Why Captive Health Plans Make Sense
July 18, 2019 by NADCA in Industry News
Employers continue to see their fully-insured plans costs skyrocket with no end in sight. The worst part is there is little transparency on why they are receiving double digit increases on their medical plans at renewal. Employers are looking for alternative solutions that will help stabilize costs. Has your benefit consultant suggested self-funding as an option for your health plan? Self-funding is the most efficient way for an employer to provide health benefits. However, self-funding can be volatile for mid-sized employers. Stop-loss captives, one of the fastest growing segments of the employee benefits market, have proven to be an effective way to self-fund and gain control of costs without the associated volatility. The key with looking at any type of alternative funding is you need to work with an experienced broker that can give you proper guidance in your review of these options.
For years, insurance companies and benefit brokers would advise employers with less than 100 not to self-fund. However, since the ACA (Affordable Care Act) became law, insurance companies and stop-loss carriers have begun to create alternative funding products. Some examples that are becoming popular are Level-Funded Programs, Partially Self-Funded Plans, and Health Insurance Captives geared more for the small companies.
Level-funding your health insurance is a way to “dip your toe in the water” for those small companies wanting to take on some risk. Level-funding works just like a fully insured plan as you pay a fixed premium every month. However, the premiums you are paying are split into “two buckets”; fixed costs (administration fees, insurance costs, etc.) and your expected claims. At the end of the year, if you spend less on claims than the underwriters predicted, you will get a refund (depending on contract it could 50% to 100% of excess). For example, let’s use a 50 life company that has annual premium of $500K. In this example, of that $500K of “premium” underwriters will say that $250K is your fixed costs and $250K is your claims bucket. At the end of your contract year, if you run $200K in claims, after runout (typically 3 – 6 months after contract ends) you will be eligible (depending on refund percentage) for a $50K premium credit. If you run $300K in claims, you don’t have to pay any more than the $250K, so it’s a favorable type of contract if properly implemented. There are some disadvantages to a level-funded program; fixed costs are usually higher and you do not have control over the plan design like you would if you are partially self-funded. Level-Funding is a good opportunity to move away from fully-insured but it does not have all the benefits of self-funding.
Partially self-funding (or self-funding) can even be more advantageous than a level-funded program. In a self-funded program, instead of paying a fixed premium monthly (like fully-insured and level-funded), you would pay for fixed costs (15-30% of overall cost of program) monthly and pay your claims by your employees administered by a TPA / Insurance Carrier. The key for smaller companies is to have the proper insurances in place to protect your company against catastrophic losses. Where companies can benefit is, over time, the law of averages shows that a company will spend less when they are self-funding than they do in a fully-insured program. In a self-funded program, the money stays with the company until the claims are incurred versus level-funding where you pay your “premiums” monthly and get a percentage back if you run well. Like the level-funded example above, if your expected claims are $250K and you only run at $200K, in a self-funded program you would have “paid out” $50k less in claims throughout the year then you would have in fully-insured or level-funded program.
Better cash flow for a company, plus many other advantages such as:
• Transparency – claims data to review monthly
o Set your medical insurance benefits like you want
o Use claims data and work with broker to find better ways to control costs
• Simplicity – Working with the right partner takes the worry out of medical insurance and lets you focus on growing your business
There are even more advantages for smaller groups to participate in a health insurance captive. You get all the advantage listed above in a self-funded plan; Transparency, Control, and Simplicity but you get even more. You can “pool” your risk with other like companies to spread your risk and potentially receive a “dividend distribution” based on the performance of the captive.
Participating in health insurance captive allows you to partner with other like companies to buy your health insurance like a Fortune 100 company. Even with just 50 employees you can buy your health insurance like a large company. You will spread your risk with others to help smooth out the bad years and you have total control of your offering. You can choose what type of plan you offer, what network of hospital and physicians you use, and what pharmacies you want to use. You have total control of what works best for your employees. It doesn’t matter if you are in New York, California, Michigan or Texas. Working with a captive will allow you to take control of your health care and tailor a plan that’s right for your company.
If you are interested in taking control of your health insurance program please feel reach out to our NADCA sponsored Employee Benefits Broker, Randy Bailey.
Employee Benefits Broker