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By MATTHEW BRODSKY, editor of Wharton Magazine

Mercer, McKinsey, Deloitte. These big-name consultancies and others have been predicting a massive defection of employers from health care benefits as we approach 2014 and the big push into Obamacare.

Even midsize and smaller companies can wield this alternative tool in their risk-transfer belt, and from what our sources tell us, they are investigating captives if not actively pursuing the option.

Mark E. Morris, senior vice president and head of the accounting and tax practice group at Lockton, is witnessing this action in different forms. Some middle-market firms (say, with a health plan in the range of hundreds of "lives," or insured individuals) are looking to use an existing single-parent captive to manage health care risk. The captive funds their stop-loss insurance -- essentially protection from significant, infrequent claims or the rare, chronically ill individual.

In fact, plenty of employers in the thousands of lives range already use captives for stop-loss coverage, said William J. Thompson, principal and consulting actuary at Milliman.

Another form of activity is relatively new. It involves group captives, where like-minded firms come together in a group captive, bound by an industry association, for instance. Or a broker/agency or insurance company can own the group captive, Morris explained. Typically, in these setups the captive provides the layer of coverage above what the individual members retain.

The exciting thing about these captives is that even a small employer (of, say, 50 lives) can join in. As most of these group captives work, the smaller employer must only be able to cover as low as the first $20,000 to $25,000 in coverage per employee to make the group captive fit its budget.

To understand one primary benefit, do the math. If you have a group captive consisting of 20 employers with 50 lives each, that makes a pool of 1,000. The aggregation of risk affords the members greater predictability and smoothed-out volatility for costs.

USA Risk Group, a captive management firm with reach into the major domiciles around the world, is setting up one such captive. Called Priority One, the setup is based on employers retaining and self-funding the primary layer of risk, as low as $25,000 per individual. Above that is the captive, a shared risk pool that covers an additional $250,000. And above that is private stop-loss insurance. AIG fronts the program and underwrites the stop-loss.

"It's one of our biggest pushes of the year," said Gary H. Osborne, president of USA Risk Group. "It's a big drive because there are a lot of people not knowing how to handle Obamacare and the exchanges."

Osborne is referring to another benefit of captives. Not only does the federal government have 1,000 pages of new rules for employers to follow for health care, but states are setting up heavy hoops and fees. By turning to self-insurance and captives in particular, employers gain ERISA exemption, meaning their benefits programs are only governed by federal rules.

USA Risk Group currently has a handful of employers in the captive and hopes to have three to four times that by next benefits renewal in January 2014. Companies with 51 to 500 employers are the target.

Artex, the captive management subsidiary of brokerage Arthur J. Gallagher & Co., is behind another of the few group captives already launched. Called Vantage, its program aims for members with 50 to 1,000 lives. Again, it offers employers the option to decide how much they will self-fund (from $25,000 to $250,000) and then offers $250,000 of stop-loss coverage through the captive's pool. Above that is private stop-loss, in this case underwritten by Berkley.

The program has only been marketed in the past few months, said Karl Huish, senior vice president at Artex, but it has upward of 10 members with several more in talks. Like Osborne, Huish sees federal health care reform and the threat of greater state involvement as a possible tipping point for increased use of self-funding for benefits.

"That will naturally lead to the captive discussion," he said.

Of note is that both examples of group captives offer access to a top layer of stop-loss. Another attractive benefit is that pooling their resources leads to buying power for this reinsurance for smaller employers. In comparison, a smallish employer self-funding on its own would find that stop-loss coverage above at $25,000 attachment money would cost "a lot of money," said Milliman's Thompson.

Employers grouped together can also weather a $500,000 claim far easier than a lone employer.

"This is an aggregation play [that] takes the scary parts of self-insurance out," Osborne said.

Taking this aggregation theme one step further, an employee benefits group captive allows smaller employers to be able afford more and perhaps better wellness and disability management services. That is good. According to Morris at Lockton, a captive is "more a top-off idea." To really tackle health care cost inflation and increased utilization, employers need to also reconsider program design and apply proven solutions for healthier workforces.

No surprise, both Artex's and USA Risk Group's programs include risk management and wellness elements.

Employee benefits group captives could hold all the answers, yet with all things seemingly too good to be true, joining a captive does not come without its risks and hard work. Thomson confided that as health care insurance captives get more play over the coming months, he has the feeling there will be more stories of failure than "wild success."

The actuary's list of challenges include: the money that incoming members will have to pony up to join, the task of finding members who are in the captive for the long run and not as a one-renewal play, and the chance that a captive could collapse if it fails to bring in enough members or if members leave.

Another risk is legislative and regulatory. Onshore domiciles that profit from the formation of captives are, of course, keeping a watchful, but approving, eye on any benefits-related captives. Steve Kinion, who is the head captive regulator for Delaware (where Artex's Vantage captive is domiciled, coincidentally), keeps watch over more than a half-dozen captives providing individual and aggregate stop-loss coverage.

Since the Supreme Court found most of Obamacare constitutional, he has "been questioned repeatedly on that topic." And one of the oft-repeated questions is: What level of stop-loss coverage would he tolerate?

Kinion ensured that most, if not all, of his current stop-loss captives provide coverage above a $20,000 attachment for individuals.

"You know, $20,000 is a pretty good number," he said.

That, you see, is a "sweet spot," currently recommended by the NAIC and generally accepted as the point at which coverage stops looking like primary, first-dollar coverage -- and below which a captive stops being a captive.

Yet Kinion brings up this pretty good number because possible changes are afoot. NAIC is considering increasing its current recommendation (enshrined in the 1995 Model Law) to $60,000.

The Employee Benefits Security Administration in the Department of Labor is investigating this issue.

And in California, a bill (SB 161) introduced on Feb. 1 would -- among many other things -- make it illegal for stop-loss insurers to sell coverage with an individual attachment point below $95,000.

If enacted, that would basically make a product like USA Risk Group's not feasible, as only employers with greater than 500 insured workers could afford to self-fund up to $100,000, according to Osborne.

"That would pretty much stifle a fair amount of that [captive] activity," Thompson said.

Multiple sources said Sacramento's reasoning is that legislators (and perhaps the lobbyists of the large HMOs and PPOs) fear that self-insurance and captives could attract enough employers to leave the state exchange and the fully insured market at a disadvantage -- perhaps turning them into high-risk pools.

As Morris explained, smaller and middle-market employers are already managing health care costs through plan changes, incentives and wellness initiatives. And these employers are turning to self-insurance to recoup the benefits, leaving the other employers (not so actively managing their costs) behind.

So the employers are fighting back. The Self-Insurance Institute of America Inc. (SIIA), a trade group representing self-funding companies and the vendors that bank on them, fought to squelch a similar California law last year and on its website (as of this writing) all but promises to bring a "major lobbying fight" to derail this latest legislation.

In fact, it launched an initiative to raise awareness about stop-loss captives, particularly for small and midsize employers.

This brings us back to our original point. Employers do still want to offer health benefits to their workers. The reasons, simply put by Alexander T. Renfro, an attorney who specializes in employee benefits at the Ratliff Law Firm in Knoxville, Tenn., is that opting-out of benefits will not end up saving as much as employers think and, perhaps more importantly, will disadvantage them in employee retention and recruitment.

"Our findings have been that no one, especially middle management and above, wants to work for a company that doesn't provide health benefits," he said.

All this bluster about ending employee health benefits because of Obamacare could be an "immediate gut reaction," Huish said. Sure, in 10 to 15 years, we could all be at a single-payer system if the exchanges fill up and thrive, but calmer heads could prevail among the employer community. Employers of all sizes, he said, might realize: "You know what, I don't like it, but we are in the health care business."

February 28, 2013

Copyright 2013© LRP Publications