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By Dave Lenckus

However the U.S. Supreme Court ultimately rules on the constitutionality of the health care reform law, the decision likely will not choke back the undercurrent of change coursing through the American marketplace, health care experts maintain.

Benefits and captive experts largely agree that the group captive approach is a no-brainer for small shops and employers that sponsor health plans covering several thousand lives. But some experts contend that group captives -- which don't need U.S. Department of Labor approval since no single employer plan sponsor would control the facility and its capital -- also could help larger self-funded employers facing rising medical stop-loss coverage costs.

Even if the court overturns the Patient Protection and Affordable Care Act of 2010, benefits experts anticipate that some already in-force provisions are here to stay, notably the elimination of health plans' lifetime and annual benefits caps.

"No matter what happens in the Supreme Court or the (presidential) election, all of these changes will continue," said Sam Fleet, president of wholesale broker AmWINS Group Benefits of Warwick, R.I.

"My view is there already is a strong undercurrent of change to control costs" that would transcend those events, said Kathleen Waslov, a Boston-based a senior vice president and the senior resource consultant in the Captive Consulting and Multinational Employee Benefits practice at Willis North America Inc.

Despite the recent leveling off in health care inflation, employers cannot afford to let up on their cost control efforts, said Key Coleman, a managing director at insurer consultant Grant Thornton LLP in Chicago. "The economy has put the maximum amount of pressure on companies and benefit managers."

Health care cost increases slowed to 3.8 percent in 2009, the smallest increase in half a century, and 3.9 percent in 2010, the federal Centers for Medicare & Medicaid Services reports. But earlier in the decade, health care costs ballooned, with rates increasing anywhere from 6 percent to 9 percent annually.

Benefits experts and now a growing number of small and midsized employers see more opportunity to contain costs by self-funding, as do nearly all employers that sponsor health plans covering thousands of lives.

"The larger you are the more likely you are to self-insure, because of the spread of risk factors you can rely on," said Mike Ferguson, chief operating officer of the Self-Insurance Institute of America Inc. of Simpsonville, S.C. A large group also typically has more cash to pay claims and a stable workforce, which allows the employer to make reliable claim estimates, Ferguson said.

A group captive also "reduces the impact of lasering" that a self-funded employer on its own would feel, said Coleman. Lasering is the practice that some medical stop-loss insurers use to cut their costs related to a catastrophic claim. In subsequent plan years, the insurer charges more to cover that claim, insists the plan assume a greater portion of the claim or excludes it altogether.

If a small self-funded employer faced a catastrophic claim alone, the costs it would face after a medical stop-loss provider lasered the claim "could eat up its whole profits for the year," Coleman observed.

small groups Show interest

All of those factors are compelling many smaller employers and some large ones to examine how a group captive facility could help them, benefits and captive experts said. "There's a lot of talk about them," said Arthur Koritzinsky, a Norwalk, Conn.-based managing director in Marsh Inc.'s Captive Solutions Group. "I think it's picking up speed."

From 40 to 80 of the group captive insurance vehicles with an average of 20 employer participants each -- and in some cases many more -- are already in place, estimated Andrew C. Cavenagh, managing director of Pareto Captive Services in Conshohocken, Pa. Cavenagh also chairs SIIA's Alternative Risk Transfer Committee.

"And I expect to see exponential growth in the next several years," he said.

Other experts agree, as some brokers and consultants -- including Marsh, Willis and Spring Consulting Group -- are spearheading group captive formations. Driven by the PPACA's elimination of lifetime and annual caps on employee medical coverage, some large plan sponsors are examining new cost containment approaches, experts said.

For example, an employer with 15,000 employees is contemplating forming a group captive with employers of a similar size to create a group with 50,000 to 100,000 lives, said John Cassel, a senior partner at Spring Consulting in Boston.

Health plan sponsors of that size have so little health care cost volatility that they do not even purchase medical stop-loss insurance. While a plan sponsor with 15,000 lives is large enough to self-fund on its own, it still would be well-advised to purchase medical stop-loss insurance, Cassel said.

Cassel, though, said he still would advise the larger group to purchase medical stop-loss initially but at a very high level and then consider reducing or eliminating the coverage later.

Larger self-funded groups that currently purchase medical stop-loss coverage and have insufficient claim reserves could benefit by joining forces, Fleet said.

Willis' Waslov, though, said plan sponsors with several thousand lives that purchase medical stop-loss coverage are better off self-funding on their own. She said they could reduce their medical stop-loss costs by raising their deductibles, although that would be gambling somewhat that their claim costs won't rise subsequently.

Challenges Ahead

While a group captive does not require DOL approval, establishing an effective facility is not simple.

Pareto's Cavenagh said the mechanics of forming or joining a captive are not difficult but that educating employers about what is necessary to bond a group to ensure a facility's success is a "challenge."

An initial stumbling block can be commitment, said Fleet. The necessary minimal three-year commitment can be difficult for a company that "may operate year-to-year." Then the challenge is finding a group of other employers that are like-minded on various issues, such as a menu of health plans, claims-control and wellness initiatives, experts said.

"That's actually more complicated than getting Labor Department approval, because of the dynamics of getting 10 to 15 [employers] together on dealing with the employee benefits risks," Marsh's Koritzinsky said.

"The No. 1 thing employers struggle with is the paradox of choice," as they move from limited health plan design options that are available from an insurer to "unlimited choice with a lot of flexibility" in design when self-funding, Cavenagh said.

None of the four or five health plans a captive offers might be exactly what an employer previously provided, but the employer certainly can ensure that one plan option "represents" its previous plan, said Cassel.

In concert with that is understanding that self-funding does not bypass regulatory responsibility, Ferguson said. "Actually, the opposite is true," because self-funded employers are subject to the Employee Retirement Income Security Act, which means company executives become plan fiduciaries, he said.

Employers considering self-funding "generally don't realize that," Ferguson said.

Self-funded plans also have to provide the "minimal essential benefits" PPACA requires, although what that entails has not been clarified, said Waslov.

dangers of a Death spiral

No group captive is guaranteed to succeed. Benefits broker Jim Edholm -- who typically places coverage for employers with 30 to 130 employees, including a handful that self-fund -- does not like the idea of group captives.

Admittedly, said Edholm, president of Business Benefits Insurance Brokerage Inc. in Andover, Mass., the concept would take away his clients. But he also said that some group captives have failed after one participant with the youngest and healthiest group finds a cheaper insured plan and drops out. That leads to higher costs for the remaining participants and typically leads the employer with the next healthiest group to find a cheaper insured plan.

That "death spiral" pattern continues until the group captive is left covering "an old sick group," and the arrangement fails. "It certainly happens and can happen to any program," said Fleet.

"I agree with that," Waslov said. "It's very hard to keep a group together, especially if one or two employers have really good experience and the rest have worse experience."

"But if you've got a group of 28-year-old marathon runners, we tell them, 'Don't do this; set up a plan of your own,' " Fleet said.

For others, Waslov suggested ensuring their commitment to the captive for three to five years by making capital contributions and surplus accumulation nonrefundable if the employer drops from the group during that initial period. But the capital contributions cannot be so onerous that they discourage participation, she said.

To ensure success, "the key is the rules up front," such as making sure participants' requirements, plan member eligibility, plan design and wellness are in place, Fleet said. "Once you have a good playbook, you'll have a successful program.

And, group captives do not have to mean lost business to brokers, Fleet said. Brokers can play a "huge role," he said, in not only setting up the facilities but also in providing ongoing administrative and consulting services.

DAVE LENCKUS has covered the captive insurance industry for more than two decades.

March 1, 2012

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