Middle market employers gain control and transparency by transitioning to self-funding (SF) utilizing a group captive program. Control over the Plans offered; Transparency over all aspects of the what drives the renewal cost. Said another way, do away with arbitrary overhead charges, undisclosed costs and RX revenue to the fully insured (FI) carrier. The FI carrier unilaterally changes the Plan (not offered this year?) misstating the actual impact of the FI renewal. SF renewals are easier at open enrollment, employers can choose to leave the Plans in place. The conversation is the change in employee and member contribution. FI overhead is subject to Medical Loss Ratio (MLR). The 15-20% MLR ignores fees and rebates FI carriers add or receive that do not require disclosure. Increasing FI profitability year over year. Prior to passage of the Affordable Care Act (ACA), the SF transition conversation centered on removal of state mandated coverage and premium taxes. The conversation today expands to include ACA Health Insurance Taxes (HIT) and the gerrymandered MLR.
The ACA imposes an annual, non-deductible cost on insurance companies that offer FI plans and other providers of health coverage – the “HIT”. This ACA fee was intended to fund the state and federal ACA marketplace. The fee is based on an insurer’s share of the market, which is calculated based on each insurer’s net premiums for the year. The estimated applicable amount to be allocated between the FI market in 2020 exceeds $15,500,000,000. ACA requires the fee be paid in each calendar year after 2013. Legislation enacted in December 2015 suspended HIT collection for 2017. January 2018 legislation suspended the HIT collection for 2019. Unless Congress acts, the fee will go into effect for 2020. Even if congress acts shortly, can you expect your locked rates to be reduced by the FI market to offset removal of the HIT mandate?
The annual HIT fee is assessed and paid on a calendar-year basis, based on data from the prior year. Next year the HIT fee is due September 30, 2020, based on 2019 data. Only FI carriers and providers of similar coverage pay the HIT fee. FI carriers pass the HIT tax to employer group clients in the form of higher market premiums. The increased HIT amount will likely result in plan premium increases for 2020, adding roughly 3% to the overall premium costs. Plan sponsors should be aware this fee may be reflected in their 2020 FI premiums.
Middle market employers self-funding utilizing a group captive gain transparency and control while avoiding HIT, certain state premium taxes, some state coverage mandates, undisclosed RX rebates and the overall lack of transparency in the FI market.
Don McCully runs Medical Captive Underwriters LLC, www.medicalcaptive.com - Program management company using alternative risk transfer solutions lowering employer’s costs in both A&H and P&C insurance. Primary focus today is employee benefit advisors to lower medical spend and medical trend for employers enrolled in ClearCaptive. ClearCaptive is a 50 state open access, stop-loss captive solution for middle market employers with at least 50 enrolled employees.
Plan Sponsors considering or reviewing your Group Stop-loss Captive program: Does cash matter?
Middle-market employer plan sponsors choose a group stop-loss captive over fully funded options for a variety of reasons. Increased data transparency derived from self-funding delivers more accurate measurements of medical spend reporting to apprise management of this unremittingly increasing expense item. Increased medical expense reduces cash liquidity on a self-funded plan sponsor’s balance sheet, especially when revenue does not grow enough to offset the rate (5.8%) of annual medical inflation over the past decade.
Medical inflation grew at twice the yearly US inflation rate during this time period and is driven largely by the costs of specialty pharmaceuticals which are growing at an unprecedented rate. Also contributing are increased instances of catastrophic claims over $1 million, which have grown more than 30% annually in each of the last eight years. The growth rates in these two categories are exacerbated by the addition of fully insured carriers adding overhead and other ambiguous expense fees to their premiums. Fully insured carriers make nearly ten times the profit compared to independent, unbundled stop-loss carriers.
Self-funding through a group stop-loss captive effectively lowers an employer’s costs as insurance carrier overhead, administrative fees, state premium taxes and ACA assessments are not a component of the plan sponsors directly paid RX and medical spend. Self-funding delivers a lower overall cost structure which contributes to increased asset liquidity on the employer’s balance sheet. Employer control over the plan agility is also accentuated as most plan assets are controlled by the self-insured employer plan sponsor.
Greater control to increase transparency and reduce costs are primary reasons that self-funding through a group stop loss captive is a preferred option for middle-market employers to more effectively manage this important income statement expense. A tradeoff however, for enrolling in a group captive program is the requirement to post collateral, typically in the form of cash or a letter of credit, to secure their portion of “insurance company” obligations assumed by the captive. In return, employers can expect reduced benefit costs and the opportunity receive dividend distributions from their participation in the shared profitability of the captive.
Profitability dividends delivered by the captive serve to effectively lower overall medical benefit spend. An example of a successful underwriting year is an employer receiving a 5% of premium return in the form of a dividend distribution from the captive. In this example, the employer posts 10% of premium in the form of collateral. The employer received a one year, 50% return on capital (collateral). It is important to note that receiving profitability distributions from the captive/shared risk layer are not guaranteed and posted collateral is also at risk of a partial or even full loss.
Cash does matter! The amount of collateral required, the number of underwriting years that collateral funds will be held, along with the percentage and frequency of dividends returned by the captive all need to be appropriately understood by the employer. Does the group stop-loss captive have a consistent history of returning profitability distributions? What is the captive program’s frequency of providing dividend distributions? Every three years, every other year or four out of five years? The experience of the underwriter combined with employer participation in initiatives that influence reductions to medical and pharmacy costs will contribute to the increased potential for delivering underwriting profit.
No two programs are the same. Each employer is unique, just like each group stop-loss captive program is unique. Lowering the ultimate cost of delivering healthcare benefits to employees is a primary objective for participating in a group stop loss captive. The program should empower an employer with increased ability to control this expense line item on their income statement and improve balance sheet liquidity. Success can be measured by reducing insurance expenses, retaining more cash and receiving profitability distributions associated with an appropriate sharing and spreading of risk.
Don McCully runs Medical Captive Underwriters LLC, (www.medicalcaptive.com). A program management company focused on alternative risk transfer solutions to lower employer’s costs in both accident and health & property and casualty insurance. Primary focus today is employee benefit advisors assisting them to lower medical spend and medical trend for employers enrolled in ClearCaptive. ClearCaptive is a 50 state open, stop-loss captive solution for middle market employers above 50 employees enrolled on the Plan.