Plan Sponsors considering or reviewing a Stop-loss Group Captive program versus level funding or fully insured options, 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 cash liquidity on the employer’s balance sheet. Employer control over the plan is also accentuated as 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 employer medical 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 approximately 10% of stop-loss premium in the form of collateral. The employer received a one year, 50% return on capital (cash returned divided by collateral amount). 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 – which sponsors ClearCaptive. ClearCaptive is a 50 state open access, stop-loss captive solution for middle market employers with at least 50 enrolled employees. We are a 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.