QBE Insurance Group
The Affordable Care Act has helped to accelerate interest in medical stop-loss captives, says Phillip Giles of QBE Insurance Group
How is the Affordable Care Act currently affecting captives?
I wouldn’t say that the US Affordable Care Act (ACA) was the driving factor but it has helped to accelerate interest in and the speed of growth of medical stop-loss captives. Self-insurance of healthcare benefits sustained considerable expansion prior to the ACA, from 48 percent of all employers in 2000 to more than 60 percent currently.
With some mandated provisions within ACA being preempted by self-funded plans, coupled with the financial efficiencies of self-funding, more employers, of all size ranges, have been encouraged to explore self-funding as an option. With that, the opportunities for placing stop-loss into a captive have and will continue to increase. There are also improved opportunities for smaller employers, as long as they are able to effectively establish a self-funded plan, to participate in group captives.
Has the ACA indirectly pushed SMEs to consider micro captives?
We really haven’t seen any smaller or mid-sized companies use micro captives for medical stop-loss coverage. The main reason is that many of the employers that would fit the profile of a micro captive (less than $1.2 million in captive premium) would either not be large enough to self-insure their health plan or would really not generate enough stop-loss premium to effectively offset the frictional costs associated with ceding a portion of the risk to a micro captive. Most of the smaller to mid-sized employers contemplating captive participation would be more likely to participate in a group captive.
From a captive perspective, how has technology had an impact on the healthcare industry? And how is the industry coping with this impact?
Aside from the more obvious administrative efficiencies associated with improved technology, there are several innovative ways employers are using technology to control the costs of healthcare. More data is now readily available than ever before. Large self-funded employers, and those using captives, can now mine large amounts of data to identify claim trends and large cost drivers. The use of external data to establish specific industry, geographic and demographic trends for comparison with the employer’s own data will help larger employers identify potential benefit plan modifications to address both claim frequency and severity.
The primary issue for data users will be how to effectively distil huge amounts of data into what actually becomes useable information for predictive modelling. In order to convert the data into useable information, the employer must have pre-established objectives and know what specifically it is trying to measure. These data benchmarks can include: underwriting probability, specific claims trends or outcomes within specific geographic areas, diagnoses, or even healthcare providers. The objective of the analysis needs to be clearly defined in order to know what information needs to be extrapolated. The resulting data can be applied to the benefit plan design to structure cost containment strategies.
The use of virtual care and telemedicine is also rapidly expanding. New technology has allowed hospitals and physicians to consult and remotely monitor patients, especially those having chronic conditions, in order to improve observation, and reduce less timely, more expensive office visits.
Congress recently added several Medicare payment codes for telemedicine and also designated $26 million in funding for telemedicine programmes for rural communities. In short, increased use of telemedicine is expected to save billions of dollars across the US healthcare system over the next two decades.
Those are just a few examples of how employers are effectively applying increased technology. It’s very important to note that increased technology also leads to increased risk exposure. One very problematic emerging risk is cyber security for private health information.
The US Department of Health and Human Services reported that more than 90 healthcare providers experienced significant data breaches in 2014 and large data breaches of Anthem and Humana earlier this year were well publicised. Stolen health records are considered much more valuable than credit card information. Some of these breeches have resulted in multimillion-dollar settlements and significant government fines.
The added cost of enhanced cyber security protection and liability insurance for providers as well as insurers, including self-insurers and captives, will contribute significantly toward increasing the ultimate cost of healthcare insurance regardless if this risk is transferred or assumed.
Has the ACA driven interest in captive insurance programmes among a broader range of industries and different-sized businesses?
In most cases, an employer’s industry classification is not as relevant in the ‘benefits industry’ as it is in the casualty industry in terms of deciding on an alternative risk structure. The employer’s industry class is an important part of the underwriting process, but not imperative in determining the risk financing structure. The primary factor is the employer’s size as expressed in the number of ‘lives’ covered by the health plan and the corresponding premium volume.
A principal requisite for an employer to contemplate participation in a healthcare captive is that it must first be able—large enough—to establish and maintain a viable self-funded healthcare plan. Once the self-funded plan has been established, the feasibility of assuming additional risk via a captive can be contemplated.
Most of the growth in healthcare captives has been with smaller to mid-sized employers participating in group captives. ‘Open-market’ heterogeneous group captive programmes target employers having between 50 and 250 lives and promote themselves as a conduit to transition from a fully-insured to self-insured structure.
There has also been significant growth with employers in the 500 to 1,500 life category forming tightly controlled homogenous (same industry) group captives with anywhere from six to two dozen member companies. This is the segment that I personally feel has the most viability in terms of achieving a meaningful economic benefit.
Another area where I have seen significant growth is with employers that already have an established captive to which stop-loss can be added. Employers that have an existing captive are likely to be self-funding medical benefits already. Adding stop-loss to an existing captive that primarily writes long-tail coverage, such as workers’ compensation or liability, can provide a protective ‘short-tail’ stability hedge by diversifying the captive’s risk portfolio.
Does medical stop-loss enhance the tax advantages of a captive?
Even though medical stop-loss can provide beneficial portfolio diversification for a single-parent captive, it should not be considered third-party risk for tax purposes. There are some differing opinions on this, but from my perspective I don’t see how it would qualify. Stop-loss provides coverage to the employer for its obligations—potential liabilities—relative to the self-funded benefit plan. Stop-loss does not provide any coverage directly to employees.
In other words, no third-party risk exists. Employee benefit insurance coverage that pays benefits directly to the employee or to healthcare providers on behalf of the covered person is however considered third-party risk by the Internal Revenue Service.
The distinguishing element is determined by whose liabilities are actually being insured: the employer’s or the employee’s. This was recognised by the US Department of Labor in a November 2014 technical release (US DOL No. 2014-01). Since I can’t give tax advice, and as there have been some conflicting opinions, my recommendation is to seek guidance from a qualified captive tax attorney.
