How Captives Can Play a Role in Controlling Employer Healthcare Costs

One of my clients is frustrated. She has spent the last few years building a company that would make anybody proud. The employees are motivated, loyal and well compensated. The corporate culture is entrepreneurial and encourages personal decision-making. It’s a destination for talent and has grown to more than 100 employees. We just successfully negotiated a medical insurance renewal at a relatively small annual increase.

So why is she frustrated?

Simply put, healthcare costs continue to be one of the largest expenses for her company. Her fully-insured medical carrier provides limited information about what’s driving up her particular program premiums. They provide no effective cost control strategies and no real opportunity to fully benefit from her employees’ positive claims experience and wellness activities. The private exchanges currently in the market add an additional layer of administrative expense, shift costs to her employees, and don’t really address the underlying costs of healthcare.

Unfortunately, she’s not alone. Now more than ever, employers are looking for ways to better understand how their insurance premiums are spent and how they can benefit from controlling costs in their health insurance programs. For many of them, healthcare expenses have now become their second largest expense behind payroll. To remain competitive, they’re looking to actively manage healthcare expenses and not rely on the cost-shifting strategies of an insurance carrier or private exchange.

What can employers like my client do?

More and more companies are self-funding their employee healthcare plans. In fact, over 60% of all US workers are now covered by self-funded plans, and 6% of employers with fully insured plans say the additional taxes and fees resulting from the Affordable Care Act will encourage them to convert to a self-funded plan at renewal. Unlike fully insured plans, self-funded plans give employers full access to their plan data. Claims data in a fully insured plan may not be made available, so employers don’t know where their healthcare dollars are going. More importantly, once they see where their dollars are going, they can’t adjust accordingly. The claims data available in a self-funded plan enables employers to conduct early intervention, customize coverage and target wellness programs.

A common misconception among employers is that they are not large enough to self-fund their health insurance program. To be sure, large employers have bigger cash reserves to take on the financial risk of being self-funded. After all, one catastrophic employee medical claim can cost tens to hundreds of thousands of dollars. It wouldn’t be advantageous for a smaller employer to take on such a big financial risk—if they’re taking on 100% of that risk. Having said that, smaller employers aren’t without hope; with the right risk strategy and stop loss protection, they can reduce their healthcare expenses and get the tools and information to make better, more educated decisions. Many of our smaller clients have already discovered that the right self-funded solution provides them with a competitive benefits advantage. Those employers who haven’t yet transitioned to a self-funded plan or haven’t found the risk management strategy that works for them may benefit from an Employee Benefits Captive.

What’s a captive and how does it work?

A captive enables an employer to self-fund its insurance program but as part of a pooled arrangement with other similar employers. Each participating employer establishes its individual “buy-in” level of self-insurance, but all participants in the captive collectively share the financial/claims risk. Captives can even yield dividends for participating employers.

There are many ways an Employee Benefits Captive can be structured; the one I recommended for my client is for employer groups ranging in size between 75 and 400 employees, delivered in partnership with Scott Captive Solutions. For some employers, the captive's attachment point, a.k.a. individual stop loss limit, may be $25,000 per occurrence. Another employer's optimal retention may be $75,000 per occurrence. All of the individual companies contribute premiums to share claims risk above their individual attachment point, up to an excess risk layer set at $250,000. Any claim that exceeds the excess risk layer is covered by the stop loss insurance policy offered by the insurance carrier (in the case of this example, AIG). All captive members pay monthly premiums based on their attachment point, but at the end of the plan year, any surplus premiums are returned to the captive member companies via “dividends” on a pro-rata basis.

By participating in a captive, my client is able to collaborate with like-minded companies on health plan issues, share what works and what doesn’t, and become an incubator for best practices. The power of this type of collaboration helps smaller member employers plug into the type of health risk management programs typically only available to large companies.

Is a captive a good idea for your business?

The financial benefits of an Employee Benefits Captive may take time to materialize and therefore requires a long-term commitment to being actively involved in the management of your company healthcare expenses. Employers that are more comfortable making year-to-year decisions with their fully insured carriers may want to consider a different employee benefits strategy.

Members of an Employee Benefits Captive often share similar philosophies: they’re forward-thinking, entrepreneurial and interested in real cost-controlling solutions. Employers interested in this type of risk management strategy should talk to an employee benefits broker who can offer expertise and solutions in captive management. They’ll be able to determine, based on loss experience and risk tolerance, the optimal level of self-insurance for your company. The captive/health platform should be built to control cost and include risk management programs that target the high-cost services that drive healthcare increases.

For more information about captives or anything covered in this blog, please contact Marc Strickland, Vice President of Employee Benefits at Woodruff Sawyer, at (503) 416-7753 or mstrickland@woodruffsawyer.com.