ACA Healthcare legislation and attempts at increasing regulation of self-funding and stop loss coverage are driving more employers toward stop loss captives.

1. 38September 2014
captivereview.com
US HEALTHCARE FOCUS | QBE
S
ince implementation of the
Affordable Care Act, there has
been a considerable increase in
the interest level surrounding
employer self-funding of health-
care benefits, medical stop-loss coverage,
and the use of captives to provide such
coverage. As more mid-sized employers
become interested in exploring options
for providing coverage to employees, state
regulators have become increasingly aware
of the potential impact that increased use
of self-insurance may have on their man-
dated benefits and state health insurance
exchanges.
Several states, along with the National
Association of Insurance Commissioners
(NAIC),haveenactedorproposedminimum
deductible attachments for self-insureds.
Deductible mandates range from $20,000 in
some states to as high as $40,000 in Califor-
nia. Additionally, the District of Columbia is
not allowing approval of captives that pro-
vide stop-loss coverage to employers located
within the domicile. Industry groups such
as the Self Insurance Institute of America
(SIIA) are aggressively challenging these
mandates.
Prudence or (and) paranoia?
There are several reasons why states are
attempting to impose such regulations. One
of them is loss of control. When employers
self-insure benefit coverages, states lose
regulatory control over the benefit plan to
the US Department of Labour (DOL) via the
Employee Retirement Income Security Act
(ERISA).
This has become an accepted conse-
quence for states. A primary driver of cur-
rent regulatory attempts is the fear that, as
healthcare reform is enacted, ‘good risk’
employers with young and healthy (i.e.,
lower insurance cost) employee demo-
graphics will elect to self-insure, thus dilut-
ing the quality of the risk pool needed for
viable state health insurance exchanges.
Whether this concern about adverse
selection is based on prudence or paranoia,
some states are using this as an opportun-
istic attempt to gain increased control, pri-
marily at the expense of smaller employers.
It should be noted that a 2011 study con-
ducted by Rand Corporation for the DOL1
concluded that self-insurance plans do not
pose an adverse selection threat within the
small employer group market following
PPACA implementation.
In post-HIPPA reality, it can be difficult
for an employer to reasonably ascertain
the overall ‘health’ of its employee popu-
lation and use that as the basis for decid-
ing whether exchange participation or
self-funding is the most appropriate vehicle
for employee healthcare delivery. The most
pragmatic decisions will be made by deter-
mining the most appropriate financial and
administrative structure for each employer.
Wrong direction on regulatory highway?
States do maintain the power to regulate
insurance and ERISA preserves that power.
ERISA also quite clearly dictates that states
cannot impose regulations that have the
direct or indirect effect of impeding an
employer’s ability to self-insure. By prom-
ulgating minimum specific deductible
attachments, states are in fact, obstructing
the ability of many smaller and mid-sized
employers to self-fund. In addition to being
in conflict with ERISA, could such man-
dates be considered discriminatory against
smaller employers?
Changing the basis of regulation?
Setting hard minimum specific deductible
levels could probably be deemed as discrim-
inatory against smaller employers. Most
actuaries and stop-loss underwriters rou-
HEALTHCARE
REGULATION:
AIDING CAPTIVES?
Philip C. Giles of QBE North America discusses changing healthcare regu-
lations and the burgeoning captive interest in medical stop-loss coverage
Written by
Phillip C Giles
Phillip C Giles is vice president of sales and market-
ing for QBE North America and oversees accident
& health sales and strategic marketing initiatives, as
well as the medical stop-loss captive business.

2. 39September 2014
captivereview.com
QBE | US HEALTHCARE FOCUS
tinely recommend a figure between 5-15%
(10% is the norm) of expected annual claims
as an appropriate specific deductible level.
What if states revised their approach so that
minimum specific deductibles could not be
lower than 5% of an employer’s (actuarially)
expected annual claims level?
This method would yield the greatest
equitability in terms of providing most
employerswiththeabilitytoself-fund,with-
out being either discriminatory or punitive.
The resulting minimum attachment would
automatically adjust based on the employ-
er’s size and actual claims history, and would
also account for medical trend inflation. In
addition, this would be a way to assuage the
fears of state regulators by reinforcing that
employers are in fact, materially assuming
risk and legitimately self-funding, rather
than simply assuming a nominal specific
deductible to maintain preemption ability
over state regulations.
Practically speaking, few employers
under 50 lives are going to consider self-in-
suring healthcare coverage (with or without
acaptivearrangement)andmanyemployers
above that threshold would not be adversely
affected by most of the proposed minimum
specific deductible level mandates. The
above example does however, validate a
muchlargerissue-thenecessityofemployer
and industry-group (SIIA) challenges of state
mandates, not only to preserve the right, but
also the ability of employers of all sizes to
self-insure as provided by ERISA.
It is worth noting that some federal reg-
ulators are also considering a tightening of
control by changing the definition of what
is considered stop-loss insurance based on
the level of attachment point. Through an
amendment to the Public Health Services
Act (PHSA), employer plans purchasing cov-
erage below a (yet to be determined) specific
deductible would be considered an insured
programme for purposes of ACA regulation.
A bill to counteract the proposed amend-
ment was introduced last November in the
form of the Self-Insurance Protection Act
(H.R. 3462), which aims to clarify the rele-
vant definitions of health insurance under
PHSA and related sections of ERISA and the
IRS code. The likelihood of either regulation
being passed remains slim, however such
legislative changes could be a sign of things
to come.
The intent of ACA is to ensure that all
Americans have access to affordable health-
care insurance. If self-funding is the most
efficient (financially and administratively)
method of benefit delivery for employers,
regulators need to encourage rather than
discourage the practice through unneces-
sarily increased and, probably, inappropri-
ate regulation.
More than 80 million individuals - 60%
of workers under the age of 65 – are covered
by self-insured health plans, a record high.
These numbers will continue to grow signif-
icantly as ACA is implemented and the use of
captives for stop-loss becomes more popu-
lar as a way to smooth the cost of healthcare
delivery for mid-sized employers.
1 Rand Corporation, employer self-insurance decisions and
the implications of PPACA, report to the U.S. Department
of Labor (2011)
Actuarial resources will support a (conservative) figure of $6,000 per person (all employees
and all dependents) to calculate the average “annual expected plan claims” of a typical
employer medical plan.
• A 20 employee group with 20 dependents = 40 total lives. 40 x 6000 = 240,000 x
.05 (or .15 for the desired deductible) = $12,000 to $36,000. The appropriate specific
deductible range.
• A 25 employee group with 25 dependents = 50 lives. 50 x 6000 = 300,000 x .05 (or
.15) = $15,000 – $45,000
• A 50 employee group with 50 dependents = 100 lives. 100 x 6000 = 600,000 x .05
(or .15) = $30,000 – $90,000
Reality check disclaimer: It is quite important to note that “underwriting credibility” is virtually
nonexistent for small employers of this size. Stop-loss underwriting and rates for employers
having less than 100 covered lives will be based largely on “manual rates,” and availability of
competitive stop-loss terms is likely to be quite limited even with group captives.
TABLE | ILLUSTRATION
Market momentum for stop-loss captives has gradually increased over the past three years
and has been spurred to higher levels by the implementation of ACA earlier this year. The
two basic types of captive structure that comprise this market segment are large single-par-
ent captives and group captives. An outline of the opportunities for stop-loss captives are
detailed below:
• Large single-parent
o Existing captives to expand use.
o Most employers that have an existing captive will already be self-funding their
employee healthcare benefits. Previously they did not purchase stop-loss, but
since the enactment of ACA and “unlimited lifetime benefit maximums” they now
purchase high levels of coverage and place layers into the captive.
o Stop-loss by itself would not provide enough premium to form a captive solely for
that purpose, however it can be used to expand the use and enhance the efficiency
of an existing captive.
o Important to note that stop-loss is not an ‘employee benefit coverage’ and thus not
considered an unrelated business by the IRS for tax purposes.
• Group captives: homogenous vs heterogeneous
o Replicate the risk profile of a larger employer to spread risk, promote stability, and
achieve cost savings from different service providers.
o Heterogeneous groups require a larger size in order to achieve appropriate spread
of risk among diverse participants. Typically ‘open market’ programmes in terms of
membership acceptance.
o Homogenous groups (like industries) can be smaller as the risk and underwriting
profile is similar. The required size to achieve an appropriate spread of risk is not as
great. Typically formed by closely aligned groups of like-minded employers.
o Potential exists for groups of employers participating in risk retention groups
(RRGs) to form parallel group captive for stop-loss.
STOP-LOSS OPPORTUNITIES