed by Vermont. Captives provide insurance to, and they are controlled by, their member owners. They can be formed as a single parent, group or association and can be organized as homogenous or heterogeneous. The captive insurance arrangement replicates the size and stability of a larger employer to help small- and mid-sized employers self-fund. Owner members share a common cause — to improve the efficiency of health care financing, save money and improve overall health.

Mechanically, a captive reinsures the stop loss policies of multiple employers. Insurance is the law of large numbers — aggregating risk minimizes volatility and improves the stability of the risk pool. All members share in the financial results of proactive population health management. Because a captive is self-funded, it avoids the health insurance company tax — a cost aversion between 2% and 7%.

The captive is a long-term solution to rising costs and not a quick fix, despite the immediate tax savings. When put together the right way, a captive solution should embrace a philosophy of putting the consumer in charge, empowering employees and their families to make informed decisions and live healthier lifestyles. The operating principles should include transparency, responsibility and opportunity to create a consumer-centric culture of health and well-being. 

What are the advantages of a captive solution?

1. Allows the aggregation of risk across state lines
2. Avoids unanticipated fully insured rate increases as result of the ACA
3. Information, cost and communications become much more transparent
4. It’s a risk-sharing model to control volatility and improve cash flow
5. Allows you to retain underwriting profit and investment income

What are the disadvantages?

1. The employer assumes risk for poor claims experience
2. The employer assumes additional administrative responsibilities to run the plan
3. It can be more challenging to budget

Through the power of shared responsibility (scale), the Captive puts more control (ERISA) in the power of the employer’s hands to retain the most predictable (keep what you don’t spend); share risk in less predictable areas (Captive layer) and fully transfer risk (stop loss carrier) where it is absolutely necessary.  The Captive insurance solution is self-funding with a twist – an innovative solution to rising costs.   
Gaunya, GBA, is an EBA advisory board member and principal at Methuen, Mass.-based Borislow Insurance. Reach him at (978) 689-8200 or mark@borislow.com.