Captive Insurance Company Lines Of Cover – Part 3 – Health Benefits

A growing trend in the employment of captive insurance companies is to utilize a captive as part of a company’s health benefits plan.  The Patient Protection and Affordable Care Act (PPACA), also known as “Obama Care”, contains multiple provisions that increase costs for many employers.  This has encouraged many employers to look for creative solutions to meet Obama Care requirements and provide meaningful benefits to employees without breaking the bank.

PPACA essentially divides employers into 2 groups; Those with 50 or more full-time equivalent employees, which we’ll call “large”, and those with less than 50 full time equivalent employees, which we’ll call “small.”  PPACA applies different rules to both “large” and “small” employers and will cause significant cost challenges for many.

Large employers that choose to offer health insurance coverage (and those that don’t will pay penalty taxes) must offer their employees “Minimum Essential Coverage.”  This means that the coverage can’t be too limited and must offer certain government-mandated benefits.  But oddly, the coverage can’t be too expansive either (i.e., so-called “Cadillac” plans are taxed additionally).  As is proving to be the case for most employers, providing the minimum required benefits under Obama Care costs most large employers more money.

Small employers, by contrast, are required to offer “Essential Benefits.” “Essential Benefits” are not as extensive as the Minimum Essential Coverage that large employers must provide, but will include things like maternity care, children’s vision, emergency and laboratory services.

Many companies looking to control costs and avoid the inflexibility imposed upon employers by Obama Care are evaluating self-insurance arrangements.  Companies that self-insure their health care plan are allowed much greater flexibility in plan design.  Greater flexibility for companies that self- insure enables them to offer “Major Medical” or custom craft their own health insurance and health benefits plans to provide meaningful but affordable coverage to their employees.

But informally self-insuring health benefits can be inefficient and risky.  However, formally self- insuring a portion of health benefits through a captive insurance company can reduce the downside risk of self-insuring health care benefits.

Also, associations or groups of like-minded businesses can choose to share risk for their self-insurance plans in a captive insurance company.  This approach results in 4 payment layers for their health benefits plans.  The first layer is paid by employees via deductibles and co-pays.  The second layer is self-insured and paid for by the employer.  The third (and most critical) layer is insured and paid for by the captive insurance company.  In a shared captive arrangement, employers can spread risk and share payment for major claims.  Major claims often cause employers’ to lose “stop-loss” coverage or face significantly increased stop-loss insurance rates.  Finally, the fourth layer is a stop-loss layer.  The stop-loss insurer pays for claims beyond the captive’s policy limits.

A “captive” is simply an insurance company with the same or related ownership as the primary companies it insures.  In recent years, competition between domiciles (states and off-shore) has significantly driven down the cost to establish and operate a captive insurance company.

Formally self-insuring health insurance risk through a captive insurance company can provide these benefits:

1)     Flexibility in health care plan design.

2)     Elimination of the requirement to book a liability on the employer’s books to account for expected health care claims.

3)     Establishment of reserves or a sinking fund that lessens the cost of stop-loss coverage in the future.

4)     Avoidance of state imposed premium taxes.

5)     The possibility of realizing substantial profits that currently accrue to the benefit of third party insurers.