In the fast-evolving landscape of healthcare and employee benefits, employers often find themselves navigating a labyrinth of choices and compromises. Health insurance serves as both a fundamental necessity for employee well-being and a persistent source of financial and administrative burden for employers.

Conventional models of health insurance—whether fully insured or self-funded—often leave employers feeling trapped in a never-ending cycle of cost escalation and reduced control. This sense of operational and financial impotence is precisely what the captive insurance model seeks to counteract.

Conventional Models

Let’s begin by examining the most commonly used traditional models, starting with fully insured plans, which have long been the default option for many employers.

Fully Insured Plans

For decades, the fully insured model has been the go-to solution for many companies. In this model, the employer pays a fixed premium to the insurance carrier, which assumes the risk. While straightforward, this approach often leads to higher premiums year-over-year with little to no justification offered, leaving employers powerless and frustrated.

Self-Funded Plans

As an alternative, some companies opt for self-funded plans, wherein they take on the risk and financial responsibility for employee healthcare costs. While this model offers some level of cost control, it is not without its pitfalls. Employers may find themselves exposed to large, unpredictable medical claims, which can cause significant financial strain.

In both the fully insured and self-funded models, the employer remains a policyholder, subject to the strategies and financial interests of larger entities. These models rarely align with the employers’ best interests, often resulting in a state of chronic dissatisfaction and financial instability.

Captive Health Insurance Model

The captive insurance model offers an innovative solution that upends the conventional healthcare insurance paradigm. Unlike traditional insurance where companies pay premiums to external carriers, the captive model involves a formal arrangement among like-minded companies to co-own an insurance entity. This game-changing arrangement transforms employers from passive policyholders to active stakeholders, each with a vested interest in the efficient performance and tailored management of their health plan.

Structure and Mechanics

Under a captive arrangement, companies pool their premiums into a shared fund, which is then used to pay out claims. Within ECCG’s captive program model, employers create what is essentially a “Goldilocks Zone” that provides stabilizing economies of scale with the social dynamic benefit of owner-member shared learning, problem-solving, and collaboration.This structural transformation sets the stage for numerous benefits that go well beyond cost-saving.

The Ownership Advantage

Control

Traditional models often leave employers feeling powerless. However, in the captive model, control is returned to the employers—the true stakeholders. This control extends from policy formulation to claims management and risk mitigation strategies. Member-owners can actively participate in shaping policies that directly align with their organizational goals, as well as the health and well-being of their employees.

Transparency

In many traditional models, opacity is the norm rather than the exception. Premium calculations and claims data often remain concealed, making it difficult for employers to gain insights into the cost drivers and opportunities for savings. In contrast, the captive model engenders transparency. Being an owner means having complete access to granular data, which, in turn, facilitates informed decision-making.

Financial Stability

The financial transformation engendered by the captive model is perhaps one of its most revolutionary aspects. In traditional models, insurance companies stand to gain from the profitability of the policies they sell. However, in the captive model, any such profits are channeled back to the member-owners. This change shifts the dynamics from a consumption-based model to an ownership-based one, inherently aligning it with the financial well-being of the employer members.

Enhanced Risk Management

One often overlooked benefit is the possibility for more targeted and effective risk management. Captive arrangements often come with data analytics tools that allow member-owners to identify trends and potential risk factors well before they escalate into costly claims. This proactive, data-driven approach not only mitigates near-term risk but also builds the foundation for long-term financial stability.

Employer Success Stories

To illustrate, Episode 5 of the Everlong Edge Podcast features an enlightening conversation between our Founder and CEO Doug Truax and special guest Terrie Ames, an employer who discusses her company ML Holdings’ experience. She reveals how joining the Longbow Employee Benefit Captive in 2010 led to an astounding 8-figure cost savings.

Case Study: Nursing Care Company Saves $166K Through Self-Funding in Everlong

Case Study: Automotive Company Saves $2.3 Million Through Self-Funding in Everlong

Beyond Financials: The Cultural Shift

Ownership within a captive model does not merely affect the financial bottom line; it also triggers a shift in organizational culture. The engagement and commitment that come from ownership often cascade down to create a more health-conscious work environment. 

Employers can employ specific wellness initiatives aimed at improving the health metrics of their workforce, which has a twofold benefit: reducing claims and enhancing employee productivity and satisfaction.

The Choice is Yours: An Informed Decision

The captive health insurance model provides an innovative alternative to the status quo. It elevates the employer from a role of passive consumption to one of active engagement and ownership. This is more than just an operational shift; it’s a philosophical one. Employers now have the chance to shape their destinies and those of their employees by taking control of their healthcare plans.

While the captive insurance model may not be suitable for every organization, the compelling advantages it offers cannot be ignored. 

Just as gold in the ground needs to be extracted before it has value, so too must a company’s health insurance. But, to extract that value, one must be more than a mere policyholder.

They need to be an owner.

Ownership brings not just control and transparency, but proactive risk management, and the freedom to make business decisions that directly improve their bottom line.

And therein lies the choice.

Continue leasing the “land” from the insurance giants or start mining the gold.

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HOW IT WORKS

Specific Stop Loss (or Individual Stop Loss): The Stop Loss Carrier and the Owner will agree to a threshold where once an individual member’s claims exceed that amount, the Stop Loss Carrier will assume responsibility for claims paid for services incurred by that member during the remainder of the contract term. The threshold is also known as the stop loss deductible.

EXAMPLE

Owner XYZ has 150 employees enrolled. Their Specific Stop Loss Deductible is $70,000.

Member A has claims that totaled $100,000

• Owner XYZ would pay the first $70,000 of claims
• Stop Loss Carrier would pay the remaining $30,000

Member B has claims that totaled $150,000

• Owner XYZ would pay the first $70,000 of claims
• Stop Loss Carrier would pay the remaining $80,000

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Getting the product right builds trust between you and the consumer. But what exactly does it mean to get the product right? With varied industries throughout the United States, is the “right” product available in a one-size-fits-all solution? Perhaps not in the way you think.

Think about the boom of Silicon Valley back in the 1980s. Though popular companies like Apple and Atari moved into the San Francisco Bay area a decade prior, it wasn’t until the 80s that the area became widely known as the technological hub it’s still recognized as today. But have you ever wondered exactly why that is? What did these companies do that differentiated them from other industries at the time? And what are they still doing that sets them apart from the competition? The answer lies within their business model.

Because life is always changing, innovation has to constantly move forward. Let’s circle back to Silicon Valley for just a moment. Apple didn’t invent the computer. The first computer was technically invented back in 1822 by Charles Babbage, who originated the idea of a general-purpose machine that could calculate mathematical tables. Babbage thought there was a better, easier way of calculating several sets of numbers than existed at the time. Though Babbage lacked the funding to see his vision come to life, he left a blueprint for future innovators to follow. And they did.

In 1890, Herman Hollerith developed the internal recording system we know now as IBM. In 1936, Konrad Zuse created the first functional modern, programmable computer. The first computer to be able to successfully store and execute a functional program was developed in 1948, and then in 1949, Electronic Controls Company – the first computer company – was founded.

So, Steve Jobs, despite being an influential person in the computing industry, was one of many who took the blueprint first introduced by Charles Babbage and in turn, found a way to simplify these existing products to meet the company’s customers’ current needs that fit into their lifestyle. This concept is still at play today. The iPhone 13 Pro Max, for example, has received superior ratings due to its camera and video recording capabilities. With TikTok and Instagram Reels becoming the new wave of social media marketing, is this design just a coincidence? No, it’s meeting the customer where they are.

Meeting The Customer Where They Are

Getting the product right doesn’t solely mean improving upon certain widgets and technologies. Rather, it’s about meeting the consumer where they are in a way that understands their needs. After all, if you design a product that no one uses or can understand, how much growth can your company expect to see? The return on investment will be nominal at best and at worst, it could ruin your company’s reputation within the industry. Going back to Silicon Valley for a moment, there’s a reason why E.T. The Extra-Terrestrial video game produced by Atari in 1982 has been voted one of the worst video games of all times: it wasn’t easy to play, it wasn’t easy to understand, and it didn’t give consumers the kind of experience they were looking for.

When developing a product, it’s useful to reflect on what companies have done and succeeded in doing in the past, but you can’t simply rely on that. You have to take the blueprint and adapt it to your own model. And that’s what we’ve done. At Everlong, we reimagined and redesigned the current captive model used in the business liability world, modified its structure and improved its performance, enabling us to turn back the tide of ever-increasing medical insurance costs caused by lack of control and transparency.

Insurance Trends and Captive Stability

Recent trends have shown a major shift in regard to self-funding insurance plans – where the employer assumes the financial risk for providing health care benefits to its employees.

According to the Employee Benefit Research Institute, “between 2013 and 2017, the self-insurance trend for large companies declined. A rebound started in 2018 but did not hold in 2020.” The COVID-19 pandemic was the primary cause of the derailment. Conversely, smaller companies began to see increasing value in alternative group health insurance options.

During the pandemic, many employers were forced to shut their doors or furlough their employees. Even when operations resumed, the hit many companies took was so severe that it took time to adapt. While many furloughed employees were able to keep their health benefits, the rising costs of health insurance premiums during a time of upheaval left much to be desired. In 2021, the annual cost of employer-sponsored health insurance for family premiums increased by 4% and according to SHRM, employers can expect an increase of up to 5.2% in 2022.

This increase, coupled with employers’ limited resources and decreased demand for products and services due to mandatory lockdowns and other pandemic-related issues, caused a wave of concern (and volatility) for companies, both large and small. As a result, and with smaller companies in particular, they needed a better way to purchase group health insurance, with an increasing number seeking the stability of captive health insurance programs.

With a health insurance captive, businesses can reduce their taxes, select vendors that offer affordable drug costs to their employees, lower premiums, and provide employees better access to wellness programs – such as mental health or telehealth services, both of which saw a dramatic uptick since 2020. Further, this ability to obtain the right services at the right cost fosters employee loyalty, lowering the attrition rate and in turn, reducing the need for continuous talent acquisition, costly new hire training, and resource-intensive onboarding.

These real-world examples of evolving needs coupled with innovation adoption demonstrate what happens when you get the product “right”. Just like the acceleration of the modern computer, innovation occurs when new problems, needs, and ways of thinking emerge.

For example, since the rise of telehealth services, there’s an emergence of new educational training and resources being taught to medical students and healthcare professionals all across the country to identify how to engage with patients and implement care in new ways.

And it all starts with identifying your customers’ needs and creating the right product or service to meet them where they are.

Commoditized Captives & Why “Elegance Without Warmth Is Arrogance” 

One of the most insightful business quotes is from Horst Schulze, former CEO of Ritz-Carlton, “Elegance without warmth is arrogance.”

Let’s unpack that for a minute.

During an interview with Knowledge@Wharton radio show, Schulze further explained that real excellence for the customer was individualization, rather than commoditization. And the reason why so many companies end up commoditizing, is their myopic focus on the bottom line. They became too big to navigate the nuances of their customers and made comprises on their product or service. As Schulze put it:

“Rather than make the soap a little smaller so you make more profit, eliminate your own mistakes. Work on your own processes and continue improvement and eliminate costs, consequently. Every time I eliminate a mistake permanently, I save money and improve my product at the same time.”

Let’s apply this line of thinking to the captive industry.

Perhaps this explains why some captive program managers rely on rate caps rather than proactive claims management? It should be no surprise then why rate caps are used most by the largest captive managers.

They have lost the ability (even willingness) to improve their product.

They will accept any employer and one size fits all because they’ve commoditized their captive structure.

You could even say there’s an arrogance to how they do business with their broker “partners.”

Here at Everlong, we believe in innovation and continuously improving our product over time. That’s why from the very beginning, with our first cell in 2010, we took the current captive model used in the business liability world, modified its structure, and improved its performance.

This approach continues more than a decade later and why we will never compromise our captive structure. Our commitment to excellence is another reason why there are no more than 50 members per cell within our high performance health insurance captives.

We don’t commoditize, we optimize.

Learn more about Everlong’s captive health insurance solutions.

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.

Stock Price Growth Since 2010

Source: https://www.beckershospitalreview.com/payer-issues/bcbs-parent-company-posts-1-3b-profit-in-2017-4-things-to-know.html

Captive health insurance provides a better way.

Better Control

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.

Better Protection

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.

Risk On

Prior to 2020’s black swan (low probability/high impact) event of the COVID-19 outbreak and subsequent shutdown of the economy, your clients had the luxury of being in a position to care less about volatility and risk exposure and only about the end result.

Today, however, your clients face economic headwinds that loom on the horizon, coupled with myriad tail risks that cannot be fully quantified or accounted for. It’s clear that the “risk on” days have fallen out of fashion and are largely behind us.

Risk Off

Looking toward the path ahead, we find ourselves heading toward a “risk off” environment, where your clients are increasingly demanding stability today and for the foreseeable future.
Within the backdrop of this new normal, it is not a matter of whether your clients will be impacted, but rather, how much they will be impacted and how well you have positioned them for success.

Stability Is The New Performance

Here at Everlong, we’ve developed a purpose-built high performance health insurance captive that’s nimble enough to navigate the foggy path ahead while designed specifically to help your mid-size employer clients achieve industry-leading stability and performance during these uncertain times—without having to cut benefits, shift costs to employees, or pay up.

MYTH:

• You need to have an ocean of employers to achieve stability.

FACTS:

• Everlong’s five-year average stop loss increase is just 3.9%.
• No risk of future lasers, with 100% transparency and maximum stability achieved.
• We achieve high performance and stability with no more than 50 members per cell.

And, after taking return of premium into account, our members are experiencing -6% renewals. As a result, your efforts transition from knee-jerk marketing and putting out fires to consulting on plan design and claims reduction.

With volatility and risk exposure increasing for your clients, consider not only what percentage of your book should be held in a captive, but the performance and stability of that captive.

We are partnering with forward thinking brokers that are providing their clients stability today.

Have you positioned your clients on terra firma?

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