Why an Employee Benefits Captive?
By Andrew Royce, June 5, 2018
Why are middle-market companies looking into Employee Benefit Captives?
Employers are frustrated with paying higher premiums while the insurance companies continue to get richer. The five-year performance for the three largest, publicly traded insurance companies is shown below; notice that each is trading at an all-time high, with astounding growth and market capitalizations.
|Stock Price (12/1/12)||Stock Price (12/1/17)||5-year Increase|
|Market Cap (12/1/12)||Market Cap (12/1/17)||5-year Growth|
|UnitedHealthGroup (UNH)||$51.8 billion||$217.7 billion||320%|
|Aetna (AET)||$15.1 billion||$58.7 billion||289%|
|Cigna (CI)||$15.4 billion||$50.9 billion||230%|
Health Care Service Corporation, the parent company of BlueCross BlueShield of Illinois and the nation’s fourth largest insurer is registered as a “not for profit” mutual company and therefore is not publicly traded. Regardless of a ‘not for profit’ registration, HCSC financial results are equally staggering:
- 2017 Revenues: $35.7 Billion
- 2017 Gross Profit: $5.3 Billion
- 2017 Net Profit $1.3 Billion
The above HCSC figures do not include fees collected from Self Funded Employers.
Health insurance costs account for the second largest employee-related expense – second only to wages, according to a September, 2017 study by the U.S. Bureau of Labor Statistics. To control increasing health insurance costs, many employers have had to:
- Absorb higher premium rates
- Raise employees’ premium contributions
- Increase deductibles
- Increase out-of-pocket expenses
- Reduce network options and/or
- (Re)-introduce HMO plans
Perhaps most important, and least known -- Transparency! For years, health insurance companies have gotten away without being forced to share information – for example, claims data - with their customers, and this has contributed to their recent explosive growth. They do not share their true costs; they embed profit centers in multiple facets of the healthcare system; and they work to keep data from buyers. Insurance carriers pass along rate increases with a deceptive term called ‘trend’. A 4% ‘trend’ rate increase might sound like a good renewal if you’re a buyer, but 4% over last year’s premium does not rationalize costs. The good news is that buyers are starting to push back. They are looking for innovative options and demanding additional data. When one compares a traditional health insurance proposal to an employee benefits captive proposal, the true costs are revealed - and the insurance carrier profiteering is startling.
Employee Benefit Captive – An Innovated Employer Strategy
A captive insurance program is a strategy that can have a major impact on controlling rising costs and providing higher quality healthcare benefits for employees. A captive structure allows businesses to ‘unbundle’ the healthcare plan, which is made up of the provider network, third party administrators (TPA), pharmacy benefit managers (PBM), and wellness providers. By unbundling, companies can strip out the excess costs built in by insurance companies. In a captive, you pay to use the insurance carrier network and for the insurance card, but utilize other providers for the administrative services. These other providers are independent, and work to serve the buyer in a cost effective and transparent manner. A captive structure is seamless to the employees - which makes for easy implementation and administration.
The captive itself is incorporated as an insurance company that rents a provider network from an insurer (Cigna, United Health Care, Aetna). Members of the captive have control over who joins, and are smart to create alliances with other like-minded organizations that are dedicated to promoting employee health and wellness. In doing this, a company’s risk pool is stabilized, costs are reduced, and profits are returned to the captive owners rather than to the insurance companies, as in the traditional market.
Additionally, captives allow their member firms to be more agile and responsive than they would on their own. As a collective group, captive members gain access to data and insights that can help steer their employee health insurance programs. Finally, the captive group model allows for significant potential savings on administrative services, health management tools, and network access fees.
Who should consider an Employee Benefit Captive?
Employee benefit captives are ideal for companies with 100-1000 employees, strong leadership, and that value employee health and wellness. Typically, companies that are a good fit for a captive program pay a minimum of $1,000,000 in annual premium, have acceptable claims history, and a healthy and diverse workforce.
Benefits of an Employee Benefits Captive
- Members become a part owner (shareholder) of the insurance company formed
- Opportunity to save up to 45% on medical premiums by unbundling
- Earn investment income on premiums paid
- Establish a new profit center
- Increased transparency which leads to more control over insurance and claims
- Reduction of pricing volatility and increased budget stability
- Earn dividends for favorable claims experience
- Realize important tax benefits
- Fund estate planning and/or executive bonuses with premium dividends
If you would like more information on an Employee Benefits captive, please contact BlueStone Advisors at 630.504.6400.
Andrew Royce, CIC, CRM, CLCS, CRIS is Co-Founder & President of BlueStone Advisors, LLC, an insurance brokerage and consulting firm specializing in Property & Casualty, Employee Benefits and Captives. He specialized in captives for property & Casualty and Employee Benefits and has over 15 years of industry experience. Andrew can be reached at firstname.lastname@example.org.
Tags: Employee Benefits