Driven by the ACA elimination of lifetime maximums and a new focus by drug companies in investments in rare disease cures, larger claims are increasing at a rapid rate. In turn, these larger claims are fueling an increase in health plan costs. Organizations that typically fully insured their medical health costs are now being forced out of “dollar zero” coverage and have had to take on a self-insured retention. Others, with smaller retentions in the first place, have had to greatly increase their retention amounts in recent years.
One method an organization can use to address increased retentions and rising costs is a captive. For employers that self-fund all or a portion of employee health plans, medical stop-loss coverage can provide greater control over plan costs, mitigation of high-value claims, and potentially generate premium savings.
In this model, the structure might look something like this:
Marsh offers a pooling facility called MedPool Re that covers a layer of $250,000 excess of the captive’s retention (captive must retain at least $150,000). Fronted by an A-rated carrier, MedPool also reduces any possible insolvency risks on the part of the insurer. This solution is especially useful for small captive and 831(b) companies because organizations of that size tend to be more dependent on the insurance market for some or all of their coverage. Larger firms are likely to already be self-insuring most, if not all, of this risk. The pooled layer provides not only diversification, but also the potential for profit should the claims not exceed the premium collected. Instead of the surplus going to insurers, it would be returned to the pool members.
By taking what would have been a higher retention of the organization’s own risk and diversifying it above the pooled layer, the captive owner is provided with more control over their costs in the long-term. Participation in a pool can offer several benefits to the captive:
- Cost stabilization for members with an expectation for future reduction in annual stop-loss coverage costs.
- Member employers can reduce premium costs by increasing retentions without a commensurate increase in risk.
- Risk stabilization and diversification to enable the captive owner to meet the IRS definition of insurance in the client captive. This can reduce the cost of non-health risks – such as Property and Casualty lines – written through the captive by 2 to 5% due to favorable tax benefit.
Organizations that are interested in a solution to their rising health care costs should evaluate the level of stop-loss they are comfortable retaining and conduct feasibility analysis to determine the potential cost impact.