By KARIN LANDRY, managing partner of Spring Consulting Group LLC; DONALD J. RIGGIN, head of the firm's risk financing practice; JOHN CASSELL, senior partner; and EMILY FERREIRA, a consultant
While the goals of healthcare reform are clear (covering the uninsured, increasing quality of care and making healthcare affordable for all), the details still being debated in Washington remain to be seen.
So far there has been a lot of speculation on what will be implemented and the effects of the changes on the insurance industry. Though healthcare reform is currently halfway through its first step on its way to becoming reality, there are still other stages of bill combinations, amendments, and votes that need to occur before a final bill is signed by the president.
Still, we can still take a look at the key provisions that are being addressed by each of the three proposed bills, America's Healthy Future Act of 2009 in the Senate Finance Committee, the Affordable Health Choices Act in the Senate HELP Committee, and America's Affordable Health Choices Act of 2009 in the House Tri-Committee, and analyze them for the potential impact on the captive insurance industry.
Each health reform initiative is looking to expand coverage to all U.S. citizens. Individuals or employers who do not offer coverage to their employees will be assessed fines or penalties. If the penalties are set at appropriate levels and applied effectively, they will have the intended effect of increasing healthcare coverage.
The Senate Finance Committee's America's Healthy Future Act of 2009 exempts employers with 50 or fewer employers from the penalty. The Senate HELP Committee's Affordable Health Choices Act exempts employers with 25 or fewer employers from the penalty. The House Tri-Committee's America's Affordable Health Choices Act of 2009 does not have a set exemption for small employers, but it will "provide hardship exemptions for employers that would be negatively affected by job losses as a result of requirement."
All three proposals also offer premium credits to small employers to assist them in purchasing health insurance. Though they all employ slightly different approaches, the end result for each remains the same: a larger market for insurers providing coverage. It also presents an opportunity for people to be covered through a captive arrangement as well.
Both the Senate Finance Committee and the Senate HELP Committee bills include provisions for state-based health insurance exchanges, while the House's Tri-Committee bill proposes a National Health Insurance Exchange. For the state-based exchanges, captives could provide a funding option for employers looking to participate in the exchange but who also need coverage on a national level.
The Senate Finance Committee bill seeks to appropriate $5 billion to finance the creation of a temporary reinsurance program for employers providing health insurance coverage to retirees ages 55 to 64. The program will reimburse employers or insurers for 80 percent of retiree claims between $15,000 and $90,000
This could provide captives with an opportunity to provide reinsurance over $90,000 stop-loss maximum for this risk pool since many pre-65 retirees have claims in excess of $90,000.
The Congressional Budget Office said recently that reforming some aspects of medical-malpracticelaw would reduce the federal deficit by $54 billion over a decade. The significant figure could encourage tort reform in the Senate's proposal, most likely placing a cap on damages awarded in malpractice cases. One goal of this cap is to discourage doctors from practicing "defensive" medicine, which can lead to unnecessary and duplicative tests for patients.
For insurance captives, however, an imposed cap by the government may decrease incentives for doctor groups to create medical malpractice insurance captives to control this risk. Med-mal captives are very common in the industry, with a majority domiciled in the Cayman Islands. Though it is unlikely that a cap would motivate any current captive owners to dissolve their program, effects would really depend on the level at which the risk is capped, a decision to be made in the coming months.
The Senate Finance Committee bill is proposing to allow insurers to offer a uniform national health plan in the states they are licensed, and also proposes to permit states to form health care choice compacts which would allow insurers to sell policies in any state participating in the compact.Allowing insurers to sell across state lines may help to reduce some of the few remaining pockets of state resistance to health group captives or risk retention groups (RRGS). In some states where there is limited competition, this would provide some welcome competitive relief.However, the Senate Finance Committee bill also allows states to opt out of the national plan so it is unclear which states may opt out.
The flexibility to operate across state lines will also create a potentially better environment for healthcare captives using a group captive or an RRG as a base. To date certain states (California, for example) have disputed this development despite the obvious advantages to multi-state employer groups. Association and employer group captives currently need to consider local fronting arrangements to provide coverage in these states at extra cost.
REINSURANCE TO FUND HIGH-RISK POOLS
The Senate Finance Committee's bill seeks to provide assistance for those with pre-existing conditions by creating a temporary high-risk pool. Individuals who have been denied health coverage due to a pre-existing medical condition and who have been uninsured for at least six months will be eligible to enroll in the high-risk pool and receive subsidized premiums. This pool will exist until 2013.
These risk pools may present an opportunity for employers to fund through a captive, thereby containing their risk. They could keep this group separate and maintain compliance by insuring them, but doing so in a way that is not detrimental to the rates for the rest of their covered population.
The Senate Finance Committee's bill also proposes to set aside $6 billion in federal funds to facilitate the establishment of health insurance co-operatives. Co-operatives as currently proposed by the bill will be required to be licensed in each state in which they operate. They will be subject to state solvency requirements and other state regulations and will be available to qualifying organizations, though will likely appeal primarily to smaller groups that lack the bargaining power to obtain competitive rates from insurers.
Although this model is relatively narrow in focus in its present form, this may change and in fact, the concept of co-ops is much broader. In principle, the concept of people or organizations banding together for the common good manifests itself in a number of ways, one example being the existing Group Health Cooperative in Seattle.
Association captives that fund health insurance in their various forms can be viewed as co-ops as the participants own the captive entity that provides health insurance or other employee benefits. The participants receive better coverage and cost savings are passed back in the form of lower rates or dividends. These entities fit the government ambitions for co-operatives.
Some effort is being made to expand the administration's view to encompass these types of programs which have valuable benefits for employer groups and for which there is real demand.
At this point, no one knows what the final version of the health care reform bill will say, and how it will affect employers' health care funding strategies. We can, however, speculate about a couple of things. First, if the mandate that all Americans must purchase, through one source or another, a minimum level of health insurance, survives into the final bill, health insurers would have access to millions of additional customers; a fact not lost on the captive community. In this environment it is easy to envision the birth of a brand new type of captive: rent-a-captives specifically for health insurance, as well as other such structures as cell captives devoted to multi-employer health insurance arrangements.
Unlike previous attempts to reform health care in the early 1990s, it appears that this time something will actually happen. Regardless of the outcome, we believe that the movement to insure health and other employee benefits in captives will continue to grow because organizations will continue to seek better control over this major cost of doing business as they have done with their property and casualty risks.
December 1, 2009
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