TAKING THE FRUSTRATION OUT OF WORKERS' COMPENSATION!
EMPLOYEE HEALTH INSURANCE CAPTIVES
TURNING PREMIUMS INTO PROFITS
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A practice that has existed for decades, the use of a captive for employee health insurance coverages, has exploded in recent years as employers seek to overcome the affects that rising health insurance premiums have had on their bottom lines. Employers have been moving to captives, particularly group captives, for a multitude of reasons, think of the Five C’s: Control, Claims, Coverage, Compliance, and Cost.
Employers have the feeling that they have no control over their health insurance program, how their employees use the health insurance, and how claim costs are contained. The use of a captive for employee health insurance gives an employer the ability to take back control as you will discover as we explore the rest of the C’s.
Unlike when you are fully insured, you will have easy access to your claims data. You may be able to receive some data from your traditional insurance company if you are large enough of a client that they are willing to provided it, however they usually do so reluctantly and with delays. In a captive, you will readily receive your claim information. It will not be employee specific, but you will be able to see what employees are being treated for, or diagnosed with, in general. That way, you can establish wellness programs to try and combat areas that may raise your healthcare utilization and therefore your premiums. It is simple risk management; if you see issues that are causing claims, you put programs in place to mitigate the impact of those issues, or better yet, put programs in place to prevent things from occurring, or at least occur less frequently and with less severity. This is where Employee Wellness programs can have an impact.
Being part of a captive, you are able to customize your insurance coverage program. You will not be restricted to one specific insurance company’s network, you will able to choose a network, or networks, you want from a multitude of options. This will allow you to choose based on locations, medical providers, or discounts available within a network.
You can also customize the coverage to control costs. If you see too many people using emergency room services, which are far more expensive, you can change your employee co-pay in the middle of the program year to a higher co-pay to dissuade them from doing so. If you see too many chiropractic visits, you can set limitations. The ability to restrict coverage to control costs, so long as you are still compliant with regulations, you will be able to do so. You can make these mid-program year changes by simply giving your employees written notice of the change.
Your captive manager, or broker, will make sure you are compliant with current regulations so you do not need worry about this. If you are self-insured, you must undergo Department of Labor exemptions for the ERISA benefits, the same would apply to the use of a single-parent captive. The Department of Labor still views a single-parent captive as being self-insured with regards to ERISA compliance. In both cases, your captive manager or broker, will assist you with compliance. On the other hand, if you are participating with a group health insurance captive, you do not need to file for exemption to meet that ERISA requirements.
As you can see, a captive has all the advantages of self-insurance when it comes to cost control, and if you are in a group captive, you have less regulatory compliance to worry about. However, there are additional benefits with a captive.
Right out of the gate, a health insurance captive has the benefit of being viewed as a self-insurance program, and therefore exempt from the Affordable Care Act (ACA) Insurer Premium Fee (Tax) assessed to all health insurance companies does not apply. What started out in 2014 as an $8,000,000,000 (yes, that is $8 Billion) ACA assessment fee to all health insurance companies, increases to $13.9 Billion in 2017, and will be indexed upwards from there. This ACA fee is applied to all health insurance companies based on a percentage of their premium written in the entire USA marketplace for traditional health insurance (not self-insured). As everyone knows, this fee is clearly being passed on to employers using their traditional insurance company programs.
Second, cash flow is more predictable. In the self-insured world, you must pay your claims as incurred, so if a number of employees seek service in one month, or an employee has a significant healthcare event, you would have to pay for those service costs, up to your stop-loss points, at one time. Therefore, one month may be a small payment and another large. With a group captive, can pay in monthly as the group would most likely be able to spread the claims payments over more employers so all you may have is your normal monthly premium payments.
Third, just as we discussed before, insurance companies make more profit from insuring the smaller, predictable and controllable claims than they do from covering the unexpected, catastrophic claims. Using captives, a single employer, or group of employers, can self-insure their smaller, more predictable claims and then utilize reinsurance, also known as Stop Loss Coverage in the health insurance world, to cover the unexpected, catastrophic claims. This allows the employer(s) to receive the potential underwriting and investment income back in the form of a dividend.
There two significant differences between health insurance captives and captives that provide general liability and workers’ compensation coverages: the claim runoff period and the funding for losses.
Claim Runoff Period
The claim runoff period used in healthcare captives is significantly different than those insuring liabilities. We discussed that in when you insure liability claims, that it may take years for them to be reported (remember IBNR) or settled. In the health insurance captive world, the captive is paying the claims as services are incurred, therefore there is no long period needed for claim reporting, development, settlement, or even IBNR.
For example, if you see your doctor on December 28th of 2016, and the bill arrives on February 1st of 2017, the 2016 program year of the captive takes care of the bill. Your follow-up visit on January 2nd that you also received the bill for on February 1st would be paid in the 2017 program year. All treatments, physician visits, prescriptions filled that occurred during a captive program year are paid by that captive year.
As you can quickly see, in health insurance, there is no long timeframe that you have to wait to see if or when a “claim” is made, or how long it will take to settle an issue in court. Therefore, there is no need for a five to seven-year captive program year closure timeframe. Healthcare captive programs typically have a three to six month claim run-off period where they do wait for the bill for services rendered during that program year. After that very short claim run-off period, a dividend will be declared.
Health Insurance Loss Fund
In a captive that insured things such as workers’ compensation and liability, it is common for the loss fund for a business be set at the predicted loss amount, as we discussed, the Initial Loss Fund. There In these captive, it is also common to have a stipulation that there be an amount that the business may also have to pay should the claims of the individual company exceed a certain amount, the Potential Loss Fund. These two combine to be the total maximum loss funding before the maximum aggregate retention point is reached and the excess reinsurance starts to pay for the claims. The funding for such a captive was outlined in Chapter 2-What is a Captive.
In a Health Insurance Captive, it is common to fund to the maximum aggregate retention. Funding your loss fund in this matter provides two benefits: first, collateral requirements will be reduced as the captive should have enough funds to pay for a worst case scenario; and second, since the likelihood of the aggregate payments that the captive has to pay for its retained claims is very unlikely, this makes it common to have underwriting profit and therefore dividends are frequently paid.
Based on everything outlined here, you can see why health insurance captives have become so popular. They typically are very competitive in terms of the premiums being paid upfront as compared to traditional health insurance, they can return underwriting profit dividends, and can provide the ability to control your plan more to your needs.
An additional note: There is a perception that your HR department will have an increased burden of work (and anxiety) when it comes to administering a self-insured or captive program. In reality, with today’s technology, the integration between your network(s) and your third-party claims administrator will feel more like a traditional health insurance company than you realize. Plus, your captive manager or broker should be able to assist in the administration and changeover. However, just as with changing any healthcare insurance company, you will still need to go through the process initially of changing “insurance providers”.
INTRODUCTION TO CAPTIVES
BENEFITS OF GROUP CAPTIVES
TYPES OF CAPTIVES
IS A CAPTIVE RIGHT FOR ME?
HOW TO JOIN A CAPTIVE
HEALTH INSURANCE CAPTIVES
TURNING PREMIUMS INTO PROFITS BOOK