What is Captive Medical Insurance?

By Andrew Kuykendall, CSFS, Alternative Risk Specialist

Chris had a problem. Even with 125 employees in 6 states the company was at the mercy of “medical trend” each year when renewing their medical insurance. They were receiving no actionable data at all to help them find a way to control costs, or budget for an anticipated increase. In fact, over the previous 5 years the increase had averaged just short of 10% annually, with a “low” of 4% one year, and a “high” of 19% the following year. There was never any warning, or justification, other than medical trend. Sure, one time they received an additional report at the back of the packet that mentioned that one employee had roughly $58,000 in care. This is a large number, but with annual premiums exceeding $1.4 million it did not feel catastrophic. There had to be a better way, but what is the better way?

What does self-funded actually mean?

Most employers have some ideas around what being self-funded for medical insurance entails. The company bears the responsibility for the costs of the medical claims. And yet, we are bombarded by media reports of surgeries, or prescriptions, or cancers that routinely exceed a million dollars a year in costs. Can your company absorb multiple million-dollar hits? And the conversation is changing: TPA, DM/UM/UR, PBM, Spec, Agg, and IBNR are just a few examples of what is, to many employers, a new vocabulary. It can get very confusing very quickly. For many employers with between 75 and 700 employees the idea of self-funding their medical plans is an idea that is reviewed, but often discarded as being too risky, too complicated, or that the group is just too small.

Getting back to Chris for a minute, in mid-2012 the company took the plunge, and enrolled in a Self-Funded Medical Captive (captive) program for their employees. This meant that the employer was responsible for claims costs, but the captive helped to spread the risk amongst a much larger population. Instead of buying insurance for 125, they were part of a pool of over 5,000 employees. The larger population meant that the claims costs were much more predictable. Based upon previous, fully insured renewal data, they were able to receive a quote that showed the opportunity to save money in their budget if the group ran as expected. That meant that if they had an “average” claims year, they could save approximately 8% versus their fully insured renewal. If they had a totally catastrophic year, they would pay more than current. However, because of the captive structure and the various types of stop loss insurance, policies that limit the financial exposure of the individual or the aggregate group, the maximum the company would pay would have been 14% higher than their renewal. A very key point in the discussion was the ability to receive their claims data. After much deliberation, they joined the captive.

In that first year the group ran a little bit better than expected and had saved about 11% versus accepting the fully insured renewal. More importantly, with the data they received a few plan tweaks were made that had little cost impact, but great quality of life improvements for the employees. For example, they increased the number of allowable visits to chiropractors and acupuncturists. At the same time, they created a system that dramatically incentivized using urgent care by charging more for an ER visit that should have been handled at either urgent care or the doctor’s office. By lowering the urgent care copay, they saw a fivefold increase in visits to urgent care and a near 60% decrease in “unnecessary” ER visits. Since the average ER visit cost the plan approximately $2,400 per hour, this had a tremendous financial impact. Over the past five years they have continued to modify the plan designs, to emphasize wellness and activity, while being able to keep co-pays and deductibles the same. In fact, they have seen an increase over the past five renewals of less than 2.5% in total since 2012.

How do we protect our company from volatility?

So, can the mere act of being self-funded help lower costs and generate control for mid-size employers? Surprisingly, the answer is yes. If all other things are equal, being self-funded will reduce costs due to premium taxes and insurance company profit being dramatically reduced. This alone accounts for about a 3-6% savings. However, not all things are always equal. The larger the purchasing pool for reinsurance the lower the premiums. These layers of protection help provide a maximum risk level that the group can adjust based upon their needs. As an example, we have seen specific deductibles of as low as $25,000 per member to as high as $1,500,000 per member. There is an opportunity to design the program in almost any way you desire. The key to any successful program is finding the risk tolerance of the organization and working within those parameters.
If this is so simple and better than anything in the fully insured market then how come so few employers are doing this? Why is this the exception, rather than the rule? Self-funding does come with the opportunity to save money over a fully insured option, but it also has the chance of being more expensive if the claims funding is set to low. This is where having good underwriters and actuaries are vitally important to setting up a plan to be successful from the start. In addition to the stop loss underwriters, we also recommend using an outside actuarial firm to help produce claims funding targets and set up budgets to avoid surprises. All of this preparation is valuable in helping employers feel that they have budgeted effectively for the plan year. That being said, it is not a guaranteed cost like the current fully insured plans. Quite often the volatility of claims funding is too great a hurdle for a company to fully commit to a self-funded platform.

Once an employer has determined their risk tolerance, and made a commitment to go self-funded, the question is finding the correct platform for their needs. A captive program is a very effective way to mitigate the risk for mid-size employers. A captive program works by asking the employer to accept all of the risk for a portion of the expected claims, then they will share risk with other member companies in the captive for larger, less predictable claims, and then ultimately purchases stop loss for catastrophic claims. By leveraging the buying power of the captive, group premiums are lower and claims costs are more predictable. In the event that there is money left in the captive program at the end of the plan year, those funds are returned as a dividend to member companies. Renewals are comprised of two portions, fixed costs (administration, stop loss premiums, etc.) and claims funding. Often, fixed costs are 12-18% of total plan expenditures. This makes it very easy to budget for renewals. The claims costs are managed by choice of network, plan design tweaks, and employee communications for example. If you are able to help employees use urgent care, rather than the ER, or focus on using generic drugs when appropriate, it is not uncommon to see an overall reduction in plan spending of 3-7% depending upon the changes.

How do we determine if this is right for us?

Self-funding is not universal, but with platforms like Self-Funded Medical Captives more employers are able to review their options and see what makes sense for them and their employees. By understanding the program mechanics, the internal risk tolerance, and working with experienced consultants it can be an answer to understanding why costs are increasing. In fact, it can help slow, and even stop, the endless increases faced by fully insured employers. The captive model of accepting risk for the expected claims, sharing risk for large claims, and insuring catastrophic claims has helped groups below 1,000 covered employees participate in the same benefits and efficiencies that every member of the Fortune 500 enjoys. With a good consultant to help guide the way, an affordable plan is within reach. The platforms available to mid-size employers today make reviewing self-funding a standard part of your renewal process. For Chris, it has led to millions of dollars in savings versus fully insured renewals. Take a look, you might find a plan that makes sense for you and your employees.

Permission is needed from Lighthouse Consulting Services, LLC to reproduce any portion provided in this article. © 2020

Andrew Kuykendall, CSFS, Alternative Risk Specialist, specializes in Alternative Risk programs including self-insured, participating, medical captive and minimum-premium solutions. He helps clients understand their programs through advanced data analytics. His role spans partner relationships, identifying the newest opportunities to help our clients control their costs immediately, and bending the cost curve in the future. He also keeps our staff educated on the theory, and practice, of alternative funding.

With 22 years of industry experience, Andrew has written and renewed nearly every funding mechanism in the marketplace, and has experience with individual policies up to 35,000 life Taft-Hartley funds. Prior to joining Woodruff-Sawyer, Andrew held key alternative risk and consulting roles at Neovia (now Woodruff-Sawyer), Bolton and Company, Andreini and Company, Benefit Solutions Company, Calco, Gallagher and Near North. He also formerly served as COO for an insurance agency in Irvine.

Andrew’s professional affiliations include serving as: board member of the British American Business Council (BABC) in Orange County from 2009-2012; founding member of the BABC Young Executives in 2010; and part of the broker advisory council for multiple TPAs and medical management service organizations. Andrew has been a speaker for the Health Care Administrators Association (HCAA) Webinar Series (2016), and developed a “Self-Funded Basics” education certificate series. He wrote one of the first Archer MSA plans in California in 1997. Andrew holds the Certified Self-Funded Specialist (CSFS) designation from HCAA. For more information, please feel free to contact Andrew at 949.233.6101 or akuykendall@wsandco.com.

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, Santa Monica, CA, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com.

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development. LCS can test in 19 different languages, provide domestic and international interpersonal coaching and offer a variety of workshops – team building, interpersonal communication and stress management.

To order the books, “Cracking the Personality Code”, “Cracking the Business Code” and “Cracking the High-Performance Team Code”, please go to www.lighthouseconsulting.com.

Our Sino-Am Leadership Program helps executives excel when stationed outside their home country. American managers in Asia and Asian managers in America face considerable business, personal, and leadership challenges because of the cultural differences. This unique program provides personal, one-on-one coaching. For more information visit, https://lighthouseconsulting.com/performance-management/talent-development/sino-american-management-style/.


Cut Health Care Costs by Establishing a “Culture of Health”

By Jerry Kornfeld, M.D.

[dropcaps type=”circle” color=”” background=””]A[/dropcaps]s every CEO and company owner knows, health care costs have skyrocketed over the past several years. In fact, many Fortune 500 companies now report that the majority of their profits are being eaten up by these outrageous expenses.

In order to deal with these increased costs, many employers have resorted to adopting managed care strategies of reducing benefits or cost shifting to employees. Unfortunately, these strategies alone cannot solve the problem. In fact, they actually make it worse by depressing the value of health benefits and directly impacting employee recruitment and retention. A larger and more effective solution involves establishing a “culture of health” in today’s companies.

What exactly does that mean?

Business owners need to think outside of the box and establish an environment that gives them some control over the crisis. This alternative strategy also depends upon improving the health status of employees so that less medical care is required.

exerciseBoth healthy and chronically ill employees will benefit from an improvement in their well-being, regardless of their current health levels. In addition, a positive program of disease management and prevention helps to reduce medical costs and has a direct impact on workers compensation, disability costs, absenteeism and productivity. This approach also complements health care consumerism as a strategy for health improvement and benefit cost reduction.

The bottom line is that getting your employees involved in a culture of health will result in improved employee health, outlook and satisfaction, as well as cost savings to you.

Where Do You Stand?

The most effective workplace health promotion involves a comprehensive program that aims at improving four key areas:

• Physical environment. A healthy, well-designed, safe place to work.
• Psychosocial environment. A culture that supports employee well-being.
• Personal resources. Having resources available to assist in coping with stresses when needed.
• Personal health practices. The opportunity to learn how to make lifestyle choices that support long-term health and wellness.

To determine how well your organization measures up to these criteria, answer the following questions:exercise2

• Do you have a strategic approach in place to develop and sustain a healthy workplace?
• Do your executives demonstrate (through their comments and actions) a commitment to the management of a healthy workplace?
• Do you have a formal program in place to evaluate employee health and health needs?
• Do you have methods in place that make it easy for employees to obtain health information so that they have help in making lifestyle changes?
• Have you suggested incentives to help your employees adopt this culture of health?

Nearly 50 percent of Americans report having a chronic illness, and they account for 75 percent of our national spending on health care. These high numbers have a direct impact on costs, disabilities, increased absenteeism, lower productivity, safety and morale. You can’t control the insurance companies and their fees, but you certainly have some control over your employees. Establishing a culture of health will help with a long-term strategy of health care management.

Currently, health care costs are estimated to cost $3,000 to $4,000 per employee, per year. Yet, 80 percent of all illness is preventable. For example, heart disease is the number one killer of men and women in America, but it is mostly a lifestyle disease. As I mention in my soon-to-be-released book, “Your Hundred Year Heart,” the majority of those who succumb to heart disease could have prevented its occurrence by changing a few habits and adopting a healthier lifestyle.

A Program that Works

How do you create a culture of health?

Start by explaining to new employees that you’re interested not only in their occupational skills, but also in their good health. From day one, let them know about your commitment to providing exposure to all of the latest methods of dealing with their illness and providing programs to help them prevent additional medical problems. To succeed, the program must involve a collaborative approach between employer and employee. The end result is healthier and happier employees and an improved bottom line through lower health care costs.

The lifestyle changes promoted by a culture of wellness and its impact on costs have been documented by many large corporations. For example:

• DuPont reported that for every dollar invested in workplace health programs, they received a $1.42 benefit in lower absenteeism over a two-year period.
• Johnson and Johnson reduced their absenteeism by 15 percent within two years after introducing their wellness programs.
• After analyzing claims over a two-year period, Sony Corp. of America found that 50 percent of its indemnity plan costs were incurred by employees with medical conditions that were lifestyle related or that could be changed.

healthyManAs a speaker, consultant, doctor and former HMO medical director, my recommendation is that every CEO and business owner strive to establish a culture of wellness for their company. Certainly, every business decision involves a careful risk/reward analysis. But when it comes to investing the dollars to develop this a culture of health for your employees, the rewards far outweigh the risk.

For more information, please contact Jerry at kjbkorn@aol.com or http://www.askdoctorjerry.com.

Permission is needed from Lighthouse Consulting Services, LLC to reproduce any portion provided in this article. © 2014 

If you would like additional information on this topic or others, please contact your Human Resources department or Lighthouse Consulting Services LLC, 3130 Wilshire Blvd., Suite 550, Santa Monica, CA 90403, (310) 453-6556, dana@lighthouseconsulting.com & our website: www.lighthouseconsulting.com.

Lighthouse Consulting Services, LLC provides a variety of services, including in-depth work style assessments for new hires & staff development, team building, interpersonal & communication training, career guidance & transition, conflict management, 360s, workshops, and executive & employee coaching. Other areas of expertise: Executive on boarding for success, leadership training for the 21st century, exploring global options for expanding your business, sales and customer service training and operational productivity improvement.

To order the books, “Cracking the Personality Code” and “Cracking the Business Code” please go to www.lighthouseconsulting.com.