The placement of medical stop-loss insurance in captives is gaining traction, as ageing workforces continue to put pressure on employers that must shoulder claims made through healthcare plans...
The placement of medical stop-loss insurance in captives is gaining traction, as ageing workforces continue to put pressure on employers that must shoulder claims made through healthcare plans.
“We have been working with clients on alternative risk financing strategies for their employee medical coverage for over 10 years and we are experiencing increased interest in the use of medical stop-loss captives, both for self-funded employers and risk bearing providers,” comments Beecher Carlson senior vice president Peter Kranz.
He says that employers want a more favourable means of funding and expensing expected claims, and to obtain saving benefits—both claims and risk management—while managing income tax liabilities.
But that divisive piece of legislation, usually referred to as ‘Obamacare’ after the current US president who was its champion, has given employers another reason to look at captives for medical stop-loss insurance.
Kranz says: “While we have been working on alternative strategies for over a decade as the ballooning cost of healthcare hasn’t been a new concept, since the Patient Protection and Affordable Care Act (PPACA) was passed there has been increased activity in this space, in part due to the spotlight shone, by virtue of the legislation, brightly on the increasing costs but also due to the concerns about the impact of PPACA on future costs—private industry’s response to PPACA has been an expectation of continued cost increases.”
The 2013 Aegis Risk Medical Stop Loss Premium Survey, which represents 224 employers covering approximately 450,000 employees with more than $145 million in annual stop loss premiums, revealed that the average premium in the US ranges from $97.43 per employee per month for a $100,000 individual deductible to $12.19 for a $500,000 individual deductible in the same context.
Just over half of the survey’s respondents reported at least one claimant in excess of $500,000 paid in the last two policy years, while 14 percent reported a claimant in excess of $1 million.
On top of this, the PPACA required the removal of any individual lifetime maximums on underlying health plans, increasing the liability covered by medical stop-loss.
In response, 97 percent the respondents to the Aegis survey reported an unlimited lifetime maximum, an increase from 13 percent in 2010, before the healthcare reform requirements came into effect.
The captive insurance market has reacted to this increased interest with new products and services, to both capture their fair share and attract those employers that may not be capable of setting up their own pure captives.
“The primary barrier that exists in a company setting up a captive for medical stop-loss is critical mass, cutting two ways—predictability of experience weighting and amortisation base for the retained loss and risk management expense” says Kranz.
“As a general rule, a medical stop-loss captive for fewer than 750 employees (or 1800 members) tends to be more challenging. The availability and structure of aggregate captive reinsurance, as well as the availability of captive surplus to support the programme, can present challenges.”
Smaller companies need to pool their risks with other entities via group captives or other similar types of aggregating facilities, according to Kranz. “As you scale up the size spectrum utilisation of a pure captive becomes more predictable and easier to structure with third party stop-loss protecting against significantly adverse volatility while retaining the upside of better claims management and experience.”
“In addition, moving to a self-funded plan, whether utilising a captive or not, the ability to negotiate favourable provider payment contracts can play an important role—with a preference for fixed payment (also known as capitation) over fee for service models.”
Indeed, the group captive model is a solution that providers believe is well-suited to the job.
AIG Benefit Solutions and Scot Captive teamed up recently to launch CAPvantage Select, a national group medical stop-loss captive programme.
“Group captives allow employers to address the volatility, non-transparency and cash flow concerns often associated with the traditional self-funded and fully insured market,” commented Pim Jager, vice president at Scott Captive Solutions.
“At the same time these group captive programmes provide tools and partnerships with best in class vendors to help employers better manage the health risk in their population and drive better financial outcomes in the long term.”
Bob Hosler, national sales director of stop-loss captives at AIG Benefit Solutions, added: “One of the major challenges we see facing mid-market employers today is the rising cost of employee health coverage and determining a cost-effective approach to maintain their employee benefit programmes. CAPvantage Select was developed to specifically meet this growing need.”
“The group captive structure is proving to be popular with smaller entities seeking to self-insurance medical stop-loss,” says Kranz.
“Group captives, or other types of aggregating facilities, allow these smaller companies to obtain the benefits of scale and risk sharing, which mitigate the challenges posed by not having critical mass on their own. A medical stop-loss programme with only 500 covered members could ‘blow up’ with just one bad claim, whereas a pool of 5000 is far less susceptible to such adverse experience.”
Another solution of the group ilk to recently hit the market is BevCap Health, a heterogeneous group captive and the first cell of Hawaii-domiciled BevCap Sponsored Captive Insurance
Originally founded in February 2013 with a standard sales company out of Odessa, Texas, BevCap Health is now comprised of five additional participants: Krey Distributing in St. Peters, Missouri, L&F Distributors in McAllen, Texas, Jordano’s in Santa Barbara, California, Andrews Distributing in Dallas, Texas, and TriEagle Sales in Tallahassee, Florida. It now covers more than 3000 employees.
Jason Dixon, a senior consultant at US programme manager BevCap Management, says: “[BevCap Health’s] benefit strategy allows fully-insured members to achieve the transition to individual employer self-funded health plans, and current self-funded clients the ability to optimise data-driven, innovative ideas through peer exchange. The standard market simply does not provide for this high value strategy.”
“BevCap Health combines the advantage of economies of scale and leverage. Leverage enables our clients to procure national health plan administration service partners at a reduced cost versus buying health insurance one-by-one from the standard market.”
“‘Unbundling’ of the service providers, choosing only the best in class, yields a transparent and accountable service model allowing our distributors the ability to directly monitor cost and obtain critical data to measure and improve healthcare plan performances and reduce expenses.”
Despite the attraction of using captives for medical-stop loss insurance, regulators are weary of employers of small workforces taking them on.
The District of Columbia Department of Insurance, Securities & Banking’s Dana Sheppard has gone on record to say that his state is not in their favour, following passage of the PPACA.
The associate commissioner said: “Regarding medical stop-loss captives, Washington DC is not in favour of allowing small employers located in DC to self-insure their healthcare risks, including the establishment of medical stop-loss captives, if their motivation for doing so would result in removing young and healthy persons out of the [district’s PPACA healthcare exchange], and leaving older less healthy employees in the exchange. We believe this will turn the district’s exchange into a high risk pool, a result the district would obviously wish to avoid.”
“Regulators are concerned that large scale use of self-funding will remove better risks from the federal and state risk pools and result in adverse selection and higher premium rates for members of those pools,” says Kranz.
State regulators are also worried that the critical public policy benefit that is health insurance will be largely unregulated.
“ERISA (Employee Retirement Income Security Act of 1974) pre-empts state regulation. While there is some legitimacy to the concerns, they may be more politically motivated,” says Kranz.
“State regulators have longed for ways to defeat the ERISA pre-emption. High priced coverage in state insurance pools undercuts the [US President Barack] Obama administration’s promise of low cost coverage.”
But Kranz remains unconvinced: “We believe the use of a medical stop-loss captive provides a private market solution that is properly regulated through PPACA, domicile insurance regulation, reinsurer regulation, and state benefit and payment laws.”
Determining whether a captive is the right fit for an organisation is more of a control question than cost, according to Dixon.
“Our clients want to understand what is driving the year over year cost increase, and have the ability to make change to help ‘bend the trend’. The financial stability of the organisation does need to be taken into account to determine if a captive is the best solution. However, the size of an organisation does not determine their financial stability, knowledge of the insurance landscape, or their desire to take back control of their rising cost of health insurance. BevCap members get to own the healthcare process (risks and costs) from beginning to end.”
