Can a Captive Program set you free?
Apr 6, 2010
Many employers are faced with the rapidly growing cost of health insurance, second only to payroll. The average cost for family coverage is almost $13,000 a year. Larger employers are capable of taking control of their costs because most of them are self insured. Since this allows for transparency, large employers can implement wellness programs targeted at what their true problems are.
Most mid-sized employers are fully insured and do not have the product options that their larger counterparts have available. They do not know what claims they have or where their premium dollars go. The lack of transparency prevents them from taking control of the cost of health insurance.
So how can mid-sized employers change what they are doing? They can form what is called a captive program. A captive can be formed by a group of employers in an effort to reduce the costs associated with providing health benefits to their employees. These employers can come from a wide variety of backgrounds including existing risk retention groups, trade associations, franchises, portfolio companion of private equity firms, and clients of an agency or broker. Employers have been using captive programs for workers compensation for years with high success.
Each captive can be customized with its own terms, rules of participation, and financial structure, and the typical captive program takes 3 – 6 months to create depending on multiple variables. Launching a captive usually requires a minimum of 3 employers with a total of 500 or more employees.
Ideal employers should have 50 to 400 eligible employees for the company’s health plan and have the financial resources to assume a portion of the risk associated with their employee benefit plan. They should have forward-thinking management who are focused on taking control of rising health care costs and are willing to lead the change. They need to be able to communicate with their employees about the importance of being proactive in lowering the cost of healthcare. Allowing the smaller employers that were fully insured to go to a self insured plan has many potential advantages, and it allows them to spread out and share the risk with other companies in the captive program.
Employers can maintain a single plan across all states, which can potentially decrease administrative costs. Employers also have greater access to claim and behavioral data (in a HIPAA compliant manner), which allows them to influence employee activity and decrease costs. They can assemble an all star-team of vendors instead of being forced into the one-size-fits-all approach of the fully insured market. Employers can choose to eliminate or reduce some of the mandated benefits imposed by each state; this allows them to remove the cost of potentially unnecessary benefits. Often the employer with better than average risk profile achieves additional savings.
In order to protect themselves from financial loss, most self-insured employers purchase a stop loss policy that provides insurance against both large individual claims and an aggregation of small claims. The majority of large employers operate self insured plans due to the benefits previously described. Many medium sized employers want the benefit of a self insured plan, but dislike the inherent trade-off associated with such plans. Captive programs are designed to allow employers to maintain the majority of the potential savings associated with moving to a self insured plan without all of the volatility of a high retention stop loss policy
Captives accomplish this through a unique risk and reward structure. Each captive program can be structured for a group of employers with a common tie. Each employer retains the losses that are predictable for it. The group of employers share losses that are unpredictable for any one employer, but that are predictable for the group. The group transfers losses that are not predictable for either an individual employer or the group to the insurance carrier. Each employer retains its predictable portion of risk through a self insured retention. The employer limits this risk by purchasing a stop loss policy. The policy provides both specific and aggregate coverage. All employers within the captive program share in the economic results of the layer of risk between the individual employers’ specific and aggregate retentions and the groups’ specific and aggregate retentions. And the employers transfer the risk of unpredictable and catastrophic losses to the stop loss carrier.
This flexibility allows each program to be designed to meet the specific needs of each group of employers. Each captive program may have different employers’ self insured retentions. For example, one employer may insure $10,000 per individual, and a different employer can insurance a total of $250,000 per individual. The stop loss carrier will cede a portion of the policy’s premium to the group’s captive. The premium for the layer between $10,000 and $250,000 per individual is a large portion of the overall stop loss policy premium. This also means that the layer will likely contain a large portion of any cost savings associated with a self insured plan. In addition to the premium, the captive should be funded with collateral provided by employers of the captive program. The collateral is typically 15 – 20% of each employer’s comparable fully insured premium and can be provided by a letter of credit or cash. Unused funds in the captive are returned to the employers. The timing of the distributions is determined by each captive. The captive is acting only as a reinsurer of the stop loss carrier. It is not a primary or direct insurer of the plan, the employees, or the employer. The stop loss carrier is responsible for paying all covered claims, and then seeking reimbursement from the captive.
Each employer within a captive program will have its own benefit plan. The sponsoring employers should have a common stop loss carrier and reinsurer. The employers can reduce the cost of their insurance through the economic results of the captive. There are no shared plans; each employer maintains its own single employer plan. There are no group policies; each employer is issued its own stop loss policy. There are no group rates; each policy is individually underwritten for each employer.
There is no commingling of plan assets; each employer is responsible for its own plan assets. There is no joint or severable liability amongst employers for their self insured retentions. The employers are not acting as reinsurers; they are participating in the economic results of a reinsurer (the captive program).
So what is the value of being in a captive? The concept behind a captive program is simple: provide medium sized employers with the advantages of self insurance while decreasing volatility. Participation in a captive program is a means to an end. The real objectives are transparency, control, stability, and profit. A captive program can help achieve these objectives.
Participation in a captive program is not for all employers. Some employers may prefer to remain in a fully insured product, while other employers may be perfectly comfortable with the volatility of traditional self funded product. Captive programs are not a miracle cure for the high costs of health insurance.
They are a tool to help employers gain more control over their health insurance and reduce its costs. A captive program must be coupled with a long term commitment to reducing cost drivers. Implementing wellness programs and medical tourism programs are ways to address cost control measures.
There are two notable fallacies associated with health insurance. The first is that employers cannot control their health care costs. This is a view held by most. Without adequate data and transparency, it is probably a true statement. If an employer is fully insured, they likely don’t know the answers to the following three questions:
- How many times did your employees visit an emergency room last year, when they could have just as easily waited a day or two and gone to their PCP?
- How many of your diabetic employees are taking their prescriptions regularly?
- How many of your employees are current on their recommended cancer screenings and physicals?
- However if an employer had the answers to these questions, they could begin to build a program to control the underlying cost drivers.
The second fallacy is that discounts are everything. There is a myth in the industry that discounts are the single most important factor to lower costs. The logic is that without the steepest discounts, the cost of health insurance will be greater. Comparisons of discounts in isolation are useless as the analysis must also consider the amount of services consumed. It is the combination of unit cost, quality of care, and quantity of care that ultimately determines cost. The total costs of health insurance are not determined by the cost of doctor visits; they are driven by the health of the employers’ population and the decisions made by the population. Preventing the medical condition that creates a claim is always preferable to simply reducing the cost of the claim. A healthier employee population has many associated benefits including improved efficiency, higher morale, and fewer absences.
In closing, a captive program gives the ability for mid-sized employers to take advantages of being self insured as long as they are able to act upon the information they are able to glean by being self insured. The potential long term changes should benefit employees by lowering claim cost, lowering employee contributions, improving service, and increasing the commitment to improving health.
Mr. Morgan Pile, CES, GBDS is the President of Partners Insurance, which is a employee benefits consulting agency, providing employee benefits to help employers recruit, retain, and reward key employees. Mr. Pile has worked with national and international clients while doing business in Tampa, FL and Little Rock, AR. Morgan is a Certified Enrollment Specialist and a Group Benefits Disability Specialist. Morgan is focused on being a proactive consultant, actively managing plans and providing innovative solutions for clients. He keeps apprised of trends in the industry and focuses on wellness as a preventative cost control measure. His new focus is helping employers with wellness, and global healthcare design, implementation and administration to take control of rising health care costs.
Designing a health care plan is only the first step: managing it is the most important! Partners Insurance meets with clients to determine the strategy for the benefit plan design, then builds and negotiates on behalf of the client. Partners Insurance is a proactive insurance agency, helping you design employee benefit plans and wellness programs to help take control of increasing insurance premiums. We help by managing your health insurance every day, instead of being reactive at renewal.
Mr. Pile is one of the leading consultants in the medical tourism industry and one of the founders in designing captive health insurance programs. Mr. Pile also consults with insurance carriers, countries, hospitals, and other benefit consultants on how to take control and mange rising health care costs for large employers. Mr. Pile is also President of Axis Business Consulting which helps employers in all aspects of business consulting. For more information regarding Mr. Pile or Partners Insurance you can visit their web-site at www.mypartnersinsurance.com or www.axisbusinessconsulting.com. Mr. Pile’s email is mpile@mypartnersinsurance.com. Phone is 501-213-5980.