Group Health Captives: Share the Risk—and the Wealth
Director of Employee Benefits Captive Practice
When I entered the health insurance arena in the early 1990s, I was bewildered by this new thing called the internet, and I saw two big issues in the group health insurance market: unsustainable costs and a lack of solutions to solve them.
Twenty-two years later, I think I’ve figured the internet thing out (sort of), but I still see the same issues plaguing group health insurance. Costs have continued to rise at a rate two to three times that of traditional inflation. Lots of employers feel ultimately helpless when it comes to identifying and implementing effective, sustainable ways to address the issue. But there’s good news to report: A solution has emerged, and it’s called a group health captive.
Health Captive: A solution to the rising costs of group health insurance?
A captive enables a group of entities to join together and form their own insurance pool. That means members share risk, and in doing so they create greater purchasing power, cost consistency, and long-term risk management. And, perhaps most important, a captive allows its members to essentially “own” their insurance. So instead of paying premiums to an insurance company (which in turn becomes profit for said insurance company), the group contributes to a shared dividend pool. That money is then rewarded back to members when there’s good performance. All the while the overall captive is still protected against large claims by an overlying insurance policy.
Another great feature of captive insurance is that it’s flexible enough to be used by all sorts of employers. If you’re feeling the pain of unsustainable health insurance costs, you probably fall into one of the following two groups. More important, you likely can be helped by the captive insurance solution.
1. Self-funded but not self-confident
Often larger in size, these employers operate their own health plans. At least in theory, self-funded plans are less expensive than the fully insured route (described below) because an added layer of cost is removed. But this in turn can leave employers more vulnerable to the unpredictability in claims. Yes, there is stop loss insurance, which can offer protection against catastrophic losses. But that can bring its own share of problems, especially when you consider that stop loss can cost up to 30% of an overall health insurance budget. Employers may typically see that the premiums they pay year after year for stop loss insurance far outweigh the actual large claim activity it’s designed to protect them against.
2. Stuck in the moment: the fully insured
Employers in the fully insured world pay a premium, fixed for a year, to an insurance carrier. The carrier bases the premium rate on the number of employees enrolled in a plan each month. But here’s the problem: Fully insured entities often take this approach not necessarily because they want to, but because they feel essentially stuck—either because of their smaller size, concerns over volatility in self-funding, or because their industry doesn’t allow self-funding insurance plans.
More specifically, these employers may not be able to access their data and thus don’t have the tools to create meaningful risk management strategies to impact plan performance. But note that even if they did have such access and employed strategies with good results, it wouldn’t necessarily have a long-term positive impact on their cost outlook. On top of that, with the implementation of the Affordable Care Act, these organizations have now seen even greater limitations on what they can do, along with additional fees and taxes associated with managing their plans.
The moral here?
If you’re an employer interested in controlling more of your own destiny and breaking from established patterns that ultimately don’t serve you well, captive insurance could be the answer. Much like the internet was to me many years ago, the captive solution is new and different. But it also has the potential to become a valuable option, one we can scarcely imagine functioning without. Just like the internet.
This information was featured in a BizInsights article, published on August 17th, 2016.