The ACA and Captives

Captives Offer Control

Captives offer employers better control over their health care benefit plans.
By: | November 3, 2014

Rogers Petroleum currently employs 89 people. The Knoxville, Tenn.-based provider of wholesale petroleum distillates insures perhaps 130 lives on its health plan, estimated its vice president of risk management, Mike Jellicorse.

That’s a small-sized company by any measurement. No matter.

Beginning in January 2014, Rogers went self-funded, joined the WELLth Employee Benefit Captive for stop-loss coverage, and aims to remain “in control of our own destiny,” as Jellicorse put it.

Health care reform, in part, drove the decision. As Jellicorse recounted, the employer first considered using a stop-loss captive in 2012, but demurred because of the vagaries of Affordable Care Act implementation.

By 2013, the future was more certain. The ACA then had the opposite effect, encouraging Rogers’ business leaders to self-fund employee health benefits and join a captive.


Again, it came down to control — in large part being able to design its plan any way it wanted as a self-insuring company (as long as it remained within the 60 percent minimum benefit threshold dictated by the law).

It’s the mantra of control that risk and benefit managers at large employers have been repeating over and over to themselves, to their bosses, to captive conference participants and captive owner prospects, and to journalists for years. Now it’s on the lips of some of the smallest employers.

They can now share in the freedom from traditional insurance markets, their volatility and unpredictability, their lack of transparency, their premium spikes year after year.

“That’s what we’re banking on,” said Jellicorse. “Historically, [captives] will flat-line your increases.”

“Everybody Gets There Eventually”

Captive industry growth in 2014 is generated as much from mid-size and small companies as big Fortune 1,000 types, insiders said. In an increasing number of cases, these smaller-sized firms are doing so to help finance their employee health benefits.

“Historically, [captives] will flat-line your increases.” — Mike Jellicorse, vice president of risk management, Rogers Petroleum

Jeffrey Fitzgerald, a vice president of employee benefits at Innovative Captive Strategies (ICS) in West Des Moines, Iowa, which is the firm that owns and operates the WELLth group captive in which Rogers Petroleum participates, said the majority of his firm’s growth has come from small and mid-size employers joining a heterogeneous group captive to seek the benefits of self-funding — more stability, transparency, and essentially more credibility and bulk pricing given from underwriters.

To meet the demand, ICS has created nine group captives — roughly half in the past 18 months — with 100 to 120 clients. The groups are fronted by an insurance carrier, which then cedes the stop-loss coverage back to the captive (a typical structure of a captive writing third-party risk).

ICS can group employers in these heterogeneous captives by several factors, size being an obvious one. Groups are also built based on the level of employer sophistication. How stringent are they on their wellness providers and what level of accountability do they demand? How focused are they on loss control? Some companies are more advanced than others.

“Everybody gets there eventually,” said Fitzgerald. “Most captive members are going to get to a point where they’re communicating with each other, they’re engaged and they’re holding each other accountable.”

Jellicorse at Rogers gives the impression that his employer is already pretty far along the learning curve. They, in part, came to a captive to help make their efforts in wellness pay off.

For years, the company saw improving loss ratios among its population without any premium savings from the insurance company. Now, as a self-funder, paying monthly premiums to itself and simply paying claims as they come along, it stands to reason that any reduction in claims will lead to more money in its proverbial pocket.

Jeffrey Fitzgerald, a vice president of employee benefits at Innovative Captive Strategies

Jeffrey Fitzgerald, a vice president of employee benefits at Innovative Captive Strategies

Rogers’ employees also benefit from new wellness programs like metabolic screening and weight-loss programs targeted at those at risk for metabolic syndrome, as well as the COMPASS program, which allows members to price shop for medical services. Claims above $25,000 go to the group stop-loss captive, and if the captive’s loss experience is good that year, what’s left over gets paid back pro-rated, to members like Rogers.

These benefits are nothing new to large employers but represent a welcome change for smaller employers.

“We have a couple of different opportunities to come out looking much better cost-wise at the end of the year,” said Jellicorse.

ACA Drives Changes

Fitzgerald sympathizes with his clients. They are really in a “tough place,” he said, meaning that they have had to spend the last two years learning how to be compliant with the ACA.

Most, he said, never intended to drop benefits. But they now know what the cost of their employee health care is, versus what they were actually spending on premiums and services. They have learned to tie their costs to their claims, versus just to their premiums.


“If they’re not in a position to control the spend or have some say or take some risk, then I think it can be really tough,” he said.
Employee benefits are on the minds of captive owners overall.

This year’s Annual Captive Insurance Market Study, released in March by the Captive Insurance Cos. Association (CICA), revealed that more captive owners are considering writing employee benefits in their captive in the intermediate term.

“Further delays, and continuing changes, in the implementation of the Patient Protection and Affordable Care Act are causing ongoing uncertainties around the impact on various constituencies,” the survey authors wrote.

Stop-loss coverage was by far the most popular. Of 133 CICA survey participants, 12 percent already wrote stop-loss in their captives, while 26 percent said it was likely or possible in the next three years.

Karin Landry, past CICA chair and managing partner at Boston-based Spring Consulting Group, said this is a mentionable “uptick” in interest.

Landry, like Fitzgerald, is seeing more small and mid-size employers seeking to pool their stop-loss coverages, and in response to this activity, a number of producers are forming captives for clients.

“I think there are a lot of good solutions out there, but there are some that are not that good,” Landry added.

Beyond stop-loss, Landry is seeing movement again in the Department of Labor’s (DOL) fast-track approval process for single-parent captives to write benefits.

Essentially, this is a process by which large enterprises must file with the DOL to be exempted from ERISA.
Once the DOL approves a given case, then others can gain fast-track approval if their captive use mirrors what’s been previously approved. The process slowed because of design, not because of a DOL change of heart, Landry said.

To earn fast-track exemption (a process called ExPro), companies had to point to at least one prior exemption in the past 10 years and one fast-track exemption in the last five (or two exemptions in the last five years).

Landmark exemptions, like ADM’s 2003 approval, were approaching this 10-year limit. What’s more, the DOL had purposefully built in a 10-year sunset on the program to allow it to review the program in 2012.

Now, however, it appears the exemption process is moving forward again.

“The DOL has shown it’s open to doing other fast-track approaches,” Landry said, suggesting she has some clients that will soon file for an exemption.

It stands to reason that trends like these, affecting single-parent captives, will ultimately drive trends in the industry overall, given the preponderance of single-parent captives in the industry.

In the Marsh Annual Captive Benchmarking Report, released in May 2014, two-thirds of captives were single parents. Only 11 percent of captives are considered group, risk retention groups or cells. These numbers are based on the 1,148 captives in total under management by Marsh, the largest captive manager in the world.

Another trend driving single-parent growth brings us back to the ACA. Health care organizations are generating plenty of activity in response to reform.

In 2013 in Vermont, the top domestic domicile, eight new captives formed for health care companies. In the Marsh benchmarking report, the health care industry is in “solid” second place in terms of having its share of captives around the world, at 13.6 percent.

“A health system making acquisitions needs to decide how many captives it needs, and in which domiciles.”

Two macro trends are happening in the U.S. health care space, with hospitals in particular, to ensure this fact remains so.
Physicians are increasingly seeking to become employees of health care and hospital systems, selling their practices in the process.

And those larger organizations are continuing to seek consolidation, buying provider groups and small local hospital systems — or even verging toward being “mega” players by buying or merging with other big systems, said John Lochner, a director at Towers Watson who specializes in working with such firms.


These processes lead health care and hospital systems to acquire new and more exposures, such as “prior acts” exposures as well as the simple fact that more doctors and hospitals leads to more risk — and often more captives, said Lochner.

A health system making acquisitions needs to decide how many captives it needs, and in which domiciles.

Lochner, though, is seeing this “very active environment” driven more by formations than by consolidations.

“Overall, there remains strong interest in captives throughout. Definitely captives continue to be formed, and not just for health care providers,” he said.

Matthew Brodsky is editor of Wharton Magazine. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Scenario

The Betrayal of Elizabeth

In this Risk Scenario, Risk & Insurance explores what might happen in the event a telemedicine or similar home health visit violates a patient's privacy. What consequences await when a young girl's tele visit goes viral?
By: | October 12, 2020
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.


Elizabeth Cunningham seemingly had it all. The daughter of two well-established professionals — her father was a personal injury attorney, her mother, also an attorney, had her own estate planning practice — she grew up in a house in Maryland horse country with lots of love and the financial security that can iron out at least some of life’s problems.

Tall, good-looking and talented, Elizabeth was moving through her junior year at the University of Pennsylvania in seemingly good order; check that, very good order, by all appearances.

Her pre-med grades were outstanding. Despite the heavy load of her course work, she’d even managed to place in the Penn Relays in the mile, in the spring of her sophomore season, in May of 2019.

But the winter of 2019/2020 brought challenges, challenges that festered below the surface, known only to her and a couple of close friends.

First came betrayal at the hands of her boyfriend, Tom, right around Thanksgiving. She saw a message pop up on his phone from Rebecca, a young woman she thought was their friend. As it turned out, Rebecca and Tom had been intimate together, and both seemed game to do it again.

Reeling, her holiday mood shattered and her relationship with Tom fractured, Elizabeth was beset by deep feelings of anxiety. As the winter gray became more dense and forbidding, the anxiety grew.

Fed up, she broke up with Tom just after Christmas. What looked like a promising start to 2020 now didn’t feel as joyous.

Right around the end of the year, she plucked a copy of her father’s New York Times from the table in his study. A budding physician, her eyes were drawn to a piece about an outbreak of a highly contagious virus in Wuhan, China.

“Sounds dreadful,” she said to herself.

Within three months, anxiety gnawed at Elizabeth daily as she sat cloistered in her family’s house in Bel Air, Maryland.

It didn’t help matters that her brother, Billy, a high school senior and a constant thorn in her side, was cloistered with her.

She felt like she was suffocating.

One night in early May, feeling shutdown and unable to bring herself to tell her parents about her true condition, Elizabeth reached out to her family physician for help.

Dr. Johnson had been Elizabeth’s doctor for a number of years and, being from a small town, Elizabeth had grown up and gone to school with Dr. Johnson’s son Evan. In fact, back in high school, Evan had asked Elizabeth out once. Not interested, Elizabeth had declined Evan’s advances and did not give this a second thought.

Dr. Johnson’s practice had recently been acquired by a Virginia-based hospital system, Medwell, so when Elizabeth called the office, she was first patched through to Medwell’s receptionist/scheduling service. Within 30 minutes, an online Telehealth consult had been arranged for her to speak directly with Dr. Johnson.

Due to the pandemic, Dr. Johnson called from the office in her home. The doctor was kind. She was practiced.

“So can you tell me what’s going on?” she said.

Elizabeth took a deep breath. She tried to fight what was happening. But she could not. Tears started streaming down her face.

“It’s just… It’s just…” she managed to stammer.

The doctor waited patiently. “It’s okay,” she said. “Just take your time.”

Elizabeth took a deep breath. “It’s like I can’t manage my own mind anymore. It’s nonstop. It won’t turn off…”

More tears streamed down her face.

Patiently, with compassion, the doctor walked Elizabeth through what she might be experiencing. The doctor recommended a follow-up with Medwell’s psychology department.

“Okay,” Elizabeth said, some semblance of relief passing through her.

Unbeknownst to Dr. Johnson, her office door had not been completely closed. During the telehealth call, Evan stopped by his mother’s office to ask her a question. Before knocking he overheard Elizabeth talking and decided to listen in.


As Elizabeth was finding the courage to open up to Dr. Johnson about her psychological condition, Evan was recording her with his smartphone through a crack in the doorway.

Spurred by who knows what — his attraction to her, his irritation at being rejected, the idleness of the COVID quarantine — it really didn’t matter. Evan posted his recording of Elizabeth to his Instagram feed.

#CantManageMyMind, #CrazyGirl, #HelpMeDoctorImBeautiful is just some of what followed.

Elizabeth and Evan were both well-liked and very well connected on social media. The posts, shares and reactions that followed Evan’s digital betrayal numbered in the hundreds. Each one of them a knife into the already troubled soul of Elizabeth Cunningham.

By noon of the following day, her well-connected father unleashed the dogs of war.

Rand Davis, the risk manager for the Medwell Health System, a 15-hospital health care company based in Alexandria, Virginia was just finishing lunch when he got a call from the company’s general counsel, Emily Vittorio.

“Yes?” Rand said. He and Emily were accustomed to being quick and blunt with each other. They didn’t have time for much else.

“I just picked up a notice of intent to sue from a personal injury attorney in Bel Air, Maryland. It seems his daughter was in a teleconference with one of our docs. She was experiencing anxiety, the daughter that is. The doctor’s son recorded the call and posted it to social media.”

“Great. Thanks, kid,” Rand said.

“His attorneys want to initiate a discovery dialogue on Monday,” Emily said.

It was Thursday. Rand’s dreams of slipping onto his fishing boat over the weekend evaporated, just like that. He closed his eyes and tilted his face up to the heavens.

Wasn’t it enough that he and the other members of the C-suite fought tooth and nail to keep thousands of people safe and treat them during the COVID-crisis?

He’d watched the explosion in the use of telemedicine with a mixture of awe and alarm. On the one hand, they were saving lives. On the other hand, they were opening themselves to exposures under the Health Insurance Portability and Accountability Act. He just knew it.

He and his colleagues tried to do the right thing. But what they were doing, overwhelmed as they were, was simply not enough.


Within the space of two weeks, the torture suffered by Elizabeth Cunningham grew into a class action against Medwell.

In addition to the violation of her privacy, the investigation by Mr. Cunningham’s attorneys revealed the following:

Medwell’s telemedicine component, as needed and well-intended as it was, lacked a viable informed consent protocol.

The consultation with Elizabeth, and as it turned out, hundreds of additional patients in Maryland, Pennsylvania and West Virginia, violated telemedicine regulations in all three states.

Numerous practitioners in the system took part in teleconferences with patients in states in which they were not credentialed to provide that service.

Even if Evan hadn’t cracked open Dr. Johnson’s door and surreptitiously recorded her conversation with Elizabeth, the Medwell telehealth system was found to be insecure — yet another violation of HIPAA.

The amount sought in the class action was $100 million. In an era of social inflation, with jury awards that were once unthinkable becoming commonplace, Medwell was standing squarely in the crosshairs of a liability jury decision that was going to devour entire towers of its insurance program.

Adding another layer of certain pain to the equation was that the case would be heard in Baltimore, a jurisdiction where plaintiffs’ attorneys tended to dance out of courtrooms with millions in their pockets.

That fall, Rand sat with his broker on a call with a specialty insurer, talking about renewals of the group’s general liability, cyber and professional liability programs.

“Yeah, we were kind of hoping to keep the increases on all three at less than 25%,” the broker said breezily.

There was a long silence from the underwriters at the other end of the phone.

“To be honest, we’re borderline about being able to offer you any cover at all,” one of the lead underwriters said.

Rand just sat silently and waited for another shoe to drop.

“Well, what can you do?” the broker said, with hope draining from his voice.

The conversation that followed would propel Rand and his broker on the difficult, next to impossible path of trying to find coverage, with general liability underwriters in full retreat, professional liability underwriters looking for double digit increases and cyber underwriters asking very pointed questions about the health system’s risk management.

Elizabeth, a strong young woman with a good support network, would eventually recover from the damage done to her.

Medwell’s relationships with the insurance markets looked like it almost never would. &


Risk & Insurance® partnered with Allied World to produce this scenario. Below are Allied World’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance.®.

The use of telehealth has exponentially accelerated with the advent of COVID-19. Few health care providers were prepared for this shift. Health care organizations should confirm that Telehealth coverage is included in their Medical Professional, General Liability and Cyber policies, and to what extent. Concerns around Telehealth focus on HIPAA compliance and the internal policies in place to meet the federal and state standards and best practices for privacy and quality care. As states open businesses and the crisis abates, will pre-COVID-19 telehealth policies and regulations once again be enforced?

Risk Management Considerations:

The same ethical and standard of care issues around caring for patients face-to-face in an office apply in telehealth settings:

  • maintain a strong patient-physician relationship;
  • protect patient privacy; and
  • seek the best possible outcome.

Telehealth can create challenges around “informed consent.” It is critical to inform patients of the potential benefits and risks of telehealth (including privacy and security), ensure the use of HIPAA compliant platforms and make sure there is a good level of understanding of the scope of telehealth. Providers must be aware of the regulatory and licensure requirements in the state where the patient is located, as well as those of the state in which they are licensed.

A professional and private environment should be maintained for patient privacy and confidentiality. Best practices must be in place and followed. Medical professionals who engage in telehealth should be fully trained in operating the technology. Patients must also be instructed in its use and provided instructions on what to do if there are technical difficulties.

This case study is for illustrative purposes only and is not intended to be a summary of, and does not in any way vary, the actual coverage available to a policyholder under any insurance policy. Actual coverage for specific claims will be determined by the actual policy language and will be based on the specific facts and circumstances of the claim. Consult your insurance advisors or legal counsel for guidance on your organization’s policies and coverage matters and other issues specific to your organization.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. Risk management services are provided or arranged through AWAC Services Company, a member company of Allied World. © 2020 Allied World Assurance Company Holdings, Ltd. All rights reserved.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]