Captivating: what's the buzz around health insurance captives?

• Author: Lang, Ron
• Position: Practice management

Health insurance captives are being touted as the new, hip way for firms to beat the Affordable Care Act. Captives are insurance arrangements owned/controlled by its participating employers, and while they may not be new, they're complicated.

Although many terms used are interchangeable, the flavor we'll discuss in this article is the Group Medical Stop Loss Captives. These are typically used for small-and mid-sized employers, which include all but a handful of CPA firms.

With a captive, the employer is at risk and therefore can benefit from the overall underwriting performance as well as income generated by invested reserves. The captive group is made up of of companies that are too small to self-insure and are typically in the same industry. By combining a number of employers, critical mass to self-insure as a group is achieved. The carrot is that employers will (somehow) achieve a lower cost of claims and administration for their employees than they could through traditional market options.

The assumption of risk also presents the employer with upfront costs, financial exposure, and administrative requirements (costs) not incurred with fully insured plans.

Many "captive specialists" have recently hit the market promoting captive advantages in particular regard to circumventing Affordable Care Act regulations. These consultants do the necessary legal and administrative work to establish a captive on behalf of a group pool of like-kind employers. They make money through consulting, broker and administrative fees for the captive.

Looking under the hood of a captive, each individual employer is operating a self-funded plan. The employer designs and offers a self-funded health plan to employees and reinsures itself by buying specific and aggregate stop-loss insurance from the captive. In addition to the reinsurance costs, the employer pays the actual cost of their claims; claims administration, captive management and network fees; and an additional capital contribution (typically 10 percent or more in the first year). Even if the captive is taking on a significant portion of the administrative burden, certain self-funded functions and costs cannot be ceded to administrators and remain with the employer.

The captive operates on the employer's contributions and pays claims in excess of the employer's stop-loss limits out of its reserves. The captive purchases reinsurance to manage the overall risk...