In the first of two articles on captive health insurance in the US, Diana Bui investigates how this alternative risk management could help employers mitigate the rising healthcare costs without compromising employees' well-being
Rising waves
Healthcare expenses have long been a significant burden for both employers and employees in the US, but recent years have witnessed an unprecedented surge.
According to a 2024 survey by WTW, US employers anticipate a 7.7 per cent increase in healthcare costs for 2025, up from 6.9 per cent in 2024 and 6.5 per cent in 2023. This marks the third consecutive year of health benefit cost hikes above five per cent, following a decade where increases averaged around three per cent.
The impact is twofold: companies face tightening budgets, while employees grapple with higher premiums and out-of-pocket costs, often forcing them to make difficult decisions about their healthcare needs.
Jeff Levin-Scherz, population health leader at WTW, highlights the dual burden: “Higher healthcare costs mean employers have fewer resources to offer raises or other benefits that employees value, like retirement plans. For employees, higher out-of-pocket expenses make it difficult to afford care at the point of service. In some cases, people may even skip medical care that could improve their health or even save their lives.”
Official figures indicate that 60.4 per cent of Americans under the age of 65 — approximately 164.7 million people — receive health insurance through their employers in 2023. This widespread reliance on employer-sponsored coverage makes the open enrolment season, which typically runs through early December, an important time for employees to review their benefits for the coming year. The stakes are particularly high now, as many workers may face higher premiums, increased deductibles, and narrower provider networks.
"Employees need to look carefully at the benefit design as well as the network to be sure that your medicines and providers are included in the plan," advises Levin-Scherz.
"High-wage workers should consider high-deductible health plans which have substantial tax advantages and can help plan members save for post-retirement healthcare. Low-wage workers are not able to 'self-insure' and should consider a richer plan design even though that lowers take-home pay."
Advancements in medical technology have undeniably improved patient care, but they often come with high costs. New treatments and procedures enhance health outcomes but also contribute to rising expenses. Additionally, the increased use of health services in the US — driven partly by an ageing population and the prevalence of chronic diseases — adds to the financial strain on both employers and employees.
As these costs escalate, employers are exploring new strategies to manage expenses. A survey by WTW found that 52 percent of companies plan to implement programmes to reduce overall costs, and a similar number intend to guide employees toward lower-cost providers. However, some of these cost-saving measures could shift more of the financial burden onto employees.
Hanging in the balance
As employers grapple with rising healthcare costs, they are searching for solutions that do not tip the scales unfavourably against their employees. One approach gaining traction is the adoption of high-deductible health plans (HDHPs). While these plans can lower monthly premiums, they often leave employees bearing a heavier financial load, creating barriers to accessing essential and preventive care.
“Studies show lower uptake of services like mammograms and colonoscopies among HDHP participants,” Levin-Scherz notes. “Employers should educate their workforce to ensure employees know there is no cost-sharing for these valuable, evidence-based preventive services.”
Phillip C. Giles, chief growth officer in Accident and Health, Skyward Specialty, expands on these challenges: “Many times, employers will implement HDHPs to reduce their employee benefit healthcare spend without first adopting the necessary cost-reduction strategies.
“For many small and medium-sized enterprises (SMEs), this ends up being a cost-shifting approach rather than a cost-solving solution. The employer is shifting a bigger expense burden to employees rather than doing anything to reduce plan expense costs.”
Giles continues: “Some employers believe that HDHPs will reduce costs by encouraging employees to ‘shop’ for more cost-effective healthcare. The concept of consumerism has not caught on as most patients are not well-equipped to shop for medical services within a highly complex and intimidating healthcare system.”
For lower-paid employees, the high out-of-pocket maximums associated with HDHPs can represent a significant portion of their income. "An US$8,300 out-of-pocket max for an individual or US$16,600 for a family represents a significant percentage of their income," notes Giles.
"Improperly implemented HDHPs have frequently led to employees delaying or declining medical treatment due to the cost. Deferred treatment can lead to delayed disease detection or the diagnosis of serious conditions, which compounds the seriousness and cost of treatment."
The financial strain of rising healthcare costs does not just affect individual wellbeing — it also hampers a company's ability to attract and retain talent.
“Employers that can lower the inflation rate of their health plans gain a competitive advantage in hiring and retaining talent,” Levin-Scherz adds. “Some innovative plan designs, such as better transparency around quality and cost, could help increase the value of health care delivered and improve population health outcomes. Some supplemental benefits improve plan member satisfaction and could be valuable to employers even if they increase costs.”
Employers are facing a difficult dilemma — how to control escalating healthcare costs while still providing benefits to their employees. Simply shifting expenses to workers through higher premiums or deductibles may not be sustainable in the long run, especially in a competitive job market where attractive benefits are crucial for recruiting and retaining talent.
In light of these challenges, companies are increasingly seeking solutions that not only reduce costs but also offer comprehensive healthcare coverage for their workforce. Many are turning to captive insurance as a viable alternative to traditional health plans.
Turning the tide
"Captives are one of the fastest-growing alternative funding options since 2020 for a reason — the captive model gives employers a higher degree of financial control and benefit customisation compared to increasingly expensive traditional health benefits plans," says Jeb Dunkelberger, CEO of ClearPoint Health. "Captives also leverage core insurance principles, utilising the law of large numbers to gain more stability and lessen volatility on medical stop loss rates."
This approach helps employers manage rising costs while ensuring employees receive the care they need without excessive financial burden. Anne Marie Towle, CEO of Hylant Global Captive Solutions, explains how captive insurance can help: "Captive insurance companies can assist in stabilising healthcare insurance premiums by retaining an appropriate layer of protection that financially makes sense to drive down the total cost for both the employer and employee. In addition, incorporating many cost-containment strategies related to the directive of care, therapies, and pharmacy initiatives."
Towle adds that captives enable employers to offer more affordable and customisable health benefits, especially as traditional plans limit options. "Through a captive, organisations can choose to cover various high-cost medications and even alternative treatments," she says. "Often, traditional insurance makes these medications or treatments too expensive for employers, but a captive can use underwriting profits to assist in covering these costs for employees."
Establishing a captive insurance company involves creating a subsidiary to manage and customise healthcare coverage for employees. In this model, employees pay premiums to the captive, which then covers their healthcare expenses, including medical bills and other related costs.
This strategy gives the parent company greater control over the insurance programme, allowing for better cost management, negotiation of favourable rates, and the implementation of wellness initiatives to reduce healthcare spending. To mitigate the risk of exceptionally high claims, captives may purchase reinsurance for additional coverage.
"The traditional, fully insured market is increasingly stressed due to persistently rising medical and pharmaceutical costs," Giles notes. "Because of the pooled structure of traditional plans, continuous rate increases are necessary to maintain carrier profitability. This causes well-performing risks — those with favorable loss histories — to leave the traditional market in favor of alternative risk structures like self-funded, level-funded, and group captive plans, where they can achieve more stable rates."
Giles points out that employers with fully insured health plans have little control over coverage terms or the ability to implement cost-saving initiatives.
"Conversely, self-insured employers have nearly complete flexibility to tailor coverage terms that best match their employee demographics and benefit objectives," he explains.
"Captives, particularly group captives, make it more feasible for small to medium-sized employers to convert from a fully-insured plan to a self-funded plan, allowing them to assume more control in reducing costs."
He acknowledges that transitioning to a self-insured structure can be challenging for smaller companies that may lack the financial resources of larger employers. "For smaller self-insureds, participation in a group captive can enhance the stability of a self-funded plan," Giles notes.
"The captive provides this through pooled risk sharing, block underwriting, increased access to innovative medical cost containment and risk reduction initiatives, and sharing in surplus dividend distributions. These rate-stabilising benefits are difficult for many SMEs to attain on their own."
Echoing this idea, Towle highlights the significant role captives can play: "Captives can be a large piece of the puzzle in financing a layer of medical costs for employers while implementing many cost-containment strategies that assist in lowering or maintaining reasonable costs for employees.
“We have seen incredible innovation with captive use since their inception in the 1960s, and I believe this will continue well into the future, particularly with healthcare costs for organisations."
As businesses seek effective ways to manage the rising costs of healthcare, captive insurance is emerging as a viable alternative that offers both financial stability and more tailored plans. In the next installment of this two-part series, Diana Bui will take a closer look at how captive insurance can improve healthcare coverage by managing high-cost claims, increasing policy flexibility, and promoting health equity within organisations.
