Health insurance and captive insurance, Pt. 1

By F Hale Stewart, JD, LLM, CAM, CWM, CTEP

The Law Office of Hale Stewart


How do employers lower the cost of their health care?

Health insurance is a hot topic right now. First, as new regulations implemented several years ago are going into effect, lawyers and advisers are trying to get a handle on exactly what has changed and how to explain those changes to their clients. Second, the foundation of the new law has been challenged by various state attorneys general, with the Supreme Court expected to rule this month. However, underlying all of these events is a fundamental question: How do employers lower the cost of their health care?

A solution does exist. By utilizing a captive insurance company as part of their health care coverage, a company has the opportunity to gain more control over their health care cost and demand, thereby lowering the cost of their health care over the medium term (three to five years). However, an important caveat is in order: This strategy will require the ongoing participation and endorsement of management, who will probably have to change important aspects of their human resources philosophy to gain the most from this program.

All that being said, let’s move forward by answering the who, what, where, when and why of this important topic by starting with the “who.”

Let me begin by presenting a hypothetical company, which we’ll call Company X. Company X is a professional services firm with about 150 employees. For the last five years, they have paid approximately $1.2 million in health insurance premiums. However, in four of those years, they only extracted between 65 percent and 85 percent of their premiums from the plan. Put another way, 80 percent of the time, the company actually obtains fewer benefits than those they’ve paid in, with the excess amount paying either administrative fees or the excess risk of other parties.

While this is typical with most insurance, it's far harder for the company to swallow considering the amount they pay for health insurance on an annual basis. In addition, in one of the years, the company had total claims higher than their premiums. This spike in claims led to a proposed increase in their health insurance costs of approximately 25 percent to 35 percent.

The company described above is a great candidate to consider this possibility. First, they’ve had the “I’m not going to take it anymore” moment as premium quotes were returned with higher than desired increases. This is really key. A company that is content with its current coverage will probably not be open to this idea.

Second, they have a fairly large employee population of 150. While there is obviously no maximum amount to the number of employees a company should have for this concept, there is a minimum.The ideal minimum is about 100, although the absolute lowest you should go is 50.

Third, they’re paying more than they’re getting out of their current coverage. Eighty percent of the time (4 out of 5 years), the company overpaid for their coverage, or, put another way, they only received 65 percent to 85 percent of their premiums back.

Fourth, they have the financial sophistication to understand and implement the concept. With 150 employees, the company probably has a dedicated CFO, or a person who performs that function with a fairly high degree of regularity.

In the next article, I’ll delve a little deeper into this new and exciting strategy.