Many business owners consider self-funded health plans because they offer greater flexibility and potential cost savings than traditional group coverage. However, these plans also come with financial risk. After all, a large medical claim can leave you strapped for cash. This is where captive health insurance can help.
Think of a captive insurance company as a team effort. Instead of taking on all the risk alone, you join forces with other employers to share costs and reduce financial uncertainty. But is captive insurance the right fit for your business?
In this blog post, you’ll learn:
A health insurance captive is an independent insurance company a group of businesses creates and owns to manage the risks of providing their employees with health insurance. The combined group of companies—often from similar industries or risk levels—is called a “captive.”
As the sole insurer, the captive covers the member companies’ employees enrolled in the health plan. As such, it incurs all the financial and administrative risk. But, employers have greater flexibility over plan design and more cost savings than fully-insured plans.
With self-insurance, a single employer runs their own health plan and independently funds the cost of providing a health benefit to their employees. In contrast to paying an insurance company a premium for health coverage, you set aside money to cover your employees’ medical claims. You’ll also pay the administrative costs and potentially stop-loss coverage premiums that come with managing the plan.
Captive insurance is a type of self-insurance strategy. It lessens financial risk by allowing several businesses to pool their resources and share the cost of insuring their employees. This gives its member companies more financial control over their budgets.
With traditional group coverage, employers choose their preferred group plan from a health insurance company. Then, the employer and enrolled employees pay a fixed premium to the insurance carrier to maintain active coverage. In exchange, the insurance company assumes all the risk of covering the employees’ medical claims.
With a captive insurance program, the members share the financial risk of providing their employees health coverage instead of relying on a third-party insurer. This gives the captive insurance company greater flexibility over their health benefits without taking on the entire risk of running a traditional self-funded plan.
The captive insurance arrangement works similarly to traditional self-insurance. Better yet, this alternative insurance model is available to various types of organizations, regardless of industry or size.
Here’s a quick look at how captive health insurance works:
If you’re considering creating or joining a captive insurance entity, you’ll be pleased to know that there are many advantages.
One of the biggest benefits of a captive health insurance entity is that it allows you to save on your healthcare costs. In contrast to fully-insured plans, you only pay for the healthcare your employees use. This can help you optimize your plan’s usage so you can save money over time.
Here are other ways captive companies can save:
Additionally, if you have more members in your captive program, you’ll have access to a bigger risk pool, which reduces each member’s overall health insurance costs. This is because potential losses spread among more companies in the group.
Captive insurance allows members to create their own health plan instead of choosing from a commercial insurer’s limited options. You determine the plan’s details, including deductibles, copays, coinsurance percentages, and out-of-pocket maximums. You can also choose your provider networks and any supplemental benefits.
These customization capabilities help you craft captive insurance coverage that will meet your employees’ unique needs, increasing satisfaction and morale.
Since captive members run their own health plan, they have complete visibility into how their employees use their benefits. This helps you identify gaps in coverage and run your claims process more effectively. You’ll also have insight into how much you’re paying for fixed costs and other healthcare benefits you’re offering.
This information can help you design better business risk management strategies and enhance your health plan to make it even more valuable.
Even with all its advantages over traditional insurers, some businesses may see potential downsides to captive health insurance strategies.
You’ll need substantial financial resources during the initial stages of a captive formation.
The setup fees include:
These setup costs can range from $50,000 to over $100,0001. This amount of money may be too much to manage depending on how many companies are in your captive.
Like traditional self-insurance, captive members assume all the difficult risks of running the health plan. A sudden change in business profits for one member company can shake the financial stability of the pooled funds. Additionally, if the captive carrier experiences several high medical claims during the year, it may not have enough resources to cover the costs. If one member has high claims, it can affect the entire group’s costs.
If you don’t have a captive where each member company is dedicated to its success, the capital you contributed may take a hit.
Like commercial insurance companies, captives are subject to insurance industry regulations in their state. The requirements may not be as extensive as those experienced by a traditional insurance company. But, like traditional insurers, there are still requirements regarding capital management, taxes, and reporting.
These regulatory requirements can be difficult to understand. They can also require significant time and money to complete. You may choose to outsource these compliance tasks to a captive management company. However, this fee for the management company services is another fixed cost you must consider.
Finally, the captive health insurance plan might force a member organization out. This can happen if a company experiences excessive claims, for example. The captive removes the organization to protect its financial stability.
If you’re looking for an alternative to your captive health insurance, there are options that can provide flexibility and cost management.
An individual coverage health reimbursement arrangement (ICHRA) allows you to give your employees a tax-free allowance for individual health insurance premiums and qualified medical expenses. This gives you complete budget control while eliminating the risk of self-insurance. Employees choose their own individual health plan, which gives them more control over their coverage.
There’s:
Learn more about our ICHRA+ solution.
For companies that like the idea of self-funding but want more predictability, level-funded plans provide a structured approach. These plans combine self-insurance with stop-loss protection, meaning employers pay a fixed monthly cost (similar to traditional insurance) while still benefiting from potential cost savings if claims are lower than expected. Unlike captives, businesses in level-funded plans do not share risk with other companies, making this a more controlled alternative.
Captive health insurance strikes a balance between traditional self-funding and fully insured plans. It gives employers more control over their healthcare costs while reducing risk through shared responsibility. By joining a captive, your business isn’t going it alone. You can draw on the strength of your fellow members to offer a quality health benefit your employees will love.
But like any new strategy, captive health insurance is not one-size-fits-all. Whether it’s a good fit for your organization depends on several factors, including the size of your business, risk tolerance, and financial stability. If done right, a captive insurer can give you a competitive advantage in managing healthcare costs while keeping your employees covered.