As the cost of providing medical benefits and health insurance continues to rise in the US, the popularity of self-funding and medical stop-loss has expanded
Medical costs in the US are some of the highest in the world and they continue to rise. Healthcare costs have increased over the past few decades, from 5 per cent of gross domestic product (GDP) in 1960 to 18 per cent in 2018.
In 2018, the US spent around $3.6 trillion on healthcare, which averages to about $11,000 per person, according to the Peter Peterson Foundation. In order to keep costs down for people, a large percentage of Americans have a health insurance plan through their employer.
In order to keep costs down, the answer for some companies is a medical stop-loss (MSL) captive. By funding stop loss in a captive, an employer gains access to lower-cost reinsurance they might otherwise not be eligible for as a direct purchaser.
A single-parent captive generally needs to follow the compliance regulations of its domicile. It is not governed by the Employee Retirement Income Security Act (ERISA) — although the self-funded benefit plan itself is — and does not require a prohibited transaction exemption (PTE) from the US Department of Labour.
“As the cost of providing medical benefits and health insurance continues to increase, the popularity of self-funding and medical stop-loss has expanded”, according to Phil Giles, managing director at MSL Captive Solutions.
He states: “The medical stop-loss market has grown tremendously — more than tripling in size — over the past decade. We went from being a $7 billion market to a $25 billion market in less than 10 years.”
Commenting on the trends with captives in the healthcare sector, John Kirke, president of the healthcare division at BevCap Management, says they are seeing more strategy in exposing and leveraging healthcare provider cost arbitrage with direct contracting.
“In risk management, we see a strong focus on mitigating specialty drug costs, large complex claims such as cancer and renal dialysis,” he adds.
MSL captives have evolved tremendously over the past few years.
Giles states that the current generation of MSL captives has progressed tremendously in the level of innovative sophistication and the ability to control risk.
Meanwhile, Ryan Mitchell, global accident and health leader and reinsurance deputy partner at RMC Group, outlines that they are seeing a growing number of captives writing MSL on groups with less than 100 lives.
Mitchell explains: “Over the years, the US has seen a downward trend in the average number of lives in a self-funded health plan. The increased number of captives writing stop-loss on groups with less than 100 lives tracked with that downward trend in the US.”
“Most of the fully-insured carriers that offer level-funded health plans are now writing below 100 lives, when just a decade ago it would have been difficult to find one fully-insured carrier offering a level-funded product below 100 lives,” he adds.
A hard pill to swallow
Reflecting on the challenges MSL captives are facing, Kirke suggests that it depends on the goals of the captive formation.
He explains: “Considerations are the numerous inputs to be mindful of in the formula from: formation capital, domicile, captive management, governance, fronting carrier(s) and overall management — you need deep expertise in all facets of the equation.”
“The next challenge is defining your go-to-market strategy. Where do you want your captive to play in the market?” he says.
Considerations may be an array of strategies from; heterogeneous to homogeneous risk, client size, advisor supported or direct to a predefined industry, built-in plan ecosystem/plan framework or a pure-play stop loss solution.
Giles suggests that group MSL captives need to have the agility to continually evolve in response to a frequently changing healthcare environment.
He explains: “They must present a strong value proposition, predicated on innovative health risk management initiatives and reducing the cost of health care charges from providers.”
“Imperative to the success of any group captive is having a selective and cohesive membership that is committed to the adoption of the progressive initiatives provided by t he captive.”
“The membership (and their brokers) must have a long-term focus and not just look for a quick reduction in premiums,” Giles adds.
COVID and cost
Rising medical costs in the US have been a long-standing talking point, however, the COVID-19 pandemic has added new layers of problems for medical costs. According to a 2020 survey conducted by AccessOne, around 66 per cent of Americans report they are very, somewhat or a little concerned they will not be able to afford medical care this year. The average cost to treat a hospitalised patient with the COVID virus is $30,000, according to a study by America’s Health Insurance Plans, a trade group for insurers.
Although the employer’s self-funded plan themselves may have had some increased illness claims related to COVID, the stop loss layers were not affected very much, Giles says.
He explains that the average COVID-related claim cost is well under the level of most specific deductibles.
“There have been some earlier predictions of a claim wave in 2021 resulting from the rescheduling of delayed elective procedures but we have not seen that yet,” he adds.
With the pandemic still ongoing, Mitchell says that more employers will adopt self-funded plans, and potentially utilise a captive insurance arrangement.
On average, fully-insured carriers were quoting double-digit premium increases on a percentage basis at renewal prior to COVID-19.
“It is fairly safe to assume that trend will continue for the next 12 months, increasing the potential benefit from utilising a captive insurance company to provide medical stop-loss coverage,” Mitchell adds.
