Purchasing Power

How to utilize captive self-funded arrangements to reduce risk

The worlds of health insurance and financial wealth investment are merging together with captive self-funded arrangements.

These captives also are giving small and midsize employers a way to operate a self-funded group health plan for less risk.

Traditionally, midsized firms, those with 100 to 1,000 lives, have been reluctant to self-fund. While 93 percent of firms with 5,000 or more employees have self-funded health care, only 58 percent of midsize firms chose this option, according to a 2010 report by the Kaiser Family Foundation.

"These arrangements have been around for a while, but they are gaining more ground as small groups look for ways to self-fund with reduced risk," says Abbe Mitze, account executive II at HealthLink.

What are captive self-funded arrangements?

They pull together a group of employers - who are either close to each other regionally or have some common thread of industry such as farm implement stores - and put them in the same pool when they buy their stop-loss insurance.

Stop loss insurance is what protects the employer's plan assets once the claims reach a certain predetermined amount. These policies protect you against an unexpectedly large claims when you self-fund your health insurance.

Each group stop-loss captive has its own unique structure, but they all entail the employers buying individual stop loss policies. The critical mass and structure of these programs provide economies of scale for each employer by providing greater purchasing power.

Due to the risk sharing opportunity that the captive provides, it is also a more efficient model from an insurance purchasing standpoint

By spreading the risk across many companies, employers can find a piece of mind that is priceless. They don't have to be as concerned about large swings in cost, which is one of the biggest deterrents to smaller group self-funding.

In addition, the captive or insurance broker who manages the captive will take some of those stop-loss premiums and invest them.

If the investment does well, the employer groups in the captive would receive a dividend. You could use that dividend to reinvest in wellness or other health measures that would benefit your self-funded solution.

How does the captive group typically find each other, in order to come together?

The insurance or captives broker would get a concept pulled together, secure the vendor they want to use or who they want to manage the captive, and then go out and find the collective group of employers. They are the ones who explain the concept and what all is involved.

Doesn't an association or trust plan do the same thing?

It's very similar. An association or trust comes together to leverage their volume to have more purchasing power in the market. And the same is true for a captive, but then there is this financial component of an additional reward based upon the investments that are made.

What else do employers need to know?

You still manage your health benefits and plan independently, just as you do today as a standalone employer group. The only thing it affects is your stop-loss.

There's not a lot of administration on the part of the employer group, but you do need to make a small initial investment that provides the starter capital for the wealth management piece. It's typically a percent of the stop-loss premium.

Who would be a good candidate for a self-funded captive arrangement?

The employer group would need to have a tolerance for self-funding, and also have the capital necessary to make that minimal investment upfront.

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