Reducing Total Healthcare Spend with Medical Stop-Loss Group Captives

Editor's Note: This article is contributed by Captive Resources, LLC. It examines how medical stop-loss group captives help companies address rising employers' healthcare costs while maintaining high-quality health benefits for their employees.

It's no secret that employers' healthcare costs have been rising sharply for years. Here are two of many statistics quantifying the challenging market economics.

• Average employer costs for family premiums have nearly tripled in the past 20 years.
• The cost of healthcare is outpacing inflation. Employer-sponsored medical insurance inflation exceeded the Consumer Price Index by 27 percent in 2022, compared with 13 percent in 2012.

These steadily growing costs have led many employers, especially mid-size employers, to seek alternatives to fully funded insurance. According to the Kaiser Family Foundation 2023 Employer Health Benefits Survey, the share of mid-size employers self-funding their medical plans grew from 47 percent in 2008 to 61 percent in 2023. As employers continue to shift to self-funding, stop-loss program premium volume increased 13.4 percent in just 5 years—with premiums reaching $31.6 billion in 2022.

Many small-to-mid-sized companies have gravitated toward group captives to manage their stop-loss programs. Medical stop-loss group captives offer employers the benefits of self-funding—like increased control and transparency—while offering the support and scale of other like-minded companies.

In this article, we'll look at several factors driving costs in the fully funded market and examine how medical stop-loss group captives help companies address those cost drivers while maintaining high-quality health benefits for their employees.

Health Insurance Cost Control Is Critical

Health insurance coverage represents a significant—yet essential—line item for employers. According to the Employee Benefits Research Institute and Greenwald & Associates, employees cite companies' medical plans as the most valued benefit (73 percent). So, it is imperative for employers to offer quality insurance programs to compete in today's tight job market.

In the fully funded medical insurance market, insurers typically pass along these increasing costs to the employers—regardless of their individual performance. In turn, employers must absorb the costs, pass them along to employees, or cut benefits. None are good options.

With the importance of cost control established, let's look at a few of the main cost drivers.

Pharmacy Costs

According to pharmacy benefit manager (PBM) TrueRx, prescription drugs represent more than a quarter of total benefits costs for the average employer, which typically is not able to select its own PBM in a fully funded plan.

Chronic Health Conditions

Patients with one or more chronic health conditions—musculoskeletal, diabetes, behavioral health, pre-diabetes, and hypertension—account for 90 percent of total healthcare spend in the United States. According to Omada Health, a chronic condition management firm, one-third of Americans have three or more of these chronic conditions.

Acceptance of the Status Quo

Another significant cost driver, according to a recent editorial in Employee Benefit News (EBN), is an acceptance of the traditional fully funded market status quo at renewal time, including rising costs—estimated at a 7 percent median increase for employees in 2024—and nebulous cost data. According to the editorial, many medical insurance costs are expensive choices that can be remedied with bold alternatives.

Cost Control Advantages of Group Captives

Medical stop-loss captives enable companies to transition from passive buyers of a health insurance plan to active equal shareholders of a self-funded reinsurance company. These captive programs are designed to help employers control costs by allowing them to retain predictable risk while continuing to transfer less predictable risk. For organizations that don't have the scale to form a single-parent captive, the group captive model is an effective way to self-fund in a stable environment with like-minded companies.

The structure of a medical stop-loss group captive enables and incentivizes employers to control their total year-over-year healthcare spend and offers key benefits* such as the following.

Increasing Transparency and Flexibility

Members gain transparency into healthcare claims data, providing increased visibility into the flow of dollars and allowing them to identify cost drivers. Members also enjoy significant flexibility in how they structure their health benefits plan, which allows them to choose the service providers that best fit their needs rather than being wed to a single insurer. This benefit enabled one employer to dramatically reduce the costs of prescription drugs for both the company and its employees.

Bending the Renewal Curve

Captives calculate renewals based on the known performance of each member company rather than as part of a pool, which helps keep renewal costs predictable and controllable. On top of controlling fixed costs like premiums, medical stop-loss group captives focus on helping members identify ways to reduce everyday claim costs, which can represent 80 percent or more of overall spend.

Rewarding Better-than-Expected Performance

In a medical stop-loss group captive, the captive retains a layer of risk that's financed with loss funds from each member. When member companies outperform loss expectations, they're eligible to recoup those unused underwriting dollars (plus investment income) in the form of dividends. So, member companies' premium is no longer just a fixed cost; it's an opportunity to be rewarded for controlling spend.

Sharing of Best Practices

Medical stop-loss group captives offer member companies networking opportunities to share health risk management best practices and strategies with their fellow members. Examples include in-person workshops and on-demand webinars.

For many employers, these combined benefits of medical stop-loss group captives offer a viable strategy for controlling burdensome health insurance costs over the long haul. The decision to join one of these captives can be a true game-changer.

*These benefits apply to medical stop-loss group captives supported by Captive Resources and do not necessarily apply to other programs.