Health Care Captives Offer Risks and Rewards (article)
Thanks to rising health care costs – likely to climb further in the wake of the Patient Protection and Affordable Care Act (PPACA) health care reform – captive insurance arrangements are once again in vogue as innovative and aggressive ways to cost-effectively provide employee health care benefits. But do these captives, used for workers compensation and general liability programs as alternatives to the traditional insurance marketplace for more than 100 years, make sense for your organization?
A captive insurance arrangement is basically an insurance company owned and controlled by its insureds. As owners, the insureds are the principal beneficiaries of the underwriting profits and investment income. Captives can be organized in a variety of ways to accommodate the owners’ specific risk tolerance, and are sometimes seen as an option for organizations too small to self-insure.
Recently, health insurance captives have been promoted as a means for mid-sized organizations to control the cost of health benefits they offer their workers. In a health insurance captive, which can serve multiple organizations, each participating employer assumes a small amount of the self-insured risk and utilizes the captive to fund large individual claims and claims in excess of an aggregate target.
Pros and Cons
For some organizations, captive health insurance arrangements may be able to lower health benefit costs because they eliminate health insurance premium taxes, reduce insurance carrier fixed costs and strip out carrier underwriting gains. Captives can also help minimize the risk for smaller employers who have historically been wary of self-funding their health plans by risk sharing on the stop loss protection with other similar groups. The ability to avoid state mandates by using a captive is also an appealing cost consideration for employers since mandates can add up to 30 percent to the cost of group health insurance.
However, there are a number of drawbacks to captives. For one, there is the potential for increased plan costs to cover the large fronting fees the plan may require. Beyond that, underwriting losses and reduced diversification combine to expose the captive member to substantial risk. Though this risk can be offset by reinsurance, captive participants are not guaranteed to save money in exchange for shouldering this additional risk. Add to that the initial capital requirements, termination provisions and fees from the captive manager and the captive may begin to look less appealing.
Clearly, deciding whether or not to utilize a captive is tricky. Becoming a captive participant may be profitable or fraught with an unacceptable degree of risk. Our National Captive Practice Group can help walk plan sponsors through the analytics so they can make an informed decision regarding whether or not to make the move to a health care captive.
For more information, contact your local CBIZ office.
Randy J. Hart is a Senior Vice President at CBIZ Benefits & Insurance. He can be reached at RJHart@cbiz.com or 443.259.3265.
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