As the rising costs of healthcare in the US continue an increasing number of firms are turning to captives as an alternative solution
Healthcare has been a hot topic in the US for a long time now with the costs of medical expenditures in the country continuing to dramatically rise.
Although it would seem that Americans are left with no other option but to have medical insurance, according to the US census bureau in 2018, 8.5 percent of people (27.5 million) did not take out a health insurance policy at any point during that year. One of the reasons behind the lack of insurance policies was due to insurance costs being extremely high, compared to the nation’s average wage growth which is lagging.
Certain public options are available such as Medicaid and Medicare but private insurance still dominates in the US. The lack of affordable healthcare means American’s look to their place of work for healthcare coverage.
As healthcare and insurance costs continue to rise, a national debate has erupted within the US surrounding this issue. During his time as president, Barack Obama passed the Affordable Care Act (ACA), also known as Obamacare, that made Medicare much more accessible to people who struggled to afford insurance. As a result, the debate has now moved onto the idea of universal healthcare for the US with France, the UK and Canada being held up as examples.
A Reuters-Ipsos poll released in August found that 70 percent of Americans supported Medicare for all.
However, with 20-odd Democrats running for the party’s nomination for the 2020 presidential race, a major distinction of each candidate—who generally share the same values—is their healthcare policy. Front-runners Elizabeth Warren and Bernie Sanders are advocating Medicare-for-all, a policy that would eliminate all private health insurances and create a healthcare system entirely run by the government, while top-tier candidate, Pete Buttigieg is running with a Medicare-for-all-who-want-it platform, much like the UK’s model which has the National Health Service offering universal healthcare but also allows the private insurance sector to exist for those who can afford it.
Even though it’s generally agreed that the healthcare system needs to be changed, the question is how. And like the ACA, these policies could take some time—if they pass—to be implemented into law and rolled out across the nation. So what can be done in the meantime to help Americans with obtaining affordable healthcare plans?
Accessing medical insurance through your place of work is the second most common form in the US. Employee healthcare is also the second-largest expense that a company has, after employee salaries. Companies are turning to self-funding in order to provide these employee benefits—and this is where captive insurance comes into the picture. Health insurance captives provide companies with the opportunity to reduce costs, receive returns of underwriting profits and enjoy the benefits of being self-insured without as much risk.
Under the microscope
Employers want the ability to budget medical costs the way they manage other expenses within the company. With change being the only common denominator in the health insurance environment, captives provide a better strategy for employers to take control of their healthcare costs.
Michael Schroeder, president of Roundstone, says: “A primary advantage to self-funding is that it allows the employer to pay only for the claims incurred up to a pre-determined amount.”
He adds: “Another benefit is transparency into the actual claims to help identify possible cost containment strategies.”
“Many of these employers would otherwise be too small to self-insure their employee health care benefits. Self-insuring is widely recognised as the most efficient funding method available for health care benefits,” he says.
In addition, companies participating in a captive programme have the opportunity to benefit from the underwriting profits.
Medical costs are too high to make completely self-funded plans a good option for many employers. To minimise risk, many employers choose a partially self-funded health plan which involves adding a reinsurer or stop-loss carrier.
The captive provides an extra layer between the self-insured employer and the stop-loss carrier. In a health insurance captive, the high-cost claim risk is spread over all member companies.
Rich Scarborough, president and CEO of Renaissance Benefit Advisors, examining the solutions captives offer the US healthcare market, suggests they offer small businesses “the ability to become self-insured with their programmes which gives them complete financial control and to improve, not only the financial component of the programme but also the benefits programme”.
He adds: “They can actually improve the benefits, lower deductibles, lower the copays for the employees, with low risk.”
Although controlling healthcare costs has become a recent priority of corporate titans such as Amazon and Apple, little attention has been paid to a small but growing number of employers who have already succeeded in this area.
Scarborough noted that Blue Ox Enterprises, a client of Renaissance Benefit Advisors, recently reduced their employee healthcare costs by 25 percent in a year by using a self-funded captive programme.
As part of its captive programme, Blue Ox Enterprises provides 150 employees with healthcare cover.
According to the Institute of Medicine, 30 percent of US healthcare dollars are wasted, with most American’s receiving healthcare benefits from their employers.
In a statement released by Health Compass Consulting, a company that aims to eradicate waste from the US healthcare system, it states that little attention had been paid to a small, but growing number of businesses that have succeeded in this challenge.
A spokesperson from Blue Ox Enterprises says: “Unlike many of our peers, we pay for 100 percent of employee (only) coverage, and these savings also allowed Blue Ox to offer a voluntary onsite mobile Wellness Initiative at no cost to employees. Almost all of our employees have used the onsite wellness benefit.”
Health Compass Consulting explains that innovative companies have “already demonstrated their ability to break the straitjacket of American healthcare and cure much of what ails our American dream”.
A lot of businesses are feeling trapped by the rising cost of their health care plan but need to offer affordable benefits to retain and attract talent. Schroeder says that by “opening the door for small and medium-sized employers, healthcare captives allow cost containment strategies to be deployed that will reduce the employee’s cost year-over-year without disruption in their benefits. Any savings can be reinvested back into the business”.
Schroeder adds “captives give the middle market the option to fund their employee benefits like a Fortune 500 company”.
With this becoming a popular movement or at least one that is gaining momentum, Scarborough suggests “there’s definitely more employers moving in these directions of these programmes because of cost savings”.
“The fully insured marketplace continues to go up every single year, there’s no relief in sight,” he adds. “So employers are migrating to these captive programmes to continue to offer quality healthcare insurance.”
A sustainable transplant?
The net result of employers actively engaging to optimise their healthcare spend is massive, these efforts are not just improving the physical and financial health of employees, they also provide employers with a competitive advantage in pursuing corporate goals.
Reflecting on the change over the past five years, Scarborough said: “With the group medical insurance, it’s changed radically over the last five years, these programmes have really started to emerge and grow. Five years ago there were maybe two or three of these around in the entire US now they are starting to flourish.”
He suggests that we’re seeing this increase “because the market is really booming, it’s growing rapidly”.
Foreseeing the next five years, Schroeder believes that “more and more employers will be leaving the traditional fixed cost insurance market and self-insuring their employee benefit costs”.
He continues: “The middle market will increasingly find the cost-saving strategies of captive programmes deliver year-over-year cost savings with little to no claim volatility.”
Scarborough anticipates “tremendous growth in the captive arena”.
He concludes: “We see all business in the next five years, probably doubling. It’s definitely going to go up, it’s not going to stop.”
