What is a Health Insurance Captive?
A Health Captive is a private insurance company created by one or a group of employers. Each employer is a member of the Captive. Instead of being pooled with the general public, the Captive member is working with other like-minded members in the Captive. Together, they share risk and engage in cost containment strategies for the good of the group. The administrative tasks of this mini company are managed by a Captive Manager. This alleviates any administrative burden on the members of the captive. It is important to note that Group Captives are selective as to who can join, due to the fact that behavior and healthcare spending of one member affects the entire group. Risk is shared, but so are profits.
Traditional Group Health Insurance vs. Health Insurance Captive
Traditional
A traditional group health insurance policy has multiple coverage pieces and multiple costs that are bundled together into one policy with one premium. However, as a consumer we typically only ever see the final premium. But that premium is comprised of many separate components. This is true of most services and commodities that we purchase, and insurance is no different. With health insurance, these pieces include but are not limited to:
- Cost of health insurance claims
- Prescription drug coverage
- Business overhead costs for the insurance company (payroll, policy issuance)
- Administration of the policy – collecting premiums, reviewing and paying health insurance claims
- State and federal taxes
- Profits for the insurance company
Health Captives
In contrast, a Health Insurance Captive “unbundles” these pieces into their separate components. This provides cost transparency, which can lead to cost control. Health Captives allow members to pay for their employee health insurance claims on an as-needed basis up to a specified limit. When your employees have a healthy year, you pay less in actual claims and savings is achieved. When your employees have an unhealthy year, the cost for more expensive claims above a certain threshold are shared by all the members within the Captive. Resources are pooled to help alleviate the burden of an individual or group of catastrophic claims. Additionally, all members pay a portion of the premium for Stop Loss Insurance. Stop Loss Insurance is the backstop. It pays for claims that exceed the limit shared by the Group Captive.
Health Insurance Captives create the opportunity for members to benefit from underwriting profits but also share in group claim results. Certain items that are part of traditional health insurance plans such as premium taxes and insurance company profits are reduced resulting in lower bottom line costs. Additional savings are achieved in years when employee claims are low. Health Captives historically were only considered by larger organizations. But the Health Captive landscape has changed. Rising costs for small and mid-sized groups in the traditional market has created interest, opportunity and availability in the captive market. Captives are now a strategic option for some small or medium sized groups.
How do Health Captives work?
A Simplified Outline
- Determine your organization wants a long term strategy for healthcare
- Qualify/Choose a health insurance group captive
- Contribute funds to the 3 Layers
- First Layer: Self Funded – Each member pays health insurance claims for their group as they occur
- Second Layer: Provide capital contribution to fund the Group Captive Layer
- Third Layer: Each member pays a portion of the premium for Stop Loss Insurance
- Claims are paid throughout the year from the appropriate funding level
- Evaluate year end and multiyear trend claim performance of the Captive
- Risk and cost is shared between like minded organizations
- Create ongoing behaviors and strategies to further reduce cost
A form of Self Funding
Health Insurance Captives can provide a form of Self Funding that helps smooth out the bumps of high claims. The first layer of coverage is truly self funded. However, there are two “buffers” to absorb catastrophic claims. Other members of the health captive can help buffer the years when your organization may have higher claims and vice versa. The group helps the members. Additionally, the group benefits when the claims performance is good, with surplus being available to members through the specific agreement of the captive. Lastly, there is the third layer of protection provided by a health insurance company. This is called Stop-Loss Insurance. If the entire captive claims experience exceeds a certain threshold, the stop-loss insurance provides the security of knowing additional claims will be covered.
Claim Data
Each Captive Member now has improved clarity and access to claim data. Claim data is very important to the success of any insurance captive. The Health Insurance Captive is motivated to share and analyze the claim data to further improve the performance of the group. Claim data is anonymized to protect employee privacy. This is important. But the aggregate data provides insight into the group’s healthcare utilization. Specifically it highlights what type of treatment is being used and where it is being provided. And it provides clear insight into the usage and costs of prescription medications. Small changes to where an employee seeks treatment or what pharmacy they use can make an enormous difference in costs. In addition, ongoing medical claims can be planned and budgeted. With health insurance claims, knowledge truly is power.