What is a Health Insurance Captive?

A health insurance captive is an insurance arrangement that is owned and controlled by its insureds.  Mutual insurance companies, Multiple Employer Trusts and Multiple Employer Welfare Arrangements, also have a similar structure.  While a captive can certainly be established and owned by one employer, and many single large employers do own and operate captives, this article will concentrate on the small and mid-size employer captive market.

With a captive the insureds are at risk and therefore can benefit from the underwriting performance and investment income generated by the captive.  They are typically set-up for companies that are too small to self-insure on their own.  By combining a number of employers together they achieve the critical mass to self-insure as a group.  The carrot is that employers will (somehow) achieve a lower cost of providing health benefit plans to their employees than they could through other traditional market options.

Many “captive specialists” have hit the market in recent years promoting health captives as a way for small employers to beat the Affordable Care Act.  These captive consultants do the necessary legal and administrative work to establish a captive on behalf of a potential pool of like-kind employers and then make money through consulting, broker or administration fees for the captive.

Looking under the hood- in a captive, each individual employer is in essence operating a self-funded plan.  Employers take on additional responsibilities and administrative responsibilities in running a self-funded plan, even if the captive is taking on significant portion of the administrative burden.

The captive structure is typically:

  • The employee receives a regular, ACA compliant health benefit plan
  • The employer established a self-funded plan.
    • The captive usually has stock documents for its insureds. The employer has specific and aggregate stop loss insurance purchased through the captive.  The employer pays that actual claims costs for their employees, plus: the administration costs of the captive (which include its reinsurance costs); the stop loss insurance costs; and in the first year or any year the captive has a need, additional capital contribution to the captive (typically 10% or more the first year).
  • The captive purchases reinsurance at levels determined by the size and risk of the captives pool of employers/employees

This structure can of course work, but the gamble is that the captive will have enough critical mass to be able to achieve its promise of outperforming the fully insured market.

California has recently enacted regulations to discourage small employers from sidestepping the ACA small employer pool by using self-funded plans and therefore captives.  The law regulates the minimum amount of the specific and aggregate stop loss small employers (fewer than 100 employees) may purchase, ensuring, in most instances a risk too great for a small employer to assume.  Specific deductibles cannot be below $40,000. Aggregate stop loss minimums are on a formula that requires a risk of at least an additional 20%, or more depending on the specifics of a group.

Upside and downside of a health captive:

The upside is potential cost savings from a number of health plan operating and performance categories.  The most important piece is that claims cost of the captive, in aggregate, outperform the fully insured market in the short and long.  This upside comes with an extremely high risk and is outside of the control of the captives members. Any number of expensive chronic conditions or catastrophic claims can put the captives’ members in a financial disadvantage.  In addition to claims performance, captives usually state that they operate at a lower administrative cost than the fully insured market.  This must be analyzed carefully because the captive has management costs, employer and the captive’s reinsurance costs, and the administrative costs of operating a health plans which have become very complex.  Provider contracts, prescription drug vendors, customer service, appeals, premium billing, large case management, fraud management and many other functions all need to be managed the same as a fully insured carrier.  There are also internal administrative costs and liability to the captives employers that are not incurred with a fully insured plan.  And an employer can have substantial cost to leave a captive or if it is not performing or runs into financial issues.

Captives usually look good from the marketing materials and the mangers who sell them are well versed at handling the risk objections.  For most small employers, particularly in California, the captive arrangement is a financial risk too great and an administrative burden that it does not have expertise in handling.

As mentioned in the first paragraph, a captive and a MEWA Trust like CalCPA Health are similar in that the aggregate a number of smaller employers together.  But the MEWA model provides the participating employers a fully insured health plan, in essence, so it does not subject them to the financial risk and administrative burdens of a captive.

 

Medicare

Medicare decisions at initial eligibility can have significant financial implications for individuals for the rest of their lives.  This means many Medicare decisions are irreversible so great care should be used in making Medicare decisions.  For this reason, employees should refrain from giving Medicare “advice” other than for employees to seek advice from a certified profession

Medicare can be a very complex for many people.  One reason is that many of the terms and processes are new to employees who have been on employer sponsored there entire career.  The other is the government have created programs and terms that do not exist outside of Medicare.

There are three ways to be eligible for Medicare:

  1. Be age 65 or over
  2. If under age 65
    • Be on Social Security disability for two years
    • Have end stage renal disease

If an employee or a dependent are qualifying for Medicare due to under age 65 disability or end state renal disease, they should contact CMS (Center for Medicare Services) directly to obtain eligibility and enrollment information.

By far the most common Medicare occurrence is an employee obtaining the age of 65.  If they are retiring at age 65, nut many people continue to work past age 65, giving them the many more options of continuing with their group health plan, enrolling in Medicare of both.

Common questions to employers (participating Employers in CalCPA Health) and to the Trust staff it is why you can’t help me in making all the required Medicare decisions.  An employer sponsored health plan is group insurance and Medicare is an individual government program that is heavily regulated regarding who can assist people with enrollment and purchasing Medicare products ( like supplements, Medicare Advantage and Part D plans).  There are professionals whose specific career and expertise are in Medicare and employees approaching age 65 should seek out one of those to advisors to aid in their decision process.

What you can tell employees is to start early.  Begin exploring their options at least six months ahead of their 65 birthday with the goal of being having all of their decision made 90 days out.  CMS has some excellent publications and web-sites that can guide most employees through many of the preliminary topics, so providing this web link can get them started in the right direction. www.medicare.gov.

As mentioned above, many Medicare decisions, at the attainment of initial eligibility, can have irreversible and significant financial implications to people for the rest of their life.  These include not enrolling in Medicare part B and D when initially eligible, and not having credible part D coverage in place.   Employees should take great care in making these decisions.

Employee Contributions – ERISA Plan Assets

When an employer established an employee benefit plan (ERISA health and welfare plan), any contributions that employee’s make are regulated by ERISA as ERISA plan assets.

There are volumes of regulations regarding the classification and handling of plan assets.  Basically, for small employer health plan contributions, the employer needs to ensure that the amount being deducted from the employee’s payroll is accurate – not more than the required contribution – and that it is remitted to the insurance carrier on the next billing cycle.

Where employers typically run into issues is where and an employee has been making contributions but the employer has not updated eligibility records with their insurance carrier – to add a dependent for example.  The employer is collecting funds from an employee and not remitting to the carrier.

Another common occurrence is when an employee terminates in the middle of a month and they have made one or more premium contributions for the current month and the employer terminated their health coverage at the beginning of the month and does not properly reconcile and return the employees over-payment.

A complete reconciliation of employee contributions is recommended after open enrollment and then individual reconciliations when employees make changes to their eligibility or employment status.

Employer Liability – Waivers

Health plan “waivers” are a very important requirement to protect employers from liability.

What is a waiver and what does it do?

The waiver is a legal document that states the employee has been offered health coverage and is declining coverage.  If an eligible employee does not complete a waiver form, thereby officially declining the offer of health coverage, they could later demand to be covered under the companies benefit plan.    The health insurance company will not allow the employee to enroll until the next open enrollment period (without a special circumstance).  This puts the possible liability for the employee’s health care costs on the employer.

Two Types of waivers:

  1. Legitimate waivers:

Employees who decline coverage because they have other coverage through an employer group of Medicare are counted as legitimate waivers.  The most common legitimate waiver is someone who has coverage through their spouse’s employer’s plan.

Non-legitimate waivers:

  1. Non-legitimate waivers count as a non-participant in the employer group’s participation requirement with their insurance carrier. Most carriers (including CalCPA Health) require a 75% participation requirement.

Non-legitimate waivers are employees who decline coverage and do not have other group coverage or Medicare.  Individual coverage, including individual coverage through Covered California or another ACA exchange, does not count as a legitimate waiver.

Employer Liability – DE-09

Managing Employee Benefit Plans – Employer Liability

DE-09

Why are employers required to submit a DE-09 and DE-09C?

All health insurance carriers require firms to submit their California quarterly payroll tax filing when they initially apply and once a year thereafter.

This requirement is to meet a number of regulatory and compliance issues.  Basically, all employees listed on the DE-09 must be enrolled in a plan or waive coverage (or are not eligible if part-time, seasonal, etc.)  Further, enrollees must appear on the DE-09 to show actively at work – W-2 status.  For example, CalCPA Health must ensure that all participants are eligible and firms are properly size-classified, under various provisions of the California insurance code and the Affordable Care Act – or risk severe penalties.

Submitting the DE-09 also reduces our Participating Employers liability by identifying possible non-compliance issues ahead of the regulatory agencies.

(Note: Form DE-09C must be submitted quarterly along with form DE-09.)

Managing Employee Benefit Plans – Communication Strategies

An effective employee benefits communication strategy begins with developing a calendar:

  1. Record the date your organization needs to complete and submit annual open enrollment material to your insurance carriers
  2. Work backwards from the open enrollment due date to determine (and record on your calendar) dates to:
    1. Distribute open enrollment materials to employees
    2. Open enrollment meetings (if applicable)
    3. Make plan option choices at the firm level
      1. Premiums and plan choices
      2. Employee contribution rates
    4. Review renewal plans and rates; and if applicable
  3. Remember to include these dates on your calendar
    1. Update payroll system for open enrollment changes – employee contribution changes
      1. Note: this will save a lot of resources trying to retroactively correct payroll deductions and accumulators
    2. Any regulatory required notices. Whenever you run across a requirement, simply add it to your calendar.
      1. Employer reporting of 1094-C / 1095-C (if applicable)

Whether your firm uses a benefits broker or benefits consultant – develop your own calendar.  Have your broker or consultant provide you with their version of the calendar and compare the two and modify each calendar to come to a consensus, final calendar.  Provide your calendar to the executive or management team to obtain buy in and feedback to the schedule.  Often it is firm’s partners, owners and executives that cause delays in benefit processes – many times because they were unaware of their required participation.

Update your calendar at any time during the year that you become aware of an addition or new requirement.

An excel spreadsheet works well for this type of calendar because you can add, change, delete and sort easily.  After the calendar is developed, list each document for materials needed to complete the calendar entry.  Then work backwards to determine and develop a start date and required completion date for each document or communication piece.  For each communication indicate whether it is an email, direct mail, hand-out, payroll stuffer, web posting, etc.  This will allow you to properly estimate lead times and distribution costs.

For each communication – have an employee that is not involved in benefit administration at your organization, review it to make sure it makes sense and if there is an action required by the employee (completing a form, making a decision) that is being communicated effectively.  Often times, in benefit administration and health plan lingo, those of us that work with it all the time think it is second nature, but to many employees this is a very confusing foreign world.

In addition to your annual calendar, keep a check list of communication requirements for new hires and employment terminations.

Who is an Eligible Employee?

  • Only active, regular, full-time employees and owners (such as proprietors and partners) are considered Eligible Employees. Seasonal/temporary employees and 1099 employees are not eligible.
  • Employees must work a minimum of either 20 or 30 hours per week to be considered full-time. Please refer to your most recent Renewal Packet or contact Banyan Administrators to confirm your company’s minimum hourly requirement for employees.

(Note: Employees must work 30 hours to be eligible for Life or LTD)

What forms need to be completed?

  • Only the employee may fill in, or modify, information on the Employee Enrollment Form. Any changes to information must be initialed and dated by the employee. No alteration to preprinted material on the Employee Application is acceptable, and altered forms will be rejected.
  • Provide the appropriate form(s) to the employee, based on your firms offerings:
    • Medical with or without Dental and Vision
    • Form A1: Medical/Dental/Vision Enrollment Form
    • Dental and/or Vision
    • Form A2 Delta Dental and/or Vision Service Enrollment Form
    • Life and/or Long Term Disability
    • Form A3: Group Term Life-LTD Enrollment Form, and
    • Form A4: Group Life-LTD Health Statement (groups of 2-3 only)

When do forms need to be submitted to Banyan Administrators? 

  • Enrollment forms must be submitted to Banyan Administrators within 31 days of the Coverage Effective Date.
  • The Coverage Effective Date is Determined by:
    • Date of Hire: The date a permanent employee begins working full-time.
    • Waiting Period: Refer to your most recent Renewal Packet or contact Banyan Administrators.
    • First of the month following Date of Hire, or
    • First of the month following 30 days of employment, or
    • First of the month following 60 days of employment
  • Example: A firm has a 30 day waiting period and hires an employee on July 7th. The Coverage Effective Date would be September 1st and the forms must be submitted by October 1st.
  • If the Date of Hire is the first of the month, and the group has a Date of Hire waiting period, coverage will be effective on that date.
    • Example: An employee hired July 1st would have coverage effective July 1st. An employee hired July 2nd would have coverage effective August 1st.
  • If the form is not submitted within 31 days, the employee cannot enroll until the next Open Enrollment period, or until they have a qualifying life event.

What if an Eligible Employee does not want to enroll?

  • Are they enrolled in another group health plan?
    • If yes, the waiver is considered valid.
    • The employee should complete the Coverage Declination section of the Enrollment Form for your records.
    • If no, the waiver is invalid and affects your compliance with the Employee Participation requirement.
    • At least 75% of eligible employees without valid waivers must enroll in Medical.
    • 100% of eligible employees without valid waivers must enroll in Dental/Vision.
    • Employees working 30 or more hours cannot waive Life or LTD.

Who is an Eligible Dependent?

  • Spouse: the plan participant’s spouse under a legally valid marriage.
  • Domestic partner: the plan participant’s domestic partner under a legally registered and valid domestic partnership.
  • Child: the plan participant’s, spouse’s or domestic partner’s natural child, stepchild, or legally adopted child.
    • Children are eligible up to the age of 26. Coverage ends on the first of the month following their 26th birthday.
    • Disabled children of eligible employees who, with appropriate medical certification, are eligible for coverage up to any age, only if they were originally enrolled before turning 26.

What forms need to be completed?

  • Form B1: Subscriber Change Request Form

When do the forms need to be submitted to Banyan Administrators?

  • The Subscriber Change Request Form must be submitted to Banyan Administrators within 31 days of the Qualifying Event. Qualifying Events include marriage, divorce, birth, adoption, loss of other coverage, etc.

When is their coverage effective date? 

  • Coverage will become effective on the first of the month following the qualifying event.
  • The one exception is the birth or adoption of a child. The coverage effective date will be the date of birth or adoption. If the date of birth is on or before the 15th, the rate change will be applied that month. If it is after the 15th, the rate change will be applied in the next coverage month.

How will the change be reflected on the premium invoice?

  • The coverage tier is listed above the premium amount. E for employee only, ES for employee and spouse, EC for employee and child, ECN for employee and children, and F for family.
  • Please note that invoices are generated a month before the due date. If a change form is submitted after the invoice is generated, the change will be reflected on the following invoice. For example, a change that is submitted on July 2nd will be reflected on the September invoice.