Medical Stop Loss Captives

An increasing number of small and mid-sized employers are exploring medical stop loss group captives as an alternative to first dollar health insurance and traditional self-funded health insurance programs. The captive leverages the benefits of a self-funded health plan through the use of a captive insurance overlay. Among the many advantages of a stop-loss captive is greater stability of excess/reinsurance costs. In addition, stop loss captives are typically not subject to Department of Labor approval, which simplifies the decision for many employers.

Read on to learn more about medical stop loss group captives, how they work, the potential benefits for employers, and two different solutions offered by Captive Resources (CRI).

The Dilemma for Employers

Most employers are acutely aware that health care costs have been rapidly rising over the past fifteen years, significantly outpacing inflation — Table 1 provides evidence of this by comparing premiums to the Consumer Price Index (used to determine inflation).

Medical Stop Loss Captives-Table 1-Healthcare is Far Outpacing Inflation-Final-v3
Sources: U.S. Department of Labor Bureau of Labor Statistics | Kaiser Family Foundation

Over the last two decades, the average employer costs for family premiums have more than tripled for companies of all sizes (see Table 2). For employers, health care often represents the second largest operating expense after employee wages (see Table 3 ). For most, it’s the fastest growing operating expense, and one that they feel they have little ability to control.

Medical Stop Loss Captives-Table 2 & 3-The Rising Cost of Healthcare
Sources: Kaiser Family Foundation | U.S. Social Security Administration

Yet, health insurance is a key benefit that employers must provide if they’re to offer employees a competitive benefits package and continue to attract and maintain top talent. The growing Millennial segment of the workforce is seeking high-value benefits without the high cost. Employees rank their health insurance as their most important benefit (see Table 4) — this makes health insurance much more than a low-cost decision.

Medical Stop Loss Captives-Table 4-Top Benefits When Considering a Job Decision
Source: Employee Benefits Research Institute and Greenwald & Associates

Options Beyond Conventional Coverage

With traditional, fully-funded health plans, many employers have few, if any, options to control these costs. For years, larger companies have turned to self-funded plans to take charge of their health insurance programs, choose their preferred third-party administrators (TPAs), and gain control over premium costs. While more than 90 percent of large companies are self-funded, less than half of mid-sized companies self-fund (see Table 5).

Medical Stop Loss Group Captives-Table 5-Companies that Self-Fund Health Coverage
Source: Kaiser Family Foundation

As health care costs continue to rise, smaller and mid-sized companies are increasingly looking to leverage the benefits of self-funded plans. While many smaller companies lack the scale to completely self-fund their health programs, there is another way to achieve similar benefits. Medical stop loss group captives allow smaller and mid-sized companies to combine their buying power to build self-funded health insurance programs as a group.

Benefits of Medical Stop Loss Group Captives

Medical stop loss group captive members enjoy the best of both worlds by providing members the increased control of a self-funded program while still offering protection from catastrophic risks. Here are just a few of the benefits of a medical stop loss group captive:

Medical Stop Loss Group Captives-Table 6-Medical Stop Loss Group Captive Benefits-v5

CRI Medical Stop Loss Captive Options

CRI advises two medical stop loss group captives that provide companies the flexibility to tailor health benefit programs to their unique requirements.

Both captives offer members the opportunity to seize greater control over their health insurance programs and premium costs. Members can work within their current plan design, choose unique stop loss limits that best fit their companies’ needs, select their own claims administrator, and access local, regional, and national PPO networks.

As stakeholders in their own insurance company, the group captive members we work with are inherently incentivized to manage costs via the captive’s risk-reward model and are eligible to earn dividends for better-than-expected performance. CRI works with the members of both medical stop loss captives to bring innovative, cutting-edge solutions and best practices, to help them continue to expand their health risk management strategy. In doing so, members are better able to manage their total health care expenditures — including costs below their specific retentions, where the bulk of their health care dollars are spent.

One captive works with companies that are currently self-funding and leveraging conventional stop-loss; the other captive works with companies transitioning from fully insured coverage to self-insurance with stop-loss provided by the captive.

Provisions vary by captive. Each captive’s program documents contain a complete statement of program terms that should be carefully reviewed.

Captive Option for Self-Funded Employers

The captive focuses on prospects that have the ability to gather at least two years of claims history, both monthly paid claims and large claim details.

 Program highlights include:

Captive Option for Employers Transitioning to Self-Insurance

This captive is designed for companies that are currently fully insured without the ability to gather claims data, but are looking to transition to self-funding. Three years of fully insured renewals are required for consideration.

Program highlights include:

How are the Medical Stop Loss Group Captives Structured?

Funding medical stop loss in a group captive has proven to be an excellent way for employers that seek to self-fund health coverage, but add protection from excessively high individual or aggregate health claims.

The medical stop loss group captives supported by CRI feature a flexible structure designed to fit your company’s needs:

Table 7 illustrates the relative risk breakdown of a medical stop loss group captive as compared to individual self-funded and fully funded plans.

Essentially, the captive provides an additional layer between the employer’s selected retention and an excess reinsurance layer. This middle layer, the captive retention, is shared with other employers. Table 8 presents the basic structure of the medical stop loss group captives and shows the risk divided into the three layers.

Medical Stop Loss Captives-Table 8-Medical Stop Loss Group Captives Structure-v3

Table 9 provides detail of the captive retention layer of coverage in excess of each member’s self-insured retention. This layer includes the member’s loss fund, provision for assessment, and risk sharing. The loss fund is a function of the stop loss premium paid and is ceded to each individual company. The loss fund is the first funding mechanism to reinsure the fronting carrier when any claims fall within the captive’s retention. If the loss fund is depleted, groups can be assessed up to a known maximum to cover their own claim dollars still falling within the captive’s retention. If a member company uses all of its loss fund and assessment dollars, it is capped out and now, the rest of the captive covers the claim dollars it cannot cover within the retention. This is the Risk Sharing or Captive Co-Participation function.

Medical Stop Loss Captives-Table 9-Captive Reinsurance Funding-v2

As a reminder, in one captive, aggregate stop loss coverage is included in the captive structure. In the other program, the coverage is optional and written directly with the fronting carrier.