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Mid-market companies are discovering that group captives can make self-funding employee health benefits a bit less daunting, experts say.
Captives can provide a primary layer of medical stop-loss coverage that would be tapped before traditional stop-loss insurance. Because medical stop-loss coverage purchased at higher attachment points generally is less expensive than that with lower attachment points, it could save the employer money while also providing protection from high-cost claims.
Self-funded employers that use a group captive for primary stop-loss coverage also can avoid “lasering,” a practice in which insurers set higher attachment points for certain plan members with costly pre-existing conditions.
“Small employers tend to find that self-funding is more of a risk because of the lasers,” said Kenneth R. Olson, president of Horton Benefit Solutions in Chicago. “They can be absolutely devastating for businesses' financial statements. So we've tried to craft the captive concept to provide reinsurance net of stop-loss.”
For example, if 10 companies each with 50 to 500 employees form a group captive to provide stop-loss coverage at attachment points up to $500,000, they most likely never will feel the impact of a laser, Mr. Olson said.
“Most lasers come in about $100,000 to $200,000. We almost never hear of a laser above $500,000,” he said.
To protect the captive from being hit with a sizable claim that would otherwise be subject to a laser, the captive can purchase disease-specific coverage, said Mr. Olson.
“We require all our members to buy first-dollar transplant coverage,” he said. “It is relatively inexpensive. For a group with 100 lives, you might spend less than $10,000 a year.”
But the peace of mind it provides to all employers participating in the captive is priceless, Mr. Olson said.
“If you have one transplant in your group, you're looking at several hundred thousand dollars. If this person is put on a transplant waiting list, there is an automatic laser. But with the transplant cover, there is no laser,” he said.
“If you take a look at the market, many midsize employers chose not to self-insure because they were concerned about large swings in cost,” said Sam Fleet, president of Charlotte, N.C.-based AmWINS Group Inc. “For them to go self-insured, it takes a huge leap of faith. They don't get any data from their carriers,” so they don't know how much risk they may be taking on.
But for group captives funding medical stop-loss coverage, “it's a brave new world. It's becoming one of the more popular ways to self-fund health benefits,” Mr. Fleet said.
The high cost of health care combined with the federal health care reform law is driving interest among mid-market companies in using captives for health benefits self-funding, said Rick Stasi, chief operating officer of the alternative risk division at Avizent in Dublin, Ohio.
“They say, "You've done a good job controlling our property/casualty costs, but we're getting clobbered on health insurance,'” he said.
On a related front, some protected cell captives that Avizent manages have been providing stop-loss coverage for about two years, he said. In fact, Avizent itself is a participant, using a captive to fund stop-loss coverage of its self-funded benefits program for less than 1,000 employees, Mr. Stasi said.
“The captive takes anywhere from $25,000 to $250,000,” depending on where the participating employer wants its stop-loss attachment point to be, and New York-based Chartis Inc. picks up any claims above that amount, Mr. Stasi said.
Like group captives that self-insure liability risks, virtually all of these new benefits captives require participating employers to engage in certain loss-control activities, such as health risk assessments and population health management, experts said.
For example, the captive the Horton Group is assembling, which will be managed by Berkley Accident & Health L.L.C., a unit of Greenwich, Conn.-based W.R. Berkley Corp., is requiring that 80% of the employees of participating employers complete a health risk assessment as a condition of remaining in the captive.
Because many participating employers previously did not have an incentive to offer wellness programs because their insurers did not give them credit against their premiums for engaging employees, “it's exciting for us to do population health management for the first time for many of these employers/ groups,” Mr. Olson said. “We expect a culture shift.”
“The benefit of the captive is not necessarily risk sharing, but health risk management,” said Mr. Fleet. “The objective is to become a zero-trend company. You can do that when you have a group of employers together that have the same goal and objectives.”
Three hundred years ago, if someone had said they had a captive in the Caribbean, they most certainly would have been a pirate. But today, captives are held by the vast majority of Fortune 500 companies and an increasing number of middle-market firms as an alternative risk financing vehicle.