» The Difference Between Captive Insurance and Self-Funding
March 22, 2023
Business Strategies, Captives, Employee Benefits, Health Insurance, Self-Funding
We sometimes hear Captive Insurance and Self-Funding used interchangeably, but they are in fact two separate employee benefits strategies. Let’s explore how are they similar and how are they different.
Captives and Self-Funding are not Fully-Insured
To begin, let’s be clear that both of these strategies are an alternative to a Fully-Insured Health Plan.
With a fully insured health plan, you pay a set premium to a carrier for a 12-month cycle, regardless of the claims and experience of your employees. Depending on the size of your group, your renewal premiums will increase based on your claims and the claims of the carrier in your local geography, a pool.
If you are self-funded and/or using captive insurance, you would only pay for your claims and your administrative costs, and you’d pocket the rest.
How does a Self-Funded Health Plan work in general?
Self-funding is a general approach for a health plan where you pay your own claims as they are incurred rather than relying on the insurance company to set premiums and pay claims. To manage the risk of large costs, you purchase what’s known as Stop-Loss Insurance in case your costs get particularly high for any one member or for the overall plan.
Up to the deductibles on your stop-loss insurance, you and your employees will pay 100 percent of the costs, depending on how you’ve designed your health plans. Above the deductibles, your stop-loss carrier pays 100 percent of the costs.
In this arrangement, the stop-loss carrier needs to underwrite your group and make sure it sets an appropriate premium for your insurance. Set it too low, and it could lose money on your group. Set it too high and the market will shift away from them as they become uncompetitive.
But companies face various factors that make procuring stop-loss insurance difficult: limited claims data and experience coming out of the fully-insured market, a small employee population makes spreading risk hard, high individual member costs (lasers), and more.
Enter Medical Stop-Loss Insurance Captive, or Captive Insurance, for short.
How does Captive Insurance differ from Self-Funding?
Companies with a captive for their health plan are a subset of companies that self-fund. In other words, every company in a captive is self-funded; not every group that is self-funded is in a captive.
I like to describe a captive as an insurance co-op; multiple groups pool money together in a pot ie “pool”, then companies dip into that pool through the year when claims rise to a certain level and before they hit traditional stop-loss insurance, and at the end of the year, the remainder of the pool is distributed back to groups if there is money left over.
Remember the point we made above where groups pay 100 percent of claims to the deductible and the carrier pays above that number? Captives step in at that point and push the insurance deductible up.
So now it goes:
- Employer and employee pay claims to deductible (attachment point) in a mix based on their health plan
- Captive makes distributions as claims rise above the set attachment point, say $50,000 per member
- Traditional stop-loss insurance pays once claims reach a much higher figure, say $500,000 per member
What does this do for the group? What are the advantages of using a medical stop loss captive?
- Captives offer a return of unused premiums that would otherwise accrue to the stop-loss carrier.
- Stop-loss carriers may be operating with incomplete or insufficient claims data, so they have to raise prices for their insurance. By raising their deductible, groups decrease the cost of their traditional stop-loss insurance significantly.
- Groups with poor data or a smaller employee base may not even be able to obtain a stop-loss quote from a carrier. Captives open up the stop-loss market to them as a viable option.
- Captives can leverage their large size (100s of groups and 100,000 lives and more) to obtain preferential pricing with networks, TPAs, and vendors like care navigators, mental health, telehealth, and more.
- Captives are as if you are working on a school project with the A+ students. They’re trying to win, they’re trying to manage costs, so wouldn’t you want to work with them over the risk pool of your current carrier?
- Captives have more flexibility around how they deal with high-risk claimants ie lasers. With traditional stop-loss insurance, groups may face risky lasers that significantly increase their annual spending.
Captives are a tried and true health plan strategy for groups with as few as 25 employees and up to 1,000 or more. They smooth out costs, open up more employers to the benefits of self-funding, and generally make the health plan market more efficient.
If you’re interested in learning about the possible advantages of a captive for your employee health plan, schedule a complimentary call with one of our consultants today!
Posted by John Hansbrough in Business Strategies, Captives, Employee Benefits, Health Insurance, Self-Funding