It's easy to understand why many large firms (1,000 to 5,000+ lives) opt for self-funded healthcare plans - they can be an effective way to mitigate the escalating cost of healthcare. According to Kaiser, 2010 premiums for family coverage under fully insured plans were $14,678 versus $13,903 under self-funded plans.1
In today's economy, $700 per employee can be a sizeable savings that has a direct impact on a company's bottom line.Midsize firms (100 - 1,000 lives) have been more reluctant to take the self-funded route. While 93 percent of firms with 5,000 or more employees have self-funded healthcare, only 58 percent of midsize firms chose this option.1
To many firms, the cost of administering a self-funded plan, coupled with premium payments for stop loss coverage to cap their risk may seem more costly and complicated. Taking into account these considerations, most mid-sized employers do not deem themselves to be good candidates for a self-funded health care plan.
Captive Stop Loss May Be an Option
A small but growing number of midsize firms have found that by joining forces with other like-minded employers, they can achieve cost savings for self-funded health care plans similar to those enjoyed by larger-sized companies.
In fact, small-to-midsize employers are driving growth in self-insured health plan enrollment. Over the previous five years, membership in self-funded insurance plans grew 11 percent while enrollment in commercial risk plans fell 13 percent according to Mark Farrah & Associates, a data aggregator for the healthcare industry.2
Typically, these companies work with their broker or a third-party administrator to bring together companies in the same industry or companies that share common business characteristics to create a Captive Stop Loss arrangement. Captive Stop Loss groups require a pooling of risk with other insurers to achieve critical mass and stability.
Different structures have evolved from a single pool to a layered approach in which most of the risk sharing occurs in the second layer. These group captive programs combine the advantages of retaining risk while acquiring group purchasing power for reinsurance or excess insurance.Companies using this approach can significantly increase their ability to realize underwriting savings and reduce their health costs.
For employers who are already self-funding their health care plan, the Captive Stop Loss option adds an additional level of insurance protection against catastrophic losses that can otherwise impact their business operations significantly. Once a captive is set up, the employer participants purchase their stop loss insurance through a fronting carrier and use the captive as a reinsurer for the risk.
The fronting carrier thus provides an excess layer of insurance protection to the captive coverage. In the short term, this type of arrangement helps minimize administrative costs. In the long term, captive arrangements can increase the buying power of each company participating and help each company realize underwriting savings that can reduce their health care costs.
In some cases, participating companies may also benefit from investment returns on their capital contribution. The captive can also provide a primary layer of medical stop-loss coverage that is used before tapping into traditional stop loss insurance. This can help employers avoid the financial impact of costly claims.
Three Layers of Risk in a Captive Stop Loss Arrangement
Within a group captive, there are commonly three layers of risk. The first layer is absorbed by the employer, who is issued a stop loss policy that is individually negotiated and underwritten. In this arrangement, deductibles can vary and each employer maintains full control of their self funded healthcare plan in this arrangement.
The captive absorbs the second layer of risk by reinsuring the risk for all participating employers in the captive risk pool. All employer participants share in the economic results of this layer of coverage between each employer's specific and aggregate retentions in their stop loss policy and the group captive's specific and aggregate retention.
Deductibles can vary. The third layer of risk falls upon the shoulders of the fronting carrier that writes the insurance and reinsures some of the risks to the captive. This carrier will cede a portion of the policy premium to the captive, but the carrier is ultimately responsible for paying all covered claims under the stop loss policy.
The fronting carrier also provides the captive with specific and aggregate retention for its second layer of risk. A Captive Stop-loss arrangement isn't right for every employer. The best candidates include companies that are willing to implement aggressive preventative and wellness programs to control health care costs, and are looking to join other companies that are committed to aggressive cost control measures.
Self-insurance has been an effective alternative for employers to provide healthcare benefits to employees for more than three decades. As we enter this new season of healthcare reform, self-funding will continue to be the leading method of funding healthcare - offering employers flexibility, efficiency, and control.
For those employers committed to providing quality healthcare coverage and investing in strategies to control healthcare costs, there are now additional opportunities to participate in the financial savings generated by assuming a portion of the medical stop-loss coverage through a captive insurance company.
About The Author
Burt Wilson is Sr. Vice President, Captives, Chartis Accident & Health Corporate Benefits, with responsibility for delivering Medical Stop Loss Group Captive solutions to the small to mid-size employee benefit market. His background includes tenures as President of Medical Excess and as President of New Life, Inc.1 "Employer Health Benefits," Kaiser Family Foundation, 2010.2. Mark Farrah Associates, 2010.