Using captives for medical stop-loss

While captives have long been used as a risk mitigation instrument for liability, property and casualty, and non-medical employee benefits risks, market conditions have companies looking to captives to further optimise their risk profile. In particular, increasing commercial health insurance premiums are leading more companies to consider self-insurance.

In turn, using a captive to provide the medical stop-loss backstop necessary to protect against catastrophic loss offers the perfect opportunity for companies to improve their risk position while also optimising their captive utilisation. The key to success lies in building the right partnership.

Using captives for healthcare benefits

Entities already utilising captives understand the advantages of assuming a portion of the risk for themselves. An investment in a captive, whether the entity of concern owns all of it or a piece (ie, wholly owned vs. group captive), allows that entity to have more control over the underwriting process, pricing, claims, and even coverage. And unlike simply paying a premium to a commercial insurer/reinsurer, the entity also shares in the returns.

When it comes to healthcare, employers with access to captives are beginning to realise the distinct benefits of self-insuring and then using a captive for medical stop-loss to further manage and participate in the risk. This allows for greater control on several different levels.

First, the owner of a self-insured health plan controls the plan design. What is covered, where, and how it is covered fall under the purview of the employer. In addition, because the actual costs affect overall performance, the employer is incentivised to ensure appropriate treatments, minimal network leakage, and accurate payments. In short, when the employer shares in the gains (or losses), it retains a vested interest in cost control and efficiency as compared to paying the fixed-cost premiums of a fully insured plan.

Second, when an employer uses a captive for medical stop-loss, it can pave the way for lower insurance/reinsurance premiums. Since the first layer of stop-loss protection comes from the captive, the excess retention level can be set higher, which typically results in lower premiums from the commercial reinsurer responsible for the excess (Figure 1)

Figure 1: MSL captive coverage

Types of medical stop-loss captives

While the details of any captive arrangement can vary widely, there are two primary categories into which medical stop-loss captives fall. The first is the single-parent captive. In this case, a hospital or a health system, for example, may already own and utilise a captive for other types of risk, such as professional liability or property and casualty insurance. There is often additional capital available that can be used for medical stop-loss, and because the types of risk placed in the captive differ from one another, adding medical stop-loss only increases the diversity.

The other type of captive often utilised is the employer group captive. In this case, a company may become a stakeholder in a captive held by several entities with the same purpose. They all use the captive to insure the same risk, so the diversity comes from the number of different companies involved. Essentially, they are risk pooling. This type of arrangement works well for smaller companies, those without their own wholly owned captive, or for those looking to get their feet wet in this market.

Key considerations

In determining what type of arrangement will work best, or whether pursuing a captive arrangement makes sense at all, there are several factors to consider. Because utilising a medical stop-loss captive is predicated by embarking on a self-funded insurance programme, companies not already having one must be able to appropriately execute at the first-dollar level before pursuing a medical stop-loss captive arrangement.

After that, data becomes pivotal. What kind of data is available, how it is being analysed, what decisions it is driving all come together as a central pivot point. Companies that are able to understand their data and use it to create actionable strategies will generally be more successful in managing their risks, as opposed to shifting them to insurance companies.

Another consideration is how active a participant a company may want to be. Defining the right type of arrangement includes determining how heavily involved in decision-making the company wants to be—and whether it has the expertise to do so. Underwriting, pricing, claims administration, medical management and the overall determination of risk structure and coverage levels come into play in entering the right arrangement. Certainly, the company’s overall appetite for risk must serve as the underlying foundation for any decision to move forward.

How the right partner can help

Becoming a risk taker, even through a captive, requires a very different mindset versus simply shifting the risk to an insurer. Essentially, the company becomes the risk taker. Fortunately, there is a growing number of tools and resources to help companies navigate the switch from traditional stop-loss insurance to a medical stop-loss captive.

Even the most novice company can realise success, as long as it engages with the right partner or partners. Whether a company needs a captive manager, a captive consultant, a claims administrator, or any combination of entities to successfully manage the risk programme, the careful selection of partners is key to its success. The main point is ensuring a better understanding of the risk, as well as the ability to proactively utilise the resources needed to properly manage it in order to achieve the desired results.

Transparency among partners, as well as shared objectives, becomes essential. Everyone must be moving in the same direction and be accountable to their performance, using the desired result as the bar. Full transparency and a true level of partnership are key. Companies actively managing that middle layer, that is, the risk in the captive itself, have much greater insight into the risks. If all stakeholders are appropriately engaged—including the reinsurer—there will be many touch points for the sharing of data and information to ensure the best care and outcomes while reducing medical cost where appropriate.

From a stop-loss perspective, companies should look for a partner who clearly understands and aligns with their objectives so the programme can be properly priced and administered. Full transparency and alignment are needed in all aspects of the programme, including but not limited to expenses, pricing, administration, and cost containment. Above all, when it comes to the excess layer, it is vital to make sure the reinsurance carrier has a strong financial history, longevity and expertise in the market, medical management resources, and a track record of meeting its obligations.

What’s next?

With the frequency and severity of catastrophic claims driving insurance premiums, companies must alter the paradigm in how they approach healthcare benefits in order to maintain profitability. Already the market is shifting toward self-insurance for healthcare benefits to give employers more control over these expenses.

For example, in the US, 67 percent of covered workers fell under a self-insured healthcare plan in 2020. The next step, then, involves the consideration of utilising captives—whether single-parent or employer group-based—to provide medical stop-loss. Medical stop-loss captives allow companies not only to have more control of their plan efficacy, but also to realise the gains (or losses) of a well-managed plan. The right strategy, the right plan, and the right partner can make all the difference.