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Group Medical Captives, Level Funding and US Healthcare Policy

In a recent article in Managed Healthcare Executive, Peter Wehrwein examines the trend of self-funding of group health benefits by smaller employers who used to depend mainly or entirely on fully insured programs.

The shift to self-funding, the article explains, is grounded in the Employee Retirement Income Security (ERISA), which exempts self-funded plans from state health insurance mandates, and in the Affordable Care Act, which strictly regulates small group and individual health insurance policies. Wehrwein presents the issues from the perspective of state and federal policymakers and regulators, which the article characterizes as “worrisome.” But what of the perspective of small employers?

Healthcare costs are rising at rates that are well in excess of the growth of real gross domestic product. This appears unsustainable, but these costs nevertheless keep climbing inexorably. For employers, the pressure to do something is compelling.

The article claims that self-funding is more expensive than fully insured coverage. But compared to what fully insured coverage, exactly? By definition, many small employers can only purchase coverage in the small-group market. This is, however, the very market these same employers are fleeing, and they are doing so precisely because it is too expensive. Indeed, the prohibitive cost of small-group market coverage is why individual coverage Health Reimbursement Arrangements have failed to gain widespread acceptance, particularly in large urban environments.

Wehrwein correctly identifies two options for self-funding: group medical captives and level funding, both of which he views as problematic. Small employers appear to disagree, however, based on their actions. In their view, these options instead represent viable options in their quest to provide competitive group health coverage to their employees. The two options for self-funding identified in the article are fundamentally different solutions that are appropriate for different cohorts of small employers.

Group Medical Captives (50 – 200 Covered Lives)

The term “captive” insurer traditionally referred to a “single parent” captive, which is a subsidiary of an operating company/parent that insures the risks of the operating company/parent and in some instances its affiliates. Historically, single-parent captives insured property and casualty risks and workers’ compensation, but they have more recently been pressed into service to cover employee welfare plan risks.

A group captive allows a group of unrelated employers to form a collective insurance company to manage some portions of their risks. Where, as is the case here, the risk is most often medical stop-loss coverage, the arrangement is referred to colloquially as a “medical stop-loss group captive.” For an extended discussion of medical stop-loss group captive funding arrangements and their accompanying legal and regulatory issues, please see our Special Report.

There is some debate over what size employer might most benefit from participation in a medical stop-loss group captive. While the conventional wisdom is that 200 covered lives is the sweet spot, credible estimates go as low as 50 covered lives. Whatever the appropriate number, medical stop-loss captives can in the right circumstances offer substantial savings when compared to fully insured coverage. [...]

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