Medical Stop-Loss Captive Funding: Just Do It

Medical stop-loss coverage is an essential aspect to limiting risk in a self-insured health plan. Healthcare reform mandates, increasing costs, and leveraged trends have led many employers to review the cost of their medical insurance programs, especially funding alternatives like self-insurance and the growing need for additional stop-loss coverage.

Captives can play an instrumental role in the decision to insure medical stop-loss. Funding medical stop-loss in a captive has proven to be an efficient way for employers who self-fund their health coverage to add a layer of protection from excessively high individual or aggregate health claims. This coverage protects against catastrophic or unexpected losses by limiting the company’s liability for specific (per person) and aggregate (overall plan) losses. Although an entity agrees to take on the financial risk when becoming involved in a captive, stop-loss coverage adds an additional level of customization that includes a cap on the amount of risk for which the entity is responsible.

Medical stop-loss is not typically considered an ERISA benefit. Therefore, stop-loss captives are not subject to Department of Labor approval. By funding stop-loss in a captive, an employer gains access to lower-cost reinsurance they cannot purchase directly. In the past, medical stop-loss captives have enjoyed some level of popularity, but recently the sector has gained significant traction. It is now one of the fastest growing coverage sectors in the alternative risk market.

Placing Medical Stop-Loss in a Captive

There are several advantages to funding medical stop-loss in a captive:

• Greater transparency and access to data: - Creates transparency regarding the various underlying financial aspects that attribute toward the dynamics of premiums - helping employers understand claims costs specific to them - Provides almost real time access to data, allowing employers to be proactive in implementing precautionary programs to improve employee health and wellness programs

• Improved cost savings on medical stop-loss - Controls employee benefit premium costs Estimated potential savings for medical stop-loss healthcare in captives vs. commercial insurance are generally between 5% to 20% - Reduces frictional costs (commissions, taxes, risk charges, insurer profit, administration) and underwriting savings - Captures investment returns - Improves cash flow and centralizes investment of reserves - Improves management reporting and understanding of risks - Savings generated from group captive programs may result in dividends that can be used to reduce the total healthcare costs to the organization and its employees

• Increased administrative control - Most group medical stop-loss captives will work to avoid lasers (excluding or using a higher deductible for certain individuals)

• Improved risk management - Manages a centralized risk pool - Purchases stop-loss reinsurance to manage exposure to catastrophic loss - Quantifies the financial benefits of wellness initiatives and specific loss prevention programs

Stop-loss captives save money through the elimination of carrier profit and premium taxes. Additional benefits include improved cash flow as the employer holds on to the claim, exemption from some state mandates and reduced administration fees.

Since claims costs are not perfectly predictable, employers can leverage stop-loss captive programs to structure a well-designed loss program to mitigate risks.

Should You Consider Medical Stop-Loss Captive Funding?

When evaluating potential captive stop-loss solutions, employers can start their own captive or band together with other organizations to form a new group medical stop-loss captive. Alternatively, they can evaluate joining an existing group captive. These options have pros and cons. While setting up a new captive usually requires establishing the captive and incurring initial startup related costs, it provides its founding members autonomy and freedom to decide on the operational strategy of the captive. Existing group captives usually have templatized participation agreements and requirements that new members have to commit to. This is a simpler process but limits the autonomy of members. Well established existing group captives are likely to see higher levels of savings depending on the strategic initiatives implemented by the group. Carving out pharmacy and centralizing your administration by using a single TPA are common initiatives for generating savings.

In general, having over $1 million in healthcare premiums is a good threshold for considering single-parent stop-loss captive funding. For group captives, a total of 800 to 1,000 covered employee lives and $2.5 million in premium is a strong jumping off point. Groups with lesser number of lives and premiums can potentially utilize existing cell captives or setting up new cell captives as a starting point. Once cells become large enough, they can be easily spun out into a standalone captive.

Case Study: Small Employer, Large Savings

In 2019, we analyzed on behalf of a charter school a charter school with approximately 175 employees, to gauge the advantages they could gain from joining a group captive, compared to their existing fully-insured structure. The carrier quoted $1.85M for a fully insured program for 2019.

The school’s analysis identified self-insured savings and further evaluated the potential of joining an existing group captive solution. By joining the group captive, the school saved:

• Over 16% when compared to fully-insured premiums, approximating to over $300,00

• Expected 5-year savings estimate of over $1.7M

These figures are based on a specific stop-loss level of $85,000 annually, and take into account the administrative fees (consultants, brokers, TPAs) associated with joining the captive.

In sum, medical stop-loss captive savings are available for employers and groups of all sizes and industries. So what are you waiting for? Just do it!