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» What is a Medical Stop-Loss Captive?

September 8, 2021

Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding

In offering group health plans to employees, businesses have a lot to navigate and understand about the options presented by their benefits advisor team. The smaller the employer, the fewer the options available to them, while the largest employers with thousands of employees have every vendor clamoring for their business.

But the majority of businesses have anywhere from 50 to 500 or more employees and may not realize that they are seeing an overly-curtailed list of options for their health coverage.

In our experience, employers like this have been underserved by the broker community and haven’t been shown how to approach their health insurance plans with a long-term approach. As our mission is to enhance the quality of life for our employee populations, we realize that our work with groups first starts with education around how health insurance is priced and what drives spending for HR and financial leaders.

If leaders better understand their risks and their risk management tools, they can better align their strategy to their unique situation and experience a better mix of cost and quality from their plans.

One of the least understood employee benefit tools in the market today is the Stop-Loss Captive, sometimes styled as the Medical Stop-Loss Captive.  Small to mid-sized groups can use a stop-loss captive to reduce the cost of their stop-loss insurance and have an on-ramp to self-funding their benefits when coming from a fully insured health plan.

Before we jump into that, let’s revisit a topic we’ve discussed here before, self-funding and stop-loss insurance.

Click here to learn more about how a Medical Stop-Loss Captive may be right for your employee health plan

Primer on Relevant Topics like Self-Funding and Stop-Loss

We’ve previously covered topics in this blog around self-funding and stop-loss insurance. For example, see the links below:

Managing Self-Funding Risk with Stop-Loss Insurance

What does Stop-Loss Insurance Cost?

Large employers predominately self-fund their employee health plans, while small groups overwhelmingly use fully-insured health insurance products from carriers. Both strategies make sense given certain business situations, however, we find that the simplicity of group insurance for brokers means many small to mid-sized groups are unaware of the advantages of self-funding.

Brokers default to what they know, leaving groups in the dark about how to actively manage their health plan and the opportunities that come from a self-funded plan. While not for everyone, self-funded plans are ubiquitous for employers with 500 or more employees.

For the groups below 500, the question is “Does this work for us?” And to answer that, we have to understand risk management and how health plans are priced.

Risk Management for Employee Health Plans

Healthcare spending for a group of employees follows a pattern where the vast majority of employees account for very few claims, while a small minority of employees account for a large portion of claims. This is a Power Curve and distributions usually follow the 80/20 Pareto Principle, typical for things such as wealth or earthquakes.

For example, a recent group we looked at could point to 1.5% of their employee population as responsible for 40% of their overall costs. So it is incumbent on groups to understand how risk management tools like retention and transfer can help them mitigate these costs and keep their spending as low as possible.

Group health insurance is a product that requires minimal engagement from the group and little year-to-year financial risk (increases notwithstanding). However, groups with a fully insured health insurance product receive little to no data about their spending, limiting their ability to meaningfully manage costs and also limiting their ability to consider alternative options.

For a group to move from fully-insured health plans to self-funding, they must obtain Stop-Loss Insurance, with previous links providing more information. The issue we find as consultants is that stop-loss carriers are risk-averse and see risk and uncertainty with any group coming out of a health insurance product without any data, whether they have 50 or 500 employees. Plus, these groups may be looking for a lower attachment point on their insurance, increasing the risk of a claim for the carriers. As a result, carriers may either offer expensive stop-loss insurance or decline to quote coverage at all.

So for the small to mid-sized group interested in self-funding, how can they confidently manage their risk through stop-loss insurance, especially at the lower deductible amounts they may desire?

What is a Stop-Loss Medical Captive?

A captive is a group of employers pooling funds together for a common risk management need, say workers’ compensation or auto insurance. The groups involved pool funds, can draw on funds if they have a claim, and at the end of the year, the captive may return unused funds if losses did not exceed premiums. In this way, groups in the captive experience less “use it or lose it” from their insurance premiums.

Stop-Loss Medical Captive applies this captive idea to stop-loss insurance. A group of employers find the idea of self funding appealing but their stop-loss insurance is too expensive at a certain threshold, say a $50,000 Specific Attachment Point. Instead, the employers pool together to self-insure themselves for claims between $50,000 and $250,000, which enables them to purchase traditional stop-loss insurance above $250,000.

This accomplishes two things:

  1. The group raises their deductible on their stop-loss insurance, reducing the premium significantly.
  2. The group still transfers risk for claims between $50,000 and $250,000, this time to the captive instead of the carrier. The captive pays claims out of it’s pool of funds, and returns the excess reserves to members at the end of the year.

Thus, the group obtains the risk transfer and risk management they needed in order to make self-funding work for them, while doing it at a lower overall cost.

This all sounds pretty good, but captives can also offer one more value-add benefit to a group interested in self-funding.

When a group comes from a fully insured health plan, they usually have little to no data on their claims history. As a result, stop-loss carriers may be reluctant to offer coverage, or else make it prohibitively expensive. Stop-Loss Medical Captives, however, have capped risk and are more willing to offer coverage to a newly self insured group, which also smooths out claims and makes the group more appealing to stop-loss carriers.

In fact, many small groups that are self-funded could never have made the move from fully insured health insurance without the on-ramp of a captive.

Next Steps if you want to know more about Medical Stop-Loss Captives

One of our key markets is helping employers under 1,000 and even 500 lives transition from fully insured health insurance plans to a self-funded employee health plan.

Click here to learn more about how a Medical Stop-Loss Captive may be right for your employee health plan


Posted by in Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding