Health Care Captives Quickly Becoming Vehicle of Choice for Medical Stop-Loss Exposures

Health care provider organizations (HPOs) are in the early stages of an unprecedented transformation toward population health management, which can ramp up earnings but also can increase earnings volatility.

HPO’s profit and loss statements (P&Ls) will shift from being predictable (based on encounters) to being at risk and begin to resemble those of multi-line insurance companies. As a result, efficient medical stop-loss protection — for the self-funded employee medical plan, accountable care organization (ACO) contracts, owned health plans, etc. — will play an increasingly important role in protecting HPOs’ ongoing financial viability.

Captive insurance companies provide significant advantages in managing these exposures compared to solutions available in the commercial insurance market and pure self-insurance:

• Access to the global reinsurance market, flush with capacity at extremely competitive — if not historically low — pricing:
  • Additional savings potential in the event of favorable loss experience, whereby surplus funding remains within the consolidated enterprise.
• Ability to:
  • Structure customized coverage.
  • Manuscript treaty wording to broaden coverage without impacting pricing.
  • Fund the captive dollar-for-dollar (no downside exposure to the captive) while still recognizing significant HPO cost reductions.
• Risk mangagement benefits:
  • Introduces short-tail exposures that are complementary to the long-tail property and casualty exposures typically managed in the captive.
  • Raises the HPO’s “risk IQ” and instills an enhanced level of operational and financial discipline across the organization.

While only a small percentage of health care organizations currently manage these exposures within their captives, the 2016 Marsh Captive Benchmarking Report identified medical stop-loss as one of the top five fastest growing lines of business for health care captives.

Before deciding how, or whether, to buy stop-loss, an HPO needs to evaluate their various exposures to health insurance claims across their organization and how best to finance that risk through self-insurance, captive retention and the commercial market.  Steps in that analysis include:

• Performing analytics to better understand how each of those exposures behaves.
• Quantifying the effect of various stop-loss coverage structures under the continuum of claim scenarios.
• Evaluating the efficiency of each financing source (self-insurance, captive, commercial market) across the various risk layers.
• Benchmarking the resulting coverage scheme against the HPO’s risk tolerance and other risks managed within the captive.

We believe the trend toward a coordinated risk budgeting approach will assist HPOs in streamlining their current risk financing programs while optimizing investment in insurance programs, captive capitalization, and risk mitigation. Medical stop-loss will play a key role in this process.

This article was written by Gary J. Bischel, Healthcare Provider Leader with Guy Carpenter & Co.