Self-Funding: Should You Join a Benefits Captive if You’re Already Self-Funded?
In the prior blogs, we discussed how group captives provide flexibility and transparency, while spreading risk with others to protect from any large claims. In this blog, we explore the benefits of joining a captive even if you’re already self-funded.
Over the years, many employers have turned to self-funding for a multi-year approach to lowering total healthcare costs. The employers who choose self-funding recognize that the years with lower claims cost will outweigh the years with high claims cost over a 5+ year period, leading to an overall lower healthcare cost for the employer. The captive approach should be viewed with the same philosophy, focusing on the stop loss premium. While stop loss policies are not profitable for insurers every year, they are profitable in most years. Therefore, by joining a captive, the employer will receive a captive profit distribution when the stop loss captive policy is profitable.
Joining a captive means increased stability for high-cost claimants. It’s not a matter of if you will have one or a few high-cost claimants, it’s a matter of when and how many. With more high-cost claims materializing in today’s healthcare system, the captive can provide stability in the following ways:
A No New Laser provision with a rate cap. While the traditional stop loss carriers offer a No New Laser provision, not all offer a renewal rate cap on the renewal premium. Without a rate cap, the carrier can increase your stop loss premium by 100% due to the large claimant. Therefore, the No New Laser provision would not provide much value. Traditional stop loss carriers who provide rate caps generally provide 40 to 60% rate caps, while the captive market typically ranges from 30 to 40%.
Resources. Captives are generally made up of like-minded employers, and everyone is aligned to lower their overall healthcare cost without disrupting the member experience. Therefore, some captives have used their size to build and offer programs that help mitigate high-cost claimants. Examples include a cancer, transplant or second opinion service. I’ve seen cancer diagnosis claims reduced by 56,000 from these types of services, and the savings can add up quickly! Typically, 5% of your covered members will make up 60% of the total healthcare cost. Therefore, it’s imperative to have programs to help control the claims incurred by the top 5% of claimants, without reducing the care member receive. Additionally, most captives provide data analytical tools to employers within the captive, so employers have actionable data to improve the underlying medical conditions within the covered members.
Profit Distributions. When a captive is profitable, the profit distributions will help off-set premium increases. Let’s look at the first two years of one of my client’s captive journey. Individually, they had a profitable first year (6% loss ratio) and the second was a loss (220% loss ratio). However, as a whole, the captive was profitable both years, and the group received 0,191 as a profit distribution for those two years.
Being part of a captive may be the long-awaited solution to help lower your total healthcare costs. If you are interested in learning if a captive is the best solution for your organization, contact a Newfront specialist or connect with me to chat further.
About the author
As the Senior Vice President of Employee Benefits, Paul helps companies scale from startup mode to global/public organizations, advising them on their risk, plan design, and compliance for their employee benefit programs at each growth stage. A key area of Paul’s focus is advising on self-funded plans to eliminate wasted spend within employers’ self-funded contracts.
The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.