Tips for getting creative with your employer health plan

A group captive can be the solution for small and midsized companies

With the Affordable Care Act sparking big changes in 2014, U.S. employers are examining their health plans to stay ahead of the curve.

Small and mid-size employers may be facing ACA-induced sticker shock from traditional group health insurers. As a result, there has been a surge in interest in self-funding of employee health plans.

In Massachusetts, the only state that has already enacted health reform similar to PPACA, the percentage of employers with self-funded health plans has grown substantially, increasing from 54 percent in 2006, when reform was enacted, to 67 percent in 2011. Overall, nearly 74 percent of employees in Massachusetts were in a self-funded plan in 2011 — the highest rate in the nation.

Self-funding offers many administrative and financial advantages that can mean real differences to employees and employers:

 • Elimination of most premium tax

 • Significant reduction of any insurer profit margin and risk charge

 • Cash flow improvement

 • Control and flexibility of plan design

 • Elimination of many state-mandated benefits

 • Decreases the expected effects of ACA

 • Better data and cost reporting

 • Clearer window into administrative and claim costs

With self-funding, the employer assumes the financial risk for providing health care benefits to its employees. Employers pay for claims out-of-pocket as they occur, instead of paying a fixed premium every month to an insurer, regardless of how much health care is actually used.

In practical terms, a self-funded plan looks virtually the same as traditional insurance to employees. An administrator is hired to be the “face” of the health plan to employees – printing ID cards, verifying eligibility, paying claims and handling annual open enrollment, as well as arranging for provider networks and prescription drug plans. Behind the scenes, the employer is paying claims out of a special bank account, but this is generally invisible to employees.

To protect employers from taking a financial hit, an insurance broker can secure a high-deductible insurance policy, called stop loss insurance, to protect the employer in the event of an unexpectedly high claim or claims in a given year.

Making the switch

But self-funding can be difficult for small to midsized companies to implement. While virtually all Fortune 500 companies choose to self-fund their employee health plans, many smaller companies cannot handle the potential fluctuation in annual costs. This unpredictability often keeps self-funding just out of the reach of these employers.

One solution for employers with 50 to 500 employees can be a stop loss captive, also known as an employee benefit group captive. A creative approach for employers who are not ready to “go it alone” in the switch to self-funding, a captive allows self-funded employers to participate in part of the medical claim costs with other like-minded companies, replicating the size and stability of a single, larger employer.

Once reserved only for the largest of employers, captives have grown in recent years and become more user-friendly. There are now turnkey programs designed especially for small to midsize employers.

Captives work by pooling stop loss claims together and spreading the risk among its members:

 • Several employers pay stop loss insurance premiums to the stop loss carrier.

 • The captive pools claims together for less volatility and better spread of risk.

 • Each company retains control over its own benefit plan design.

 • Each company shares in the financial results. If claims and expenses are lower than expected, unused funds from the captive can be returned at the end of the program year.

Captives are among the fastest-growing niche in employee benefits. Employers willing to get creative with captives can have the best of both worlds – a way to continue offering employee health benefits, but with far more financial control and flexibility.

Dan Cronin is president of CGI Business Solutions, a benefits brokerage firm based in Hooksett. He can be reached at 603-232-9302.