HEALTH BENEFIT CAPTIVES PAY OFF

More than 10 years ago, there was emerging interest among US employers in a new concept: using group captives as a way to manage the risk of employee health plans. At the time, employers faced an enormous challenge. The US healthcare industry was characterized by a lack of pricing transparency, skyrocketing costs for medical services and pharmaceuticals, and market inefficiencies.

These issues, which continue today, led to increased interest in self-funded healthcare plans, which provide employers with more control and transparency than fully-insured commercial insurance plans. This trend reached an all-time high in 2020, with 67 percent of US workers enrolled in self-funded health plans, according to the Kaiser Family Foundation’s 2021 Employer Health Benefits Survey.

Employers of all sizes were turning to alternative risk solutions, such as self-funding, to fight rising costs. However, it was difficult for many small and midsize employers to self-fund, due to the inherent volatility of assuming healthcare risk. Small groups simply lack the economies of scale that larger groups have to weather the peaks and valleys of annual claim fluctuations.

In the late 2000s, the first health benefit group captives began cropping up as a solution for small and midsize employers. They allowed employers to band together in a cooperative risk-sharing environment to reduce volatility and enjoy the benefits of self-funding.

There was a tremendous interest in these programs, which use protected or segregated cells to group employers into heterogeneous or homogenous programs. They provided a unique ecosystem and an easy route for smaller employers to get into self-funding.

Employers come together under one risk umbrella, but maintain the flexibility to choose and design their own medical and prescription drug plans to fit the needs of their employees. Employers self-fund the small-dollar, predictable portion of their employees’ health costs, share the mid-level risk among captive members, and then transfer the risk for the high-dollar, more unpredictable costs to an insurer. The arrangement gives employers easy access to the cost-effective structure of a captive insurer, as the overhead of the protected cell company is shared among all the cells, making it lower cost for the members, all the while ensuring the assets of each cell are fenced off from each other.

There has been a growing frustration with the cost and lack of control associated with the traditional health insurance markets. This has driven the tremendous growth we’ve seen. New captive programs are forming every month to accommodate this growth, including many niche, special interest programs.

When we started over 10 years ago, health benefit group captives were an unwelcome and disruptive force to the carrier market, and now it is a fast-growing industry closing in on $5 billion in premium.

Health benefit group captives have become an invaluable risk management tool for US employers. Those in the industry instinctively knew there were financial benefits, because of the anecdotal evidence from individual employers. But because it was a relatively new industry, there was a lack of long-term data to prove their effectiveness—until now.

Ten-year study finds lower healthcare costs for employers

In 2021, Berkley Accident and Health completed a 10-year actuarial study of its health benefits captive insurance business and found significant value for employers. Using long-term data, the analysis confirms that the vast majority of employers see lower healthcare costs. This is the first published study of its kind and is based on Berkley Accident and Health’s block of captive programs, which is one of the largest and most mature.

The metrics showed that the majority (85 percent) of protected cell captive programs met or exceeded financial expectations, based on ceded layer loss ratios of active participants from 2009 to 2019 with at least three years of experience. Those that outperformed financial expectations had loss ratios of 98 percent or lower; those that met them had loss ratios between 98.1 percent and 101.9 percent; and those that underperformed had loss ratios of 102 percent or higher.

Only 15 percent of programs did worse than projected, but employers in those programs had their costs capped at a maximum liability, which limited their overall risk exposure.

The study uncovered other findings:

Lower first-dollar costs for employers

In a group captive program, employers are responsible for their first-dollar health claims—those smaller, more predictable claims that make up the bulk of their healthcare spend. On average, employers saw 8 percent lower first-dollar claims than expected. (Expected first-dollar claims are based on from the employers’ historical experience and projections for employers with similar characteristics, such as industry, geographic location, and employee demographics.)

Shared savings from good risk management

Employers in a captive program band together to share their midsize claims, in order to reduce the financial peaks and valleys over time. Imagine a bank account, where everyone puts money in and then some is taken out when a claim occurs. In good years, members will receive any unused funds back from the captive program. In bad years, members may not receive funds back, but their maximum exposure limit within the program helps reduce the volatility. Over the past 10 years (2009–2019), $21.9 million (5 percent of captive ceded premiums on average) in unused funds were distributed back to members.

Fewer high-dollar claims

Employers in a health benefit group captive program have medical stop-loss insurance in place to act as a backstop against high-dollar claims. Even so, employers on average saw a much lower incidence (23 percent lower) of large claims greater than $250,000 per 10,000 employees in 2016–2020, compared to Berkley’s control group of regular (non-captive) stop-loss policyholders.

This study comprised data from nearly 700 employers in 48 US states with 125,000 covered employees.

What’s behind the savings?

In healthcare, utilization is expected, meaning that employers should assume to fund their anticipated employee health risk. A health benefit group captive allows employers to fund this risk more efficiently. It enables them to self-fund and directly pay for the small, routine claims; to share the midsize risk with other employers; and to transfer the largest risks to a stop-loss insurer.

The approach minimizes an employer’s dependence on commercial insurance, along with its accompanying overhead, taxes, and fees. This efficient model leads to immediate savings, due to lower costs of insurance and lower reliance on the traditional insurance market.

There are long-term savings, due to the proactive approach to risk management that members possess. We have observed a number of similar traits among many of our members. It’s this proactive, rather than reactive, approach to risk that we feel is a leading factor in creating high-performing captive programs.

These attributes include:

The right mindset

Employers in high-performing programs share a sense of ownership for their employee health plan. This is a central trait of every captive member. They are engaged and forward-thinking. Rather than transferring their employee health risk to an insurer and forgetting about it, these employers treat the risk as any other business expense that can be managed and controlled. They believe in this approach and are willing to collaborate with other like-minded employers.

The right financial incentives

Employers in high-performing programs have the right financial incentives in place with their healthcare vendors. They ensure that vendor fees and payments are aligned with, rather than fighting against, their goal to lower healthcare costs. For examples, many employers use transparent pharmacy benefit managers (PBMs) to control prescription drug costs and hire independent third-party administrators (TPAs) that aren’t affiliated with a network of health providers.

The right approach toward innovation

Employers in high-performing group captive programs are by nature innovative and forward-thinking. They use cutting-edge cost-containment techniques, such as reference-based pricing, direct or narrow provider networks, and centers of excellence networks, that have a proven track record of lowering high-dollar claim costs.

In addition, they constantly track and evaluate their current strategies and seek to improve them. They adopt new solutions and techniques on a regular basis and are relentless in their pursuit of excellence.

What’s next for health benefit captives?

The continued growth of specialty pharmaceuticals is an area of concern for the future. We are seeing a number of cell and gene therapies, which can cost millions of dollars, on the horizon. These high-cost treatments will continue to escalate the cost of healthcare and will demand employers and insurers to grapple with how to pay for them. This will continue to increase interest in alternative risk solutions such as captives.

Captives are well-positioned to handle the challenges facing US healthcare. With their cost transparency and focus on data analytics, members receive the insight they need to better understand their health spend over time and guide decision-making.

For the industry as a whole, markets are constantly changing and adapting. Many employers continue to struggle with rising costs, which creates more demand for captives in US healthcare. Based on the results we have seen these past 10 years, we believe the growth potential in this space is significant.