Medical Stop Loss Captives: A Solution Growing in Popularity — and for Good Reason

Insight By
Michael LoVasco
Topic
Employee Benefits

Healthcare costs continue to rise worldwide, while uncertainties related to recent legislation threaten the amount of control employers can maintain within traditional benefit programs. The global pandemic has complicated matters even more.

The conventional approach for addressing these challenges, such as cutting benefits or passing on cost increases directly to employees is no longer palatable to many. Employers—especially self-insured employers—are left searching for more viable, sustainable, and employee-friendly solutions that will improve risk management and manage costs. Enter medical stop loss captives.

Mid-sized employers are increasingly turning to medical stop loss captives as an alternative cost-containment strategy. Choosing this type of insurance structure, as opposed to buying stop loss from a commercial insurer, adds another layer of risk protection that could potentially lead to significant savings for employers.

The premise behind a group medical stop loss captive:
  • Retain the risk that is least severe and most frequent—making it the most predictable.
  • Share moderate and occasional risk by paying into the group captive pool—sharing profits if claims are less than the pool balance and sharing costs if greater than the pool balance.
  • Transfer the least-frequent and more catastrophic risk to a medical stop loss insurer.

Note: While there are various types of captives, this article focuses on heterogeneous (dissimilar industries) medical stop loss captives.

What is a medical stop loss group captive?

A medical stop loss captive is when a group of unaffiliated yet like-minded employers, ranging in size from approximately a hundred to several thousand employees, come together to form their own insurance entity: the captive.  

While a captive may include dozens of members, each member maintains its own self-funded benefits program, claims administrator, and its own unique stop-loss policy. Think of it like different classrooms within a school. All classrooms are part of the same school and governed by the same core rules, but each of the classroom teachers has autonomy to create policies and rules for their own class.  

Captives give mid-sized employers a way to gain control over their employee benefits by stabilizing insurance costs through risk management, rather than simply assuming it.  

Specifically, the captive allows employers to retain manageable layers of predictable risk while transferring more volatile and unpredictable layers to an insurer. When catastrophic claims are large, the group captive serves as a shock absorber. When claims are modest, captive members (employers) essentially pocket a portion of the profit that would normally have gone to an insurance carrier.  

How does a medical stop loss captive work?

  • The group members select a common stop loss insurer or reinsurer that will provide coverage to each member of the captive. 
  • Each member purchases specific (and in some cases aggregate) medical stop loss coverage, according to their own risk appetite.
  • Each employer has (or must establish) a self-funded medical plan for their own employees. In most cases members can keep their existing third-party administrator, plan design, and provider networks.  
  • The stop loss carrier designates a portion of the collective stop loss portfolio, attributable to all participating group members, to a captive jointly owned by all participating members.
  • Through sound claims management, innovative wellness practices, and loss control, captive members can lower the costs of claims, and therefore reap financial dividends through the captive.

Specifically, the group captive structure typically divides the risk into three layers:

  • 1st layer:  Risk RETAINED by the employer.
  • 2nd layer: Risk SHARED by other employers (the captive).
  • 3rd layer: Risk TRANSFERRED to the medical stop loss insurer.

Who should consider joining a medical stop loss captive?

Self-funded, mid-sized employers that are interested in sharing the risks and rewards of their benefit liability while actively managing expenses.

What are the advantages to joining a captive?

  1. Easy to implement: Adding a medical stop loss captive to an existing self-insured structure or switching from a fully insured structure is simple and straight forward. In most cases, members can keep their Third-Party Administrator (TPA), their network, and their plan designs.  
  2. Ownership: The group captive is member owned and member controlled. Members are the only ones to have a say on how the captive operates.
  3. Potential short and long-term savings:  Through the captive structure, members have increased potential for reducing and stabilizing employee benefit costs.
  4. Peace of mind: The group captive structure represents inherently less risk than being 100% self-insured. The captive serves as a shock absorber for both large claims and high claim frequency.
  5. Price stability: With traditional stoploss insurance premiums surging, reasonably priced coverage is increasingly hard to secure. Captives offer more predictable and stable pricing. Specifically, captives remove many market factors from the pricing equation. Cost is not based on what insurance companies think they can charge, but rather what organizations predict their losses will be.
  6. More power: The size of the group captive can enhance the leverage with carriers, provider networks and related service providers to generate volume-related discounting that typically would not be attainable for many individual self-insured employers.
  7. Risk and reward model: Members can receive premium dollars back in the form of dividends when they are having a good year and lower than expected losses.
  8. Greater transparency:  Members can see where every dollar of their healthcare spend is going. Healthcare for many companies is the second biggest spend next to payroll. The ability to track where every dollar goes is a valuable advantage to captive members.
  9. Total healthcare view: The group captive focuses on total healthcare; not solely on stop loss premium. (The stop loss premium is typically around 25- 30 percent of an employer’s overall healthcare cost each year).
  10. Collaboration:  Employers in the captive have an opportunity to share best practices, information, and resources in pursuit of reducing claim costs.

What is the impact on employees?

In most cases, your employees will have no idea you’ve moved to a captive. Assuming you keep your current TPA, your employees will continue to have the same benefit coverage, plan design features (deductibles, copays, coinsurance, and out-of-pocket maximums), and network of doctors and hospitals.

Is it time to rethink your approach?

Organizations of all shapes and sizes are rethinking their approach to employee healthcare risk and costs. In situations where traditional stop loss insurance has become unaffordable, captives are an option worth exploring. Many organizations that have already made the switch are now finding increased predictability, control, and savings in an otherwise unpredictable time.  

To learn more about captives and whether they may be right for your organization, please contact LoVasco.  

Insight By
Michael LoVasco
Executive Vice President
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Topic
Employee Benefits
Published on

April 21, 2021

updated on

April 21, 2021

Disclosure

This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.

Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. LoVasco Consulting Group is independently owned and operated.

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