Interest in self-funding and group captives will grow significantly as medical costs continue to rise and the uncertainties related to ACA healthcare reform threaten the cost and amount of control that employers are able to maintain within more conventional insurance structures. Hopefully, the legislative marksmanship relative to healthcare reform will also sharpen to the point of actually hitting the correct targets...
Kahn: Kirk? You’re still alive my old friend?
Kirk: Still, “old friend!” You’ve managed to kill everyone else, but like a poor marksman, you keep missing the target!
Kahn: Perhaps I no longer need to try, Admiral.
Many of you will recognise that famous dialog from the movie Star Trek II. Now, just envision the same conversation in the context of the US healthcare system under the Affordable Care Act (ACA), and substitute Kahn for US President Barack Obama and Kirk for much of the insurance industry and you might just have a reasonable view of how the new order for healthcare access has progressed this first year from an industry perspective.
President Obama has met one of his platform objectives—increasing access to healthcare by way of the ACA. However, like the poor marksman mentioned above, the act completely misses one the primary targets: achieving sustainable affordability. Now in the autumn of his presidency, and with a rapidly increasing level of lameness (not covered under ACA), perhaps Obama is no longer motivated to try.
Universal access needed to improve. One of the primary problems inhibiting access is the cost that is charged for care. The root problems of healthcare pricing are much too complex to breakdown in this discussion, however, I feel comfortable in saying that, over the years, buying healthcare in the US has denigrated to a process that is similar to purchasing an automobile, the sticker price has no relevance to reality.
Many providers will charge a grossly inflated price knowing that they are likely to receive only 60 percent of billed charges from a commercial insurer (much less from Medicare and Medicaid) based on negotiated discounts.
The value of preferred provider (PPO) arrangements has also been reduced as competition and the demand for increased provider access has diluted the concept and value of in-network steerage. This further contributes to, rather than helps contain, the cost of healthcare delivery.
It should be noted that, under ACA, Medicare/Medicaid money is distributed to providers based, in part, on size. Larger health systems having more physicians and treating more patients will receive a bigger slice of the federal pie.
Consequently, bigger healthcare systems are purchasing smaller systems and independent specialty practices at a record rate allowing them to pyramid internal income from all phases of healthcare, increase market control and receive more in governmental funding.
As healthcare systems consolidate and grow, the value of differing pricing structures (and PPOs) will become more irrelevant. What sense does it make for several different people having the same medical condition, going to the same providers, within the same healthcare system to be charged completely different costs for the same treatment simply because they have different medical insurance cards?
The solution for affordability is not simply increasing access to insurance and then redistributing costs and providing low-income subsidies. This approach is ‘cost spreading’ as opposed to ‘cost solving’ and only provides a temporarily disguise for the problem as opposed to permanently resolving it. Socialised cost shifting is analogous to a governmental Botox injection. In time, the temporary beautification will wear off and a deeper financial problem will be revealed.
Suppressing the symptoms should never be confused with providing a cure for deteriorating beauty. The cost of insurance is a direct reflection of the expected costs charged for healthcare. The only way to make health insurance more affordable is to make healthcare itself more affordable.
The cost solution will only come from developing a more realistic, systemically consistent single referenced–based approach to pricing from providers and also having a reimbursement formula that acknowledges the level of patient outcome quality performance of the provider.
Controlling what you can
While there is no immediate solution on the horizon for mitigating the cost of healthcare, the logical focus for most employers will centre on mitigating the cost of health insurance provided to employees.
Self-funding has long proven to be the most efficient form of financing insurance. As mentioned above, the cost of health insurance is largely based on the expected cost of claims, plus carrier overhead and profit. By self-funding, an employer only pays for the actual cost of claims, related administrative overhead and stop loss insurance. What the employer doesn’t pay in claims is kept, either in general assets or in a designated trust to offset future plan costs. The ‘profitability’ of the plan accrues to the benefit of the employer rather than to an insurance carrier. This typically translates to lowering the ultimate cost of benefit delivery to employees.
Employer self-insurance has enjoyed tremendous growth over the past several years. At the beginning of the millennium, less than 48 percent of employers were self-funded. Growth exceeded the 60 percent level in 2014. A recent A.M. Best report predicts continued increases in employer self-funding and the medical stop-loss market fueled by ACA mandates for the forseeable future.
Captivating opportunities for stop loss
As interest in employer self-funding increases, market momentum for stop-loss captives is also rapidly increasing. The two basic types of captive structures that comprise this market segment are large single-parent captives and group captives.
Large single parent captives
Most employers large enough to have an existing captive are already self-funding their employee healthcare benefits. Many employers of this size previously did not purchase stop loss, but since the enactment of ACA and unlimited lifetime benefit maximums, they now purchase high (unlimited) levels of coverage and assume lower layers into their captive.
Stop-loss coverage by itself would not generate enough premium to justify forming a captive solely for that purpose, however, it can be used to effectively expand the use and enhance the efficiency of an existing captive. It is important to note that stop loss is not considered to be an employee benefit coverage and so not generally considered to be unrelated (third party) business by the Internal Revenue Service for tax purposes.
Group captives
There generally are two types of group captives: heterogeneous and homogeneous (like industries). Both types strive to replicate the risk profile of a larger employer to spread risk, promote stability, and achieve cost savings from different service providers.
Heterogeneous groups require a larger size in order to achieve appropriate spread of risk among diverse participants. Typically ‘open market’ programmes in terms of membership participation.
As homogenous groups are more industry-specific in their composition, they can be smaller as the underlying risk and underwriting profile is similar. The required size to achieve an appropriate spread of risk is not as great as in heterogeneous groups. Group captives are especially effective when formed by closely aligned groups of like-minded employers within the same industry.
Risk retention groups (RRGs) are a form of homogenous group captives. RRGs are only authorised by the Federal Liability Risk Retention Act to cover liability risks, but the potential exists for groups of employers participating in RRGs to form parallel group captives for medical stop-loss coverage.
Each employer purchases specific and aggregate medical stop-loss coverage according to its own risk appetite. The stop loss is purchased from the common insurer or reinsurer that will provide coverage to each member of the captive. The stop-loss carrier will then cede a layer within the collective stop-loss portfolio, attributable to all participating group members, to a captive owned jointly by all participating members. The actual captive participation level will be determined by the collective risk appetite of the insured members and can be structured either on an excess or quota-share basis.
Interest in self-funding and group captives will grow significantly as medical costs continue to rise and the uncertainties related to ACA healthcare reform threaten the cost and amount of control that employers are able to maintain within more conventional insurance structures. Hopefully, the legislative marksmanship relative to healthcare reform will also sharpen to the point of actually hitting the correct targets.
