By Neal Bierman, Risk Advisor
As a business owner, finding the ideal health insurance solution can be tricky, as each has challenges. Traditional group health insurance programs are simple but offer little customization and few opportunities to save money. On the other hand, self-insuring using your resources has the potential for significant cost savings but could be risky if you face an unlucky string of claims.
A captive for health insurance can be a compromise approach that allows small and medium-sized business owners to reduce healthcare expenses, provided they’re willing to spend time managing their plans.
A captive for health insurance is like self-insuring, but you’re often not doing it alone. Instead, you pool resources with other like-minded organizations and businesses trying to control their healthcare spending without reducing quality.
A captive for health insurance isn’t a standalone insurance company. It’s a subsidiary owned by policyholders who set up insurance through the captive.
Companies using the captive for health insurance work together to design the plan benefits. Together, you use your pooled resources to cover the benefits previously provided by large-group health insurance, including:
Each member contributes to a joint fund to cover employee healthcare claims. Each member also pays for stop-loss insurance to cover catastrophic employee claims, which cost at least $10,000 or more and wouldn’t be paid for by the joint fund.
Group cost savings: Cost savings are a significant benefit of using a captive for health insurance. Over the long run, businesses save money using this system versus a traditional group health insurance plan.
The pooled purchasing power of many employers can help you negotiate better rates for the coverage and benefits in your plan. While not guaranteed, renewal premiums historically grow more slowly with captive health insurance than traditional group plans. Since you’re spreading the claim risk over many organizations, it leads to more stable monthly costs than using a self-insured plan.
Transparency for plan usage: A captive for health insurance gives more transparency for your healthcare spending versus a group plan. You receive the data showing how your plan spends on employee medical and drug claims. With this data, you can better assess whether the coverage meets your staff’s needs or if there are any benefits they aren’t using.
The power to control costs: You can also use the data from these programs to determine steps to reduce costs. For example, if you discover drug spending is higher than expected, you could work with your benefits broker to design strategies for how employers can find better deals on their prescriptions. If you put in the effort to save money using health and wellness programs, those savings go to your business rather than extra profit to a health insurance company.
Customization: Finally, a captive for health insurance gives you more customization. You can build the health insurance plan you want to attain your goals by selecting between coverage amounts, provider networks, deductibles, wellness programs, and other benefits like vision and dental. It’s not a one-size-fits-all solution like a group insurance plan.
A captive for health insurance approach is not suitable for everyone. It takes time, effort, and investment to reap the long-term cost savings.
Higher upfront costs: Initially, your upfront costs could be higher than those of a group plan. You must pay administrative fees to set up the new plan and contribute your share of the pooled resources to the claims pool. A captive for health insurance doesn’t make sense for someone expecting a payoff within 12 months.
Time commitment: A captive for health insurance also takes a significant time commitment. You’ll have access to healthcare data that you never had before. Someone in your organization has to look at that data, discuss it with a benefits consultant, and set goals to lower costs. For example, suppose you realize your employees have higher inpatient claims than average. In that case, you’d need to devise a strategy to reduce this expense and then track the data over time to see if the strategy is working.
Cost uncertainty: Some employers might not have the risk tolerance to use this strategy. While pooling resources helps stabilize costs, you could still run into cost fluctuations if many employees develop serious illnesses simultaneously. You might owe nothing in claims one month, and the next, owe thousands. There is some risk and unpredictability compared to a traditional group plan.
Shared control: Finally, you may not like being pooled with other companies because you don’t know their philosophies and long-term goals for health insurance. This isn’t as serious a pitfall as things average out due to the law of large numbers. However, some business owners prefer being fully in control.
Before launching a captive for health insurance, ensure you’ve properly compared against all your health insurance options.
A fully insured group health insurance plan is the traditional approach. You pay a monthly premium to a health insurance company for employees. It is then responsible for covering claims and managing the benefits. A group health plan is the most straightforward strategy and requires less time commitment. But annual costs rise faster on average than a captive for health insurance.
Another option is to self-insure using a level-funded or self-funded program. Your business is responsible for covering employee claims rather than spreading the risk. But if you can control costs, you get the full benefit versus sharing with others who might not have been as effective. Self-insuring could make sense if you feel comfortable taking on this extra risk and believe your workforce can control healthcare costs.
If, after weighing your options, you think a captive insurance program might be right for you, contact your health insurance benefits broker/consultant. Or schedule a meeting with one if you don’t have this relationship in place. A captive health insurance program is too complicated to design without the help of a professional.
The broker/consultant will go through a long list of questions to understand your current health insurance needs. They will use this information to come up with an analysis and strategy. There are multiple different captive solutions and providers available. Your broker will steer you to the best approach.
You’ll need to work alongside three different companies as part of enrollment. You will use a TPA to process claims using your funds, a stop-loss insurance company to cover catastrophic claims, and a pharmacy benefit manager for prescriptions. In a group health insurance plan, these are all bundled into one plan. You must set up and manage all three with a captive for health insurance program.
Captive health insurance programs take extra work to run. But your effort can be richly rewarded. A captive for health insurance solution gives the flexibility to design your plan and more cost stability versus the rapidly rising premiums of group plans. Even better, if your company works to track data and find cost-saving solutions, those savings will go to your bottom line.
For more information on whether a captive for health insurance makes sense for your business, contact one of the benefits experts at Ellerbrock-Norris.
