Exploring Health Captives

The idea behind joining a health insurance captive – a form of self-funding – is to pool risk across its participating companies to save significant amounts of money for each. But what happens when your company’s employees often represent the “good risk” holding up the “bad risk” within the pool?

That’s precisely what can occur when credit unions enroll in a traditional health plan or join a generic health insurance captive. In fact, most credit unions share risk with high-risk industries, such as construction, roofing, maintenance and even asbestos removal. While this may provide cost savings benefits for companies within those industries, it results in unnecessarily high expenditures for credit unions and exorbitant costs for their employees. With an average age younger than 40 and the number of annual medical claims nearly a quarter below other industries, credit unions’ risk level is among the best in the U.S. Don’t let that positive performance go to waste.

What Is a Health Insurance Captive?

Rather than the traditional fully insured model where companies pay premiums to an insurance company in exchange for health care coverage, the health insurance captive is essentially its own insurance company owned and controlled by its members. Participating companies pool funds to support claims payments. The captive then buffers large claims through tiered risk levels. Typically, at the first tier, a participating employer will be responsible for paying claims up to a predetermined ceiling that signifies it’s reached its maximum cost threshold. The captive’s shared risk pool will be responsible for the next layer of stop-loss coverage until it, too, reaches its cost ceiling. The final tier activates on substantial claims that rise above the captive’s shared risk maximum. The captive’s reinsurance company covers this third tier.

Premiums paid into the captive’s shared risk layer (the middle tier) but not used within a plan year can be returned to participating organizations. For credit unions that adopt the captive model, this type of rebate is a major shift in the financial relationship between credit unions and their health plan. At present, most credit unions go the opposite direction, producing about 25% in wasteful employee benefit spending each year. That’s $225,000 lost for a group of 100 employees.

Benefits of Joining a Health Insurance Captive

As a supercharged self-funded plan, health insurance captives can lower costs, maximize transparency and improve benefits. Because the captive owns its health plan data, member credit unions have full access to claims trends. Free from the constraints of a fully insured plan, the captive can develop its health plan network, benefit structure and incentives to best meet its membership demographic’s needs.

By pooling risk with like-minded partner credit unions, captive members can tailor insurance coverage to reflect the group’s loss exposure more accurately. Each participating employer is rated and charged individually. As a result, credit unions are rewarded or penalized for their individual expenditures and risk while still benefiting from the overall group’s performance. How? Underwriting gains from the captive’s shared risk layer (middle stop-loss tier) are returned proportionally to the members each plan year.

Because captives offer a level of transparency and flexibility not available through a fully insured plan, they don’t subject members to surprise bills or treatment sticker shock. A properly managed captive will improve the employee experience through guided medical management that ensures each plan member’s health care is accurate, timely, optimally priced and produces the desired result.

Why Captives Are Even More Beneficial for CUs

With an average age of 39 and the low-risk nature of their employment, credit union employees form a particularly favorable risk pool – a healthy group whose lower overall claims mean much lower group insurance costs than other industries. Demographics mean everything in health insurance pricing, and for credit unions, this can be a huge financial advantage for those who act on it.

CU Benefits Alliance medical claims analytics reports show that credit unions’ per-employee per-year (PEPY) medical claims are 23% less than other industries. Even when compared to other financial services workers, credit union employees display far lower PEPY medical claim costs.

A credit union-specific captive harnesses the predictability of those claims, rating and charging its members appropriately – and financially rewarding them through lower premiums. Instead of acquiring stop-loss with other employers (and covering those groups’ higher risk in the process), participating credit unions’ stop-loss premiums are based exclusively on the low-risk profile credit unions enjoy.

Why Didn’t My Broker Tell Me About This Model Before?

Some companies have concerns about the word “captive.” After all, in another context, it means being taken prisoner or confined. Like any health plan arrangement, a captive must be administered correctly and with the right intentions. Brokers who primarily deal with fully-insured health plans – or the agents who represent them – may be reluctant to talk about captives or other alternative health plan models that may not be in the broker’s wheelhouse.

Telltale signs of improperly organized captives include members with an overly risky risk pool or policies that are unduly generic and simplified to suggest that the plan does not expect to manage any real claims. A captive also must have adequate capital and show that it makes significant claims. Otherwise, it could be a red flag signaling intentional design to serve as nothing more than a tax shelter. Using the model as a tax shelter, especially in property and casualty, has drawn the scrutiny of the IRS and the Securities and Exchange Commission.

Brokers sometimes operate with a limited approach to alternative self-funding arrangements. As a result, a credit union’s health plan decision-makers may not be aware of the captive model. Although, ironically, traditional health insurance companies often participate in their own captive strategies to help cut their expenses. Additionally, only a handful of credit union captives are active in the United States. Most brokers, even if they are familiar with the captive insurance concept, simply don’t have access to a credit union-specific captive.

Join Forces With Like-Minded CUs

With the right partner and plan design, health insurance captives capitalize on the advantageous risk pool shared by credit unions across the country. They do so without shuffling expenses from the credit union to its employees in the form of higher deductibles, monthly premiums and other out-of-pocket costs.

Don’t throw away the advantages of your credit union’s healthy risk pool. With a health care captive, you can empower plan members to navigate the insurance system with all the information and tools they need to receive optimal care while your credit union takes control of its health care costs, becomes more competitive and shares a portion of annual premium returns.

John Harris CEO CU Benefits Alliance Portland, Ore.