What You Need To Know About Captive Health Insurance
2020 was a tough year for employers. The pandemic and economic shutdown presented companies with multiple financial challenges, and rising health-related costs only added to the problem.
Even worse, many companies now report that group health insurance costs are climbing at a faster rate than corporate revenue. And it’s not just the employers that are facing increasingly harsh headwinds; employees are struggling to cope with payroll deductions for insurance premiums that are further eroding their ability to make ends meet.
But the problem of increasing medical costs and insurance premiums existed long before 2020, the pandemic just highlighted and accelerated the awareness and severity of the chronic issue.
Now more than ever, employers are seeking new and innovative ways to break through the headwinds of today by catching the tailwind of tomorrow’s insurance solutions, like captive health insurance.
What is captive health insurance?
A health insurance captive is a wholly owned subsidiary insurer that provides risk-mitigation services for its parent company or a group of related companies. The employer, along with other similar-sized enterprises, sign up to become participants of the plan. As member-owners of the program, the participants all agree to spread the risk, using a stop-loss insurance model. This approach is designed to keep costs down over time while also reducing volatility.
Understanding the captive layer
- Of your total specific stop loss premium, a high percentage flows through the captive layer
- this amount is your potential dividend
- Any claims over your specific deductible amount reduce your potential dividend
- Large losses are no longer part of the captive layer once they hit your specific deductible amount (plus the maximum amount for your self-funded retained layer)
- When you use all your potential dividend, you start using the rest of the group’s potential dividend as part of the captive layer shared risk
- When all potential dividend is gone, collateral is reduced until depleted
- When all collateral is gone, the captive has an aggregate policy that takes over
The origins of captive health insurance
Many of the first employers to use the captive model for group health insurance were larger scale companies. With a larger workforce, these companies had both an incentive to change (increased exposure to expensive medical costs) and the means to do so (big enough to resolve internally). For example, in the last Milliman Research Report, more than 3,500 organ transplants were performed in the U.S. last year. If we extrapolate this data, a 200-life group can expect about a 58% chance of incurring a very expensive organ transplant within a five-year window, which is an incredibly short window of time in terms of financial impact.
The health insurance captive model enabled big companies to reduce financial risk and the amount their employees needed to pay for healthcare – additionally supporting talent acquisition and retention efforts.
Over time, smaller companies saw the advantages of the captive model and adapted it to suit their needs. They were able to overcome their smaller workforce by joining forces with other similarly sized employers.
Why does captive health insurance work so well?
There are several key advantages to being part of a typical captive health insurance arrangement:
- Controlled drug costs. On average, approximately 25% of all claims relate to prescription drugs. With a health insurance captive, employers have the freedom to select a vendor of their choice (e.g., one that offers reduced costs and pays the rebates to the business).
- Reduced tax and admin costs. Recent history shows premium tax lowered by 2%, and admin expenditure decreased by 5% to 9%.
- PAYG model. Companies only have to pay for what employees use within the self-insured retained layer.
- Wellness program access. There is increased focus on improving the health and wellbeing of employees to help mitigate and manage claims.
Does captive health insurance offer better value than traditional group health insurance?
Traditional group health insurance is broken. Consider for a moment how stop-loss insurance actually functions. The reality is stop-loss carriers are working for the benefit of their shareholders. Hospitals, carriers, and sub-par brokers are conflicted because they all gain when prices go up (which they have for the past two decades). This means employers (and employees) lose.
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Captive health insurance provides a better way.
There are two approaches to cost control, reactive and proactive. Traditional group health insurance is structured to “respond” reactively. This happens when the unanticipated higher renewal increase occurs and employers are back to that cycle of shifting costs around or moving to another carrier who is “buying the business” for the next 12 months. As a result, this ends up creating an even bigger problem at the next renewal. Nothing is being done to determine or actually fix the problem of what is causing higher claims.
Health insurance captives are designed to allow for proactive claim reduction efforts through innovative solutions to control plan costs and improve employee health. This forward-thinking framework provides the employer with the ability to exercise more control over costs by proactively improving the health outcomes of their employee population, resulting in lower claims overall.
To reduce volatility (unpredictable fluctuations in the insurance premium) and mitigate risk exposure, the captive has an additional layer (or buffer) between the self-insured employer and the stop-loss carrier. This means that the risk to any high-cost claims is spread across all members within the captive.
Better Profit Potential
The captive pooling structure not only helps reduce volatility and increase predictability for operational and budget-friendly control but also functions to retain excess premium accrued by the group (paid as dividends), rather than passing those profits on to stop-loss carriers.
Is captive health insurance right for your business?
Let’s zoom out and take a look at the bigger picture. A health insurance captive program encourages longer-term strategic planning and is designed to provide financial savings over time (along with improved health and lower costs for the employees). So, it’s clear that health insurance captives are the better way, but it can be less clear why one captive program manager is better than another.
Every business is unique, and captives are not a “plug-and-play” solution. There are important differences to consider before selecting the right captive program manager, which we detail in Part 2 of What You Need To Know About Captive Health Insurance. Stay tuned!
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