US healthcare spending is set to reach $4 trillion in 2020, according to a report by the Centers for Medicare and Medicaid Services (CMS) from earlier this year.
In the same report, the CMS estimated that US national healthcare spending reached $3.81 trillion in 2019. It also projected that by 2028, healthcare spending would reach $6.19 trillion, and would account for 19.7 percent of GDP, an increase of 17.7 percent in 2018.
With such high prices, those living in the US, who can afford it, generally have health insurance. In order to help keep costs down, a lot of Americans are insured through their employer. Companies in the US have turned to captive insurance as a way to insure employees, making healthcare plans a popular employee benefit.
However, as more companies take control of their employees’ healthcare, it has created a lot of room for the uncertainty of unexpected or large claims that weren’t accounted for and the rising costs of healthcare. This is just one of the reasons that healthcare captives are quickly becoming a vehicle of choice for medical stoploss (MSL) exposures.
The US Department of Labor (DOI) does not recognise MSL as an employee benefit as the coverage because it does not directly insure the employees. MSL coverage indemnifies the employer for its claim obligations to the selffunded plan that it takes out.
MSL coverage consists of two parts: specific and aggregate.
Specific coverage protects the employer from large, catastrophic claims or a series of claims attributable to any individual covered by the plan in any one year. While the aggregate coverage protects the employer against an unusual amount of claims frequency attributable to the entire group of covered members.
Benefits
One of the main reason programmes were set-up initially, according to Jarid Beck, director and co-founder of Risk Management Advisors, a division of Risk Strategies, was to address the issue of access and capacity.
In the traditional health insurance market, there are not that many options. As there are only five to six carriers operating in any given region, and they increase rates every year and recycle conventional products.
Beck explains that many employers would like to exit the traditional market and self-insure where they can control their plan, stabilise cost and recoup underwriting profit.
He says: “A key component in making this feasible is obtaining stop-loss insurance because it can be difficult to find a carrier to issue favourable terms to a company coming out of the traditional market,” adding that “MSL captives bridge that gap”.
“The other big benefit is savings. In the captive, the insured employers are the owners. If the captive is profitable then they will receive profit dividends, which reduces the overall cost of the plan,” Beck adds.
Also weighing in, Michael Schroeder, president of Roundstone, adds: “Self-insuring opens a tool kit of cost containment strategies that are not available in the traditional fixed cost insurance market. MSL captives deliver transparency, control and cost savings.”
Less bang for your buck
MSL is not just for larger corporations, with the combination of rising healthcare costs and continued regulatory uncertainty, more smallto-medium sized companies are switching to self-funding. Philip Giles, managing director, MSL Captive Solutions, explains that due to those circumstances, the use of group captives will continue to expand.
Giles suggests that the traditional MSL market itself will experience a “noticeable firming of rates” across most segments in 2021.
“Overall market performance in this line of coverage has not been favourable over the past several years, and many carriers will be looking to ameliorate their underwriting results,” he says.
“This will further encourage more employers, especially ‘good risks’ – those having an established track record and favourable loss history as a self-insurer – toward group captive participation.”
Larger employers are also set to increase their specific deductibles and cede more risk to single-parent captives. Giles adds: “Again, being able to distance a selffunded employer from relentless market volatility will increase the attractiveness of MSL captives.”
In 2010, during his time as president, Barack Obama passed the Affordable Care Act (ACA), also known as Obamacare, with aims to make Medicare much more accessible to people who struggled to afford insurance.
Beck suggests that ACA has been a “contributing factor” to companies considering an MSL captive.
He explains: “The ACA was designed to lower or control cost. That didn’t happen and you can point to provisions in the law that have had the opposite effect, causing cost to increase.”
In addition, Schroeder expresses that the ACA was “the match that lit the forest fire” of stop-loss group captives, but noted that today, the primary driver of stop-loss captive growth is the rising cost of traditional health insurance.
Beck paints the medical loss ratio (MLR) as a good example. “Just as employers are recognising that relying on the carriers to lower cost is not a recipe for success, so too is the realisation that regulation is unlikely to shake out in their favour,” he says.
Three broad variations
The MSL group captive market has three broad variations: heterogeneous programmes, homogeneous group programmes, and high performer groups.
Heterogeneous programmes are a wide variety of industry classes and generally require more employers to achieve an appropriate spread of risk among its diverse membership. The larger size and risk spread are necessary to mitigate the increased risk variability, and the potential for increased underwriting volatility, caused by differing demographics among the participating employer populations.
Giles comments: “Most group captive market growth has emanated from heterogeneous ‘open-market’ captive programmes, representing the largest segment of the group MSL captive market.”
The average member size within this category generally is smaller than in other group captives and is typically between 50 and 250 employees.
Giles adds that these programmes primarily target fully-insured employers and use the group captive programme as a conduit to ease the transition to self-insurance for smaller employers.
On a homogeneous group programme, Giles outlines that they can be smaller because their underlying risks and underwriting profiles are similar, so the size needed to achieve an appropriate spread of risk is not as large as it is with heterogeneous groups.
The average member size is typically larger than in heterogeneous groups and generally targets existing self-insurers having between 250 to 500 employees.
Finally, on high performer groups, Giles describes that they can be either heterogeneous or homogeneous in terms of composition.
He states: “As its name would imply, a high-performance captive would be open only to established self-insurers with a consistent track record of exceeding specific performance benchmarks.”
Reflecting on the most popular structure, Giles suggests that in terms of the number of employers and premium volume, the open-market programmes represent the largest segment of the group MSL captive market.
“Although the composition profile of each type of group captive may be different, the primary objectives of each centre are stabilising the cost of medical stop loss and reducing the ultimate cost of healthcare benefit delivery,” he adds.
COVID-19 increase
With the ongoing COVID-19 pandemic still affecting people worldwide, how can MSL programmes help to businesses for similar future events?
Schroeder suggests there will be an increase as MSL captives have “proven to be a strong performer during the pandemic”.
He explains: “The fact captive participants keep premiums they don’t spend has benefited the employers during the dramatic downturn in elective medical procedures. A stop-loss captive’s flexibility and control also allow for quick responses to a changing healthcare marketplace.”
“Virtual medical care such as telemedicine services are quickly accessible for employees and their families when their employer insures the health plan under a stop-loss captive arrangement”, he adds.
Beck echoes Schroeder’s belief that this pandemic and economic crisis will increase MSL, stating that “during periods of economic crisis, it is normal for businesses to take stock and evaluate where they can be leaner, smarter or more efficient”.
“For most middle-market companies, group medical benefits are the second-largest expense after payroll, making it ripe for analysis. MSL captives are a viable alternative”, Beck adds.
