IN THE BATTLE OF HEALTHCARE, CAPTIVES COME OUT ON TOP

As I write this in early 2022, we continue to be in the midst of a pandemic that will just not give up, a hardened insurance market, a crippled healthcare system, “the Great Resignation”—resulting in a transient workforce—and the continued problem of unaffordable or inaccessible healthcare for many.

For about a decade, we have seen employers and employees grapple with the rising costs of healthcare, with an influx of cost-sharing models such as high deductible health plans and other alternatives such as voluntary benefits and minimum essential coverage contracts. Looking at the continued trends of rising healthcare costs, it seems as though the bubble will never burst, and that no innovation can stay ahead of the steep cost curve.

Before we dive into one that might be able to do just that, let’s dig into the key cost drivers in the market, and how they came into play.

What we’re up against

Spring’s actuarial modelling shows that over the past 10 years, healthcare costs have risen roughly 80 percent for employees and 60 percent for employers, while comparatively, economic growth has increased by only about 23 percent. Today, we are looking at a 4 to 7 percent uptick in medical trend for 2022.

How did we get here? This perfect storm came about from a collection of factors, which include, but are not limited to:

• Fragmented, uncoordinated care: even before the pandemic, provider shortages, over-bedding, and long wait times were the norm.
• Mergers and consolidation: consolidation among providers has been rising for years. As a result, we have seen vertical and horizonal changes to the marketplace—changing the way you receive care as well as its cost. When we have relationships such as CVS with Aetna, and UnitedHealthcare with Optum, much of the continuum of care is owned by the same entity, leaving very little room for the other side to negotiate.
• Behavioral health: in July 2021, over 50 percent of the workforce felt that they needed behavioral health assistance. In addition, a recent WHO-led study estimates that depression and anxiety cost the global economy $1 trillion each year in lost productivity.
• Aging population: governmental plans made up 45 percent of the market last year, and with an aging population, there will be a greater shift toward Medicare, making things even less competitive for employer-sponsored plans, which already pay 140 to 220 percent more for certain services compared to costs under a public plan.
• Another factor to consider here is the high expenses related to end-of-life care, something the US has yet to figure out. Further, with a larger percentage of the workforce in the Millennial bucket, they are looking for different types of benefits delivered in different ways. Companies are struggling with bridging this gap.
• Increased utilization/deferred care: when COVID-19 hit, everyone was deferring care, which meant carriers collected premiums without having to payout much in the form of claims. As the pandemic has ebbed and flowed, there have been spikes in utilization and deferred care. This has created an element of unpredictability for payers and providers.
• Prescription drugs: the Kaiser Family Foundation reported in 2019 that prescription drug prices rose by 5 percent from the following year, and that 30 percent of Americans have not taken their prescribed medication due to cost concerns.
• Lack of transparency: the increase in transparency legislation is a response to a problem that has long left consumers confused, surprised, and under-prepared to tend to their health.
• Administrative expenses: administrative expenses make up 33 percent of healthcare spend, according to Harvard Magazine.

When you mix these ingredients with an ongoing global pandemic—the ultimate ‘black swan’ event—the result is that the entire continuum of care, encompassing providers, insurers, employers and consumers, has been impacted dramatically. On the provider side, we have seen an increase in accountable care organizations (ACOs) over the last five years, some of which contract through health plans and some of which contract directly, making things murky.

Hospitals’ operating income has decreased, going from 2.8 percent in 2016 to 1.3 percent in 2020, and they are struggling to understand how to make up that deficit. The repercussions of this climate come in a range of other forms. For example, in 2021, the Department of Labor reported a 7.9 percent hike in carrier rates in Massachusetts. In 2020, the total cost of healthcare per employee (between employer and employee contributions) was over $20,000 for the year.

If you’re looking for a silver lining, I think that many lessons were learned as a result of COVID-19. One of them is that the current healthcare model does not work—it does not fit consumers’ wants or needs. Employers now are poised to take a fresh look at their strategy to make sure employees are seeing value in the plans offered, which is a big investment, and to ensure they are taking innovative steps to mitigate the accumulating expenses.

Now that I’ve painted such an unpleasant picture, I’ll move on to a more optimistic tone.

The case for captives (and other alternatives)

Historically, employers would select a bundled health and benefits package that checked their key boxes and wouldn’t make many changes from year to year. Now, a more savvy approach that many employers are shifting towards is to unbundle their benefits and move to a self-insured environment where a combination of third-party administrators (TPAs) and point solution vendors address your populations’ needs in a targeted way.

In fact, the traditional fully-insured model is being actively disrupted—five to 10 years ago, about 50 percent of employers were self-insured, and now that statistic is more like 64 percent, and Spring’s healthcare survey shows that 82 percent of large employers are self-insured.

It’s important to note, however, that self-insurance can work for companies of all sizes, with smaller employers increasingly considering alternative options such as group purchasing, group captives, or multiple employer welfare arrangements (MEWAs). We have also seen employers implementing more defined contribution models, such as health reimbursement arrangements (HRAs), health savings accounts (HSAs), flexible spending accounts (FSAs), and individual coverage health reimbursement arrangements (ICHRAs). Taking one of these pathways gives the employer much more leverage to negotiate the healthcare landscape.

While there is a spectrum of alternative solutions to ease the burden the healthcare marketplace creates, as illustrated in Figure 1, our focus here pertains to captives. Captives have been around since the 1970s and risk managers continue to use them to control costs in risk, across both property & casual as well as employee benefit lines.

Over time, as the healthcare environment has shifted and costs have risen, captives have gained much popularity. Today, surveys report that 40 percent of employers with medical stop-loss coverage put it in a captive structure, compared to only 15 to 20 percent about five to 10 years ago.

One of the benefits of a captive is that it can be a dynamic and flexible solution to meet the needs of the employers—there is a model for nearly every type of organization. Captives provide for a certain level of control over insurance costs that is not possible in the commercial markets. Such advantages include:

• For group captives, economies of scale resulting in lower administrative costs, improved reinsurance terms and a significant reduction in premium volatility
• Identification and implementation of risk mitigation programs unavailable in fully-insured arrangements
• Spread of risk and better control over claims costs

Figure 1: Healthcare options

We have noted that medical stop-loss specifically have grown astronomically. This strategy offers the following pros:

Quantitative:

• Lower stop-loss costs—elimination of carrier profit, premium taxes, administrative fees
• Improved cash flow—employer holds on to the claim
• Reduces reliance on commercial market renewals and trends
• Creates a purchasing forum for addressing future needs

Qualitative:

• Customized to meet unique needs of employers’ demographics
• Reduced volatility and greater predictability via captive layer by mitigating the impact of claims unpredictability
• Promotes long-term price stability and cost-savings potential

Figure 2 illustrates the savings garnered as a company moves from fully-insured to a captive structure. Savings 1 is the result of stripping away portions of the carrier profits. Savings 2 and 4 pertains to group captives, where coming together to purchase stop-loss reinsurance allows for group purchasing power.

Savings 3 and 6 are from lower administrative costs, and Savings 5 represents the ability to access solutions unavailable in the commercial markets, such as carving out pharmacy services providers. This is especially true in the group captive space where small employers are coming together.

Another qualitative advantage of the captive model is that it works its magic in the background, invisible to your workforce and seamless to the end user. You are simply restructuring what you are already paying for, in a more strategic way. Overall, our experience shows that a captive program can produce savings of up to 25 percent of program costs.

Figure 2: Savings over time of a captive

Conclusion

Pre-pandemic, captives had already built a reputation for being an innovative risk management technique that can yield significant savings, increase control, offer customized programs, and create transparency.

In 2022, as COVID-19 has brought the pot of existing cost drivers to an aggressive boil, savvy employers are increasingly turning to alternative risk financing, such as captives. View this as an opportunity to maintain your talent through the Great Resignation, and shift your mindset.

To get started, we recommend working with a consultant and/or actuary to take a hard look at your data, including claims, retention levels and financial history to determine the areas that warrant immediate attention. Without understanding where you are now, it’s impossible to get to where you want to be.

From there, we are seeing many companies choosing to unbundle their plans and take a more à-la-carte, customized approach to benefits, which works well within a captive insurance solution. If you have already moved to a self-insured or captive model, we still recommend reassessing goals and priorities every few years. As circumstances change, so should your strategy.

Prabal Lakhanpal is a vice president and senior consultant at Spring Consulting Group. He can be contacted at: prabal.lakhanpal@springgroup.com