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Midsize employers join self-insurance pool to fund health care liabilities

Approach cuts volatility for individual firms

Midsize employers join self-insurance pool to fund health care liabilities

Senior care and services organization Kendal at Oberlin fully insured its health care coverage for about 200 employees for years, but CEO Barbara Thomas and her management team were not satisfied with the arrangement for the Oberlin, Ohio-based senior living organization.

“We just didn't have a lot of confidence that it would be sustainable or affordable for the long term,” Ms. Thomas said.

“We had a history in which premiums were constantly in flux without any basis to predict future costs,” Ms. Thomas said.

Given its small size, self-insuring Kendal at Oberlin's health care coverage was not a practical option, she said.

“As long as we were self-insured, we ran the risk of being exposed to catastrophic claims that could be financially devastating to our organization,” Ms. Thomas said.

Working with various consultants, including IMA Inc. of Denver, the nonprofit launched a new approach. First, it assumed a $25,000 self-insured retention per claimant. Then, joining forces with 10 other midsize Quaker, Mennonite and Brethren-faith-based senior living based organizations with about 1,500 employees, Kendal at Oberlin utilized a Delaware-based cell captive to self-insure claims of more than $25,000 up to $250,000 per claimant. The group operates as the Peace Church Health Insurance Program.

“This is a long-term strategy,” Ms. Thomas said, adding that the savings she believes Kendal at Oberlin will achieve will “enable us is to be better stewards of our resources to serve residents and staff, as well as influence better health outcomes.”


Other employers also are bullish on the group/captive concept.

“This was a good move for us,” said Marnie Young, director of human resources in Roanoke, Virginia, with computer software firm Meridium Inc.

Working with Lynchburg, Virginia-based Scott Captive Solutions, Meridium, which has about 180 employees, also, since 2011, has participated in a Vermont-based cell captive, which covers health claims in the $25,000 to $250,000 layer, along with several other midsize employers.

“This is a great way to achieve premium savings. Instead of paying premiums and, ultimately, profits to an insurer, we can take the savings we are achieving and use those savings to contribute to employees' health savings accounts,” Ms. Young said.

The companies are among dozens, if not hundreds, of employers, mostly midsize with 100 to 500 employees, that have banded together in recent years to self-insure part of their health care liabilities through group or cell captive. Simply put, a cell captive is a segregated or walled-off part of a larger captive in which a group of employers, perhaps in the same industry or with a similar loss experience, self-insure a layer of coverage.

“You don't put a 200-life software company with a 200-life trucking company,” said Sean Willoughby-Ray, vice president-practice lead, at Scott Captive Solutions in Greensboro, North Carolina. “Our experience is that similar risk profiles facilitate equitable risk sharing,” Mr. Willoughby-Ray added.

The employers pay premiums to the captive. A fronting insurer pays claims and then is reimbursed by the captive.

“It is a pooling of risk,” said Terry Richardson, a principal in Dallas with PricewaterhouseCoopers L.L.P. “These are programs managed by captive managers,” so participating employers do not have to figure out how to manage captives, he said.

Part of the motivation for participation is longstanding. Since the employers are effectively self-insuring their own risks, they are exempt — under a pre-emption provision in the federal Employee Retirement Income Security Act — from state laws that require insured health plans to offer certain benefits.

That exemption from state mandated benefit law cuts costs by roughly 1% to 2%, experts say, and just as significantly gives employers operating in multiple states the ability to offer a uniform benefit plan design.


“By self-funding, an employer has greater control in designing plans tailored to its employee population,” said Tris Felix, vice president of risk management in Denver with IMA.

“There is great savings in being able to have a single plan design for all the states in which the employer operates,” said Anne Waidmann, director human resource services at PricewaterhouseCoopers in Washington.

The Patient Protection and Affordable Care Act has given group captives another boost. The 2010 law imposes billions of dollars in new taxes that commercial health insurers must pay the federal government on coverage they write directly, a cost that will be passed on to policyholders.

Those taxes give employers “an even greater impetus to look at alternatives,” said Greg Stancil, an account executive with Scott Captive Solutions in Greensboro, North Carolina.

“Employers get away from that overhead” through self-funding through group captives, said Dave Ostendorf, a senior consultant at Towers Watson & Co. in Milwaukee.

Larger employers also have tapped their captives to provide stop-loss coverage on their group health programs. For example, Banner Health, a Phoenix-based health care system with about 37,000 employees, has used its Cayman Islands captive, Banner Indemnity Ltd., to provide stop-loss coverage, with the amount of risk assumed by the captive steadily increasing over three years.

“It was a transition to total self-funding,” said Dale Schultz, Banner Health's vice president of business health and risk management. “We can assume the risk ourselves.”

During that transition, Banner Health developed better management of claims as corporate units became more comfortable with self-funding, Mr. Schultz said. During the first year of the program, the health care system saved $750,000 compared with savings rising to $1 million in each of the next two years.

By totally self-funding, the annual savings — compared to buying coverage exceeds $2.5 million, Mr. Schultz said.

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