An Uncertain Impact
Yet, since the ACA passed in 2010, a lot has changed. Now that implementation of its major components is all but guaranteed, employers — particularly those that self-insure their employee health benefits, purchase stop-loss insurance to transfer medical risk above a certain retention point, or self-fund their stop-loss needs through a captive insurance vehicle — have been left to wonder about the law’s impending consequences, both intended and unintended. Employers may wonder, and even fear, that the Affordable Care Act will augment their captives’ exposure — even make the traditional insurance market more appealing.
Truth be told, self-insuring employers that use captives had best be wary of uncertainties that could impact how they design their employee health care plans — but not just those necessarily resulting from the ACA.
Uncertainty No. 1: No More Limits
It should be noted that Debbie Liebeskind, a senior consultant at Towers Watson, doesn’t believe the ACA really influences employee benefits captives for large employers. When pressed, she did suggest that self-insured employers of all stripes ought to pause and re-evaluate their risk in light of one ACA proviso: the elimination of annual and lifetime maximums for essential health benefits.
“That has a direct impact on the dollar value of claims,” said Mike Ferguson, chief operating officer of the Self-Insurance Institute of America, a trade and lobbying group. We should also note that Ferguson also first stressed that ACA and captive insurance have very little to do with each other on paper. Health care reform has its impact at the build-block level, he explained, at the individual health plan and sponsor level.
“There is no mention of captives in the ACA,” he said. “Stop-loss captives are not directly impacted by the health care law.”
But numerous unknowns mean that they very well could be going forward.
Beecher Carlson’s Senior Managing Director Berni Bussell agreed that captive owners ought to ensure their vehicles are funded to handle a catastrophic medical claim in the multimillion-dollar range.
“They are relatively infrequent, but when they hit, they hit big,” he said, adding that captives can cede the exposure to reinsurers for “sleep-easy cover” in a very traditional excess of loss transaction.
His colleague Jason Flaxbeard, senior managing director at Beecher Carlson, runs the broker’s captive practice. Flaxbeard added that reinsurers have been willing to accept that lifetime, infinite exposure in his experience.
Still, said Bussell, the head of managed care, the marketplace has not “come to a resting place” on this exposure.
“There’s still a good deal of thinking around what that’s going to mean,” he said.
From the vantage of Andrew Pareto, managing director and founder of Pareto Captive Services, a firm that manages employee benefit group captives for employees with 50 to 500 employees, the traditional insurance market for stop-loss group captives looking to cede some of their risk is not just settled, it’s expanded and softened.
Capacity is there, from such players as AIG, Berkley, QBE, Munich Re and IHC. In the case of the group captives his firm manages, and the design of most stop-loss group captives, he said, stop-loss carriers write the layer above the members’ retention and then cede it back to the captive.
Teri Weber, a partner and senior consultant with the Boston-based Spring Consulting Group, said after years of hesitancy, carriers have become much more comfortable reinsuring captive risk.
“When you think about it, people with captives are usually large employers or pretty savvy groups that have come together,” she said. “And what better client base than a really savvy consumer?”
Uncertainty No. 2: Kicked Cans and Taxes
Donald McCully, vice president of alternative risk transfer for Roundstone Insurance, said that the only ACA-related change germane to self-insuring employers (and by definition including those involved in stop-loss captives) was the employer mandate, the so-called “play or pay” penalty for employers with more than 50 workers that fail to provide employee health benefits (aka, “virgin groups”). This tenet received the “kick the can down the road” treatment from politicians and bureaucrats, said McCully.
Also impacted beyond virgin groups — or not impacted — are employers with large groups of low-paid workers who might not be able to afford to buy into an existing sponsored plan.
If too few workers buy into an employer’s plan, that would be considered “discrimination” under the ACA.
Before the can got kicked, these two issues had been big unknowns for the self-insurance market, said McCully.
(Given the delay in implementation is one year, these unknowns will rise again.)
McCully pointed to one certain new ACA impact: higher costs for self-insured employers from the Transitional Reinsurance Program fee and the Patient-Centered Outcome Research (PCORI) fee. The former is a $63 annual charge (and $5.25 per individual monthly charge) on all plan sponsors in 2014, designed to stabilize the individual insurance market through 2016. The latter is a new fee ($2 per covered individual after October 2013 and indexed every year afterward through 2019) on all plan sponsors to fund research on medical treatment strategies.
Uncertainty No. 3: Overzealous Regulators
Whether or not ACA will impact captives, state regulators with political intent to support the ACA could have — indeed, already are having — an impact.
Legislatures in some states, such as California and Rhode Island, said McCully, are eyeing more stringent rules to increase stop-loss attachment levels — which would make self-insurance of any form too expensive for smaller employers. Think of it as a gaming table, and these states are trying to raise the minimum bet to play at the self-insurance table.
The second level of activity is at the captive domicile level. Take the regulators in Washington, D.C.
“Washington, D.C., is not in favor of allowing small employers located in D.C. to self-insure their health care risks, including the establishment of medical stop-loss captives, if their motivation for doing so would result in removing young and healthy persons from the exchange, leaving older and less healthy employees in the exchange,” Dana Sheppard, associate commissioner of the district’s Department of Insurance, Securities and Banking, said in July.
Asked for this article to clarify, the district’s team stood by the July statement, but said that the position only applies to employers with fewer than 50 employees. Companies that were self-insured prior to the policy are also not affected at the moment.
But the district’s commissioner of the Department of Insurance, Securities and Banking, William White, added in an email, “The District of Columbia has not taken a position on small employers in the district who already self-insure their health insurance risks. The district will monitor the use of self-funded health insurance arrangements, including the use of stop-loss captives, once DC Health Link, the district’s health insurance marketplace, begins full operations.”
Experts on the other side of the self-insured business balk at the implications and assumptions behind this stance.
Pareto countered that employers are not looking to cherry-pick the best employees into their self-insurance plan and away from exchanges.
He reiterated the refrain of most people involved in self-insurance when he said that the arrangement is about employers wanting more control of their futures and their finances.
In addition, self-insuring their health care risks gives employers the chance to house their own data, on their own particular set of risks.
“If you are self-insured you’re going to have a little bit more control of your plan design, a little bit more control over the kinds of programs you want to offer to hopefully make some targeted changes for your population,” Spring Consulting’s Weber said.
Pareto is concerned that these moves on the part of state governments represent the first of many moves by regulators against stop-loss insurance and self-insuring employers.
SIIA’s Ferguson called the D.C. stance a “political statement.” Captive regulators are essentially only supposed to enforce solvency, he said.
White’s response to that, in part, is that certain group stop-loss captives could be solvency risks.
“Non-health insurer affiliated captives will not have the data, expertise or market presence to compete against health insurer led self-insurance plans and will be susceptible to underpricing to attract business.
“This can create insolvency risk and disrupt the small business insurance market,” he said in an email.
Ultimately, the trend appears that health reform — and the inexorable inflation of health care costs due to numerous reasons — continues to prompt employers more than ever before to consider self-insuring or stop-loss captives.
More of Towers Watson’s large clients are considering using existing single-parent captives to manage their stop-loss exposure, said Liebeskind.
Midsize employers will always tend to evolve toward considering self-insurance as they grow, health care reform or not, she continued, but now they and even smaller employers think more and more about self-insurance instead of fully insured employee benefit plans.
The interesting twist is that by going to some form of self-insurance, employers will not avoid most of the ACA requirements. A move to self-insurance in any form would mean a plan would be considered a plan change and thus “non-grandfathered.” It would then be subject to ACA requirements, said Ferguson.
“You’re not getting yourself out of any requirements per se, but you are able to control the future of your health plan,” he said.