QUESTION: With all of the buzz surrounding “alternative funding” these days, can you please provide a couple of strategies that can assist clients in better controlling health care costs?
ANSWER: The bottom line is that it is time for brokers to understand that the new reality means a smaller market and less commission for their fully insured groups.
Alternative funding mechanisms give you a solution for employers where health care is a critical requirement for the recruitment of key employees, where affordability and costs matter and there is a sense of social obligation. Two alternative funding mechanisms many are considering in today’s health care climate are Captives and Risk Retention Groups.
Captives & Risk Retention Groups
Captives and risk retention groups (RRG) are established for the sole purpose of financing risks of a single employer or group of employers. Such risks include property and casualty and/or employee benefits. The self-funded arrangement for both strategies allows its participants many advantages, and the concept is fairly simple. A captive or RRG allows an employer or a group of employers to:
- Take control of medical data
- Agree to work with others to lessen the impact of large claims
- Use the money saved to convert fixed costs paid to others, to variable costs controlled by the employer and their firm
- Use the data to provide targeted solutions to current AND future claims.
- Act!
Insurance is about paying small amounts of money for large unknown things. Today we pay large amounts of money to cover small known things. Captive strategies are designed to get back to the true nature of insurance.
The Brokers’ Value
With the passage of the Patient Protection and Affordable Care Act, small and middle-market employers will likely find less flexibility in the benefits market and limited plan options available to them. For employers who want to continue to provide quality benefits to their employees, but keep costs under control, self-funding is a cost-effective and increasingly popular option, and can be done with very little difference in risk from a traditional fully insured offering. Today, 50% of insured Americans (70 million people) are in self-funded programs, according to a recent Towers Perrin report. Among other things, self-funding offers employers transparency and control, cash-flow advantages, and lower fixed costs.
With health insurance premiums rising and new regulations coming to light, employers are beginning to see that one of the best ways they can control their costs and scope of benefits in a post Healthcare Reform environment is to self-fund healthcare through a variety of vehicles including captives and risk retention groups. There are significant differences between a fully-insured and self-funded program, least of which is the type of employer that is best suited to self-fund. The ideal employer profile should include:
1. Views This Program as a Long-term Strategy—Not a quick fix; three- to-five-year process
2. Sees the Need to Engage Employees—Wellness and care management programs
3. Willingness to Make Investment—Employees are its most important asset
4. Not Looking to Shop Rates—Rather looking to manage costs
5. Understands Trend—Inflation and utilization
6. Successful—Strong financials
Brokers and consultants must be prepared to show their value by having client action plans demonstrating the value of alternative funding to groups who meet the criteria.
If you’re a broker with tough questions, I’m here to provide unbiased answers and feedback to help you take the next step in adapting your business. Feel free to leave your question in the comments.
Fleet is president of AmWINS Group Benefits, a wholesale broker of comprehensive group insurance programs and administrative services.
