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Shifting models could advance captives’ role in health care


FORT LAUDERDALE, Fla. — Rising health care costs, shifting care delivery models, escalating mergers and acquisitions activity and a potential new megaplayer are all complicating the health care landscape, but could also boost the use of captive insurers to cover health care risks, particularly group captives, experts say.

Stop-loss captives can be a valuable tool for employers navigating the evolving health care landscape because they enable employers to share risk with a larger population and insulate individual employers from claim fluctuations, experts say.

But Courtney Claflin, Oakland, California-based executive director of captive programs for the Office of Risk Services for the University of California, pushed back against the “fallacy” about group captives that the entire group will pay for one bad participant’s loss.

“Today, if you’re insuring, you’re sharing risk with everybody,” he said at Business Insurance’s World Captive Forum in Fort Lauderdale, Florida, on Thursday. “You just don’t know who you’re sharing the risk with. At least in a group captive arrangement, you’re sharing risk with people that have undergone more rigor in the underwriting process and you have a better chance to succeed.”

The university’s captives are also tools for revenue growth, he said. The university has both a single-parent captive called Fiat Lux Risk and Insurance Co. and a risk retention group called UC Health RRG that sells medical malpractice insurance to physicians and physician groups affiliated with the university’s medical centers, with about $80 million in medical malpractice premiums.

“The captive’s a muscle,” he said. “Exercise it.”

Health care costs are increasing despite the Affordable Care Act, and the sector is evolving, including the introduction of “increasingly complex” health care delivery models and significant mergers and acquisition activity, said Bruce Whitmore, senior consultant for health care and global captive practices with Willis Towers Watson P.L.C. in Tampa, Florida.

“When I look out and see the private equity money that’s coming into health care, I kind of call it Shark Tank for doctors,” he said.

Claims costs in the medical stop-loss sector are growing significantly, with the average large claim rising from $1.4 million to above $2 million in the past three years, said Tony Minnich, Minneapolis-based assistant vice president of captives for Tokio Marine HCC, which started a medical stop-loss captive in 2012 that now has more than $200 million in premium revenue. The largest claim his company has seen was about $24 million.

“We’re seeing the frequency and severity spike in a way we haven’t seen in history,” he said.

When the company launched its medical stop-loss captive, officials thought they would be covering self-insured companies with 300 or more employees, Mr. Minnich said. “We couldn’t have been more wrong. I think in large part because of ACA,” he said. “In leading toward affordable health care, it’s led to some of the most profitable times for carriers.”

Because of these issues, employers as small as 15 to 25 employees are looking to self-fund their health care risks, but “they are nervous about the volatility,” he said. “We group them together. If any one employer has a bad year, they’re not hit with a huge increase.”

“Plan for increased cost coming into this health care space, both frequency and costs are continuing to go through the roof, and there doesn’t appear to be a solution on the horizon,” Mr. Minnich said. “Plan for that increased frequency and you can do something at least to lessen that volatility by utilizing a captive and spreading that risk over like-minded employers. It’s not going to change immediately. It’s great that we’re able to solve more riddles than we used to when it comes to peoples’ health problems, but it’s not inexpensive.”

Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. announced last week that they are jointly developing a health care solution for their U.S. employees through an independent company free from profit-making incentives and constraints, according to a statement. The initial focus of the new company will be on technology solutions that will provide their U.S. employees and their families with “simplified, high-quality and transparent health care at a reasonable cost.” Berkshire Hathaway also established a dedicated medical stop loss division in 2016.

“I think that’s part of their long-term play — to try to change what’s going on in that space,” Mr. Minnich said.

While their technological might gives them “a real shot,” changing the health care sector will be a challenge despite the size of the companies, he said.

“Even 40,000 employees isn’t going to get too many health systems to change what they’re doing in a city of 4 or 5 million people,” he said, referring to the size of Amazon’s workforce in Seattle.

It appears the three companies are “not just looking to create a vehicle — what they’re really trying to do is to figure out is there a better way of doing it from the ground up with a no profit-margin idea,” Mr. Whitmore said.

The general assumption is that the trifecta would eventually establish their own health care provider network, Mr. Minnich said. “But I don’t think anyone other than (Amazon CEO) Jeff Bezos and (Berkshire Hathaway CEO) Warren Buffett really knows the details of it.”

“We don’t know what it’s going to look like,” Mr. Whitmore said. “I don’t think they do either.”

“They just have a lot of money and they want to fix health care,” Mr. Claflin said.