Mar
28
2018

Most employers know self-funding is an effective way to take control of rising healthcare costs. Instead of buying traditional health insurance from an insurer, a company pays for its employees’ medical bills directly, while purchasing medical stop-loss insurance to protect against catastrophic losses from large claims.

Self-funding divides the financial risk into two layers: an employer layer (below the stop-loss deductible) and a stop-loss layer (above the deductible). Most employers hire a third-party administrator to handle day-to-day tasks, such as adjudicating claims, determining eligibility, communicating with plan members, and providing customer service.

Why do employers self-fund? Self-funding allows employers to see where their healthcare dollars are going (transparency) and gives them the flexibility to design a health plan around their employees’ needs (control).

For all its benefits, however, self-funding isn’t right for all employers. By dividing the risk into two layers, self-funding creates a risk versus reward tradeoff. To lower fixed costs, an employer can buy less stop-loss insurance, but that can mean more year-to-year volatility. If an employer buys more stop-loss insurance, the fixed costs will be higher. This is why larger companies are more likely to self-insure than smaller companies—with deeper pockets, they can afford to select a higher stop-loss deductible (buying less stop-loss insurance) and still absorb each year’s financial ups and downs. However, for many midsize employers, self-funding isn’t a perfect solution.

A group captive adds a third layer of risk to the picture. Sandwiched between the employer and stop-loss layers, the group captive acts as a shock absorber for the employer’s health claims. Health insurance captives, also known as medical stop-loss insurance captives, can be a successful part of an employer’s cost control strategy.

A captive allows smaller and midsize employers to join forces and mimic a large company’s size, enabling smaller companies to have the same advantages when buying healthcare coverage. Made up of multiple employers, a group captive can provide size and scale for greater predictability. When a self-funded employer joins a group captive, the employer can retain its most predictable risk layer but still have a layer of insulation from all the larger claims that could threaten the financial stability of the plan.

The tiered structure of a captive typically looks like this:

Tier 1: Employer layer
The risk an employer is responsible for on a large claim. The specific stop-loss risk layer generally ranges from $10,000–$150,000, depending on the size and risk tolerance of the employer.

Tier 2: Captive layer
This layer is a shared risk pool that sits between the employer layer and traditional reinsurance (stop-loss). It pays members’ claims that are over their specific stop-loss maximum but under the reinsurance deductible and is funded by a large portion of the reinsurance premiums that members pay to the captive manager. The balance of the premium is used to purchase actual reinsurance and cover costs associated with management of the captive. Any unused premium (the surplus in this layer) is returned to participants after the policy year is completed.

Tier 3: Traditional reinsurance layer
This layer, also known as excess risk, protects the shared risk layer from substantial claims by capping its exposure. Reinsurance covers excess costs of a claim after the employer pays their portion (Tier 1) and the shared layer pays its portion (Tier 2).

Captives can be used for employers in a similar industry (i.e., veterinary), known as homogeneous risk pools, or employers across multiple industries (heterogeneous risk pools). A major advantage is that all participating employers can choose their own health plan designs, provider network, and more. For a captive to be successful, members must have a long-term view and be willing to implement health risk (i.e., cost management) programs.

To learn more about Alera Veterinary’s employer captive, visit aleravet.com/captive.

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