Health Insurance Captives are being touted as the new, hip way for firms to beat the Affordable Care Act. Captives are insurance arrangements owned/controlled by its participating employers, and while they may not be new, they’re complicated.
Although many terms are used interchangeable, the flavor we’ll discuss in this article is the Group Medical Stop Loss Captives. These are typically used for small and mid-sized employers, which include all but a handful of CPA firms.
With a captive, the employer is at risk and therefore can benefit from the overall underwriting performance as well as income generated by invested reserves. The captive group is made up of companies that are too small to self-insure and are typically in the same industry. By combining a number of employers together, critical mass to self-insure as a group is achieved. The carrot is that employers will (somehow) achieve a lower cost of claims and administration for their employees than they could through traditional market options.
The assumption of risk also presents the employer with upfront costs, financial exposure, and administrative requirements (costs) not incurred with fully insured health plans.
Many “captive specialists” have recently hit the market promoting captive advantages in particular regard to circumventing Affordable Care Act regulations. These consultants do the necessary legal and administrative work to establish a captive on behalf of a group pool of like-kind employers. They make money through consulting, broker and administrative fees for the captive.
Looking under the hood of a captive, each individual employer is operating a self-funded plan. The employer designs and offers a self-funded health plan to employees and reinsures itself by buying specific and aggregate stop-loss insurance from the captive. In addition to the reinsurance costs, the employer pays the actual cost of their claims; claims administration, captive management and network fees; and an additional capital contribution (typically 10 percent or more in the first year). Even if the captive is taking on a significant portion of the administrative burden, certain self-funded functions and costs cannot be ceded to administrators and remain with the employer.
The captive operates on the employer’s contributions and pays claims in excess of the employer’s stop-loss limits out of its reserves. The captive purchases reinsurance to manage the overall risk of the group at levels determined by the size and risk of the entire pool of employers.
This structure can of course work, but the gamble is that the captive will have enough critical mass and better than average claims experience to be able to achieve its promise of outperforming the fully insured market.
California has recently enacted regulations that virtually eliminate small employers (fewer than 100 employees) from using self-funded plans and therefore captives. The state’s aim was to stop small employers from sidestepping the ACA’s small employer regulations, which leaves captives only in play for CPA firms with greater than 100 employees.
Mutual insurance companies, Multiple Employer Trusts and Multiple Employer Welfare Arrangements (MEWA) are similar to captives in that they are owned by their insureds. But they differ from a captive in that they provide fully insured products to the employers, thereby providing less risk and administrative burdens.
Although not in the health insurance space, CAMICO is an example of a mutual insurance company and CalCPA’s Group Insurance Trust (CalCPA Health) is a MEWA. Like a captive, a number of smaller employers are aggregated together in the MEWA to spread risk and purchase insurance, but on a much larger scale than a typical captive. The MEWA creates a risk pool of like firms, in this case, CPA firms, with administrative cost and tax advantages over the traditional fully-insured market, and the captive vehicle. All of the people operating and managing CalCPA’s Group Insurance Trust are CalCPA members and participants of the MEWA. CalCPA Health is unique to CalCPA members, being the only CPA MEWA in the country.
Health captives may look good from the marketing materials, but for most small and mid-size employers, particularly in California, they may have a considerable financial risk coupled with an administrative burden most firms do not have an expertise in handling.