CAPTIVES:
An Ideal Place for All
Types of Stop Loss
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Dan H. Carlson
Marsh USA Inc. - Managing Director
Gary J. Bischel
Guy Carpenter - Managing Director
Jay B. Waters
University Hospitals - VP-Corporate Risk Management
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DISCUSSION OUTLINE
“Setting the Table”
Dan H. Carlson
Marsh
“Hands-On” Experiences
- Provider Excess Loss Insurance &
Employer Stop Loss Captives
Gary J. Bischel
Guy Carpenter
- University Hospitals, OH
Employer Stop Loss Captive Program
Jay B. Waters
University Hospitals
Summary / Questions
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“SETTING THE TABLE“
Stop Loss “101“
Healthcare Reform – Evolving Risk
Industry Trends / Dynamics
Large Medical Claims
Dan H. Carlson
Marsh USA Inc. - Managing Director
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STOP LOSS...a loosely used term
• Employer Stop Loss (ESL)
• For employers with a self-funded (ASO) employee benefit plan
• Provider Stop Loss Insurance (PSL)
Provider Excess Loss Insurance (PEL)
Provider Excess Insurance (PEI)
• For “at-risk” healthcare providers that are accepting risk through
capitation, bundled payments, or global payments, plus ACOs)
• Health Plan (HMO) Reinsurance
• For reinsuring a health plan’s large catastrophic medical claims
of covered members
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“STOP LOSS”
Typical Coverage
Retention (Deductible)
$100,000 - $1M or higher
(annual per person)
Coinsurance Payable
90% or 80%
(after the retention)
Covered Services
Global, specific services (i.e. hospital-inpatient,
outpatient, professional, pharmacy, etc.)
Reimbursement Level
Contracted amount or amount paid
Maximum Benefit
$1M, $2M, $3M, $5M, $10M, or Unlimited
Other
Membership size/type, utilization data, provider
contracts, and claims experience
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TYPES OF PATIENT “POPULATIONS”
• Commercial
» Individual Products
•
Including Health Insurance Co-Ops
» Employee Benefit Plans (Group Insurance) Products
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Health Plan or Health Maintenance Organization (HMO)
Point-of-Service (POS)
Preferred Provider Organizations (PPO)
Accountable Care Organizations (ACOs)
Administrative Services Only (ASO) with Employer Stop Loss (ESL)
• Medicare
• Medicaid (AFDC/TANF, ABD, SSI, etc.)
• “Dual Eligibles” (Medicare and Medicaid)
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HEALTHCARE REFORM
Evolving Risk…
• Commercial Health Plans
– No pre-existing conditions underwriting
– Phasing in of no annual & lifetime maximums
– Covering children to age 26
– Medical Loss Ratio (MLR) pressures
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HEALTHCARE REFORM
Evolving Risk…
• Medicare / Medicare Advantage
– Formation of Accountable Care Organizations (ACOs)
– CMS Shared-Savings Risk Pools
– Reduced reimbursements
– Patient Centered Medical Homes (PCMH) & Medical
Neighborhoods
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HEALTHCARE REFORM
Evolving Risk…
• Medicaid Health Plans
– Expanded geographies / eligibility
– Dealing with significant covered population increases - Network
& Administrative Adequacy Challenges !!
– Long term funding given State and Federal budget constraints
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INDUSTRY DYNAMICS / TRENDS
Provider Contracting
• ACO-Type Contracts for Commercial Populations
• Accountable Care Organizations (ACOs)
– Specific Provider Excess Loss Insurance
– Aggregate Provider Excess Loss Insurance for “Pioneer” ACOs
• Bundled Payments (hip & knee replacements)
• Provider Direct Contracting with Employers
• Risk-Taking Specialty Providers (Cancer Treatment)
• Health Insurance Exchanges
– Including New Health Co-Ops
– BEWARE: New and Unknown Patient Populations
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LARGE MEDICAL CLAIM TRENDS
Beware…
• Continued concern over increasing FREQUENCY and SEVERITY
of catastrophic claims
- Neonates
- Hepatitis C
- ESRD
- Biotech cancer drugs
- Hemophiliacs (blood factor)
- Organ transplants / re-transplantations
• Some carrier and client loss ratios are deteriorating.
• Healthcare providers are attempting to negotiate higher
reimbursements from health plans
• THE RESULT: Increase in risk and the potential for market-driven
increasing reinsurance premiums
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STEPS LEADING TO THE CAPTIVE OPTION
Premium Funding Continuum
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Fully Insured with Experience Refund
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•
Monthly per member per month (PMPM) premium payment
Premium Funding Alternatives (cash flow advantages)
•
Retro-Claims Corridor
» Shared claims risk with insurer – the “middle” layer
•
Other
»
“Aggregating Specific” and “Inner-Aggregate”
• Use of Captive
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CARRIER MARKET DYNAMICS
GOOD NEWS
• Carriers are preparing for the formation of new risk-bearing
entities such as ACOs, and the migration from fee-for-service to
value-based “at-risk” revenue compensation models.
• They are more receptive to new types of risk opportunities.
• New carrier entrance
• “Direct writers” are considering expanded distribution strategies
• Adding staff
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CARRIER MARKET DYNAMICS
Is it time to consider placing this coverage in your captive?
BAD NEWS
• Carriers are fine-tuning their risk appetite.
• Carriers have more selective distribution strategies (limiting
insurance broker access).
• “Seasoned” underwriters are aware of your historical
purchasing practices.
• Administration margins can be up to 40%!
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“Hands On“ Experience
Provider Excess Loss
&
Employer Stop Loss
Captives
Gary J. Bischel
Guy Carpenter - Managing Director
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Captive Stop Loss Programs
Motivated by Historical Frustration
• Trading dollars with their stop loss carrier and consistently
finding themselves on the losing end
• Being restricted by provisions within the filed insurance
products available to them
• Lacking “linkage” between finance, care management,
human resources, etc.
• Struggling to find ways to effectively increase utilization of
their captive
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Captive Stop Loss Programs
Common Objectives
Create a risk management scheme which provides:
• The ability to reap the benefits of their own success in
managing claims
• A mechanism for which to manage the desired amount of
retained exposure while at the same time controlling the
reinsurance markets
• A reduction of frictional costs (premium tax, carrier loads, etc.)
of risk transfer
• Introduction of uncorrelated, short-tail, 1st party exposures
which are complimentary to the captive’s portfolio.
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Captive Stop Loss Programs
Important Considerations
The ability to properly analyze the subject risk to:
• Quantify its volatility
• Create an optimal coverage scheme
• Determine appropriate captive funding levels
• Dictate pricing/terms to the reinsurance markets
Coordination of resources to satisfy numerous interested parties
• Regulatory authorities
• Captive Boards
Commitment across multiple organizations to the short term effort
and long term success of the program
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Captive Stop Loss Programs
Consistent Results
• Reduced hard dollar “all in” cost
• Significant (25%+) reduction in premium spend to external
(re)insurer
• Potential for significant surplus contribution to captive
• Improved financial results (i.e. lower net cost of reinsurance)
across continuum of loss scenarios
• Upside-only exposure for captive
• Risk corridor is often fully funded
• Potential to earn a positive investment return on those
premiums
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“Hands-On” Experience
Employer Stop Loss
Captive Program
Jay B. Waters
University Hospitals - VP-Corporate Risk Management
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UNIVERSITY HOSPITALS
Historical Information
• Self-Funded Employee Medical Benefit Program
• 25,000 Lives
• Third Party Administrative Services
• $500K per Claim Retention
• Employer Stop Loss Provided by Administrator
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Nominal Premium
$2M per Claim Excess of Retention / No Aggregate
No Exposure to Employer over $2.5M Lifetime Maximum
Excluded Pharmaceuticals
Recovered 80% of UH Costs
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UNIVERSITY HOSPITALS
Historical Information
• 2011 Formed Accountable Care Organization
• Covers All Employees
• 2011 Healthcare Reform Eliminates Lifetime Maximum
• Financial Exposure Excess of $2.5M
• Selected New Administrator
• Employer Stop Loss Coverage Not Offered
• Cost of Commercial Stop Loss Coverage Doubles
• Captive Asked to Evaluate Providing Coverage
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UNIVERSITY HOSPITALS
Evaluation – Claims History
• Actuarial / Consultant Review (Loss Cost Funding)
• Internal Claims Analysis (2009 Year ~ 1 Claim for $2.4M)
• Overall Favorable Loss Experience
University Hospitals Claims History
Year
2007
2008
2009
2010
2011
Average
Aggregate Claim
Value
Trended (000)
$0
$977,000
$3,167,000
$233,000
$100,000
$50,000
$2,287,000
$3,854,000
$448,000
$148,000
$895,400
$1,357,400
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UNIVERSITY HOSPITALS
Evaluation (Continued)
• State of Employee Health
• Accountable Care Organization
» Wellness Programs ~ Improving Employee Health
» Oversight of Claims by UH Nurse Case Managers
• Anticipated Improvements in Frequency and Severity
• Pricing
• Actuarial / Consultant Review
» Estimated Premium
• Broker Quotations
» Commercial Insurer Quotations
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UNIVERSITY HOSPITALS
Captive Program
• $3M Annual Aggregate
• $500K Retention
• 15 / 12 Contract Term
• 100% Recovery of UH Costs
• Pharmaceuticals Included
• Commercially Comparable Coverage and Premium
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UNIVERSITY HOSPITALS
Captive Program Results
• Significant Improvement in Recovery
• Policy Surplus
University Hospitals Recovery History
Year
Total Claims
Including
Pharmaceuticals
Recovery Under
Captive
Recovery Under
Commercial
Coverage @ 80%
Claims Excess
Retention
Annual Premium
2012
$6,327,722
$615,257
$615,257
$0
$1,500,000
2013
$9,911,786
$963,720
$963,720
$0
$1,000,000
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UNIVERSITY HOSPITALS
Captive Program
- 2 New Policies Written in 2014
- 31,000 Lives in 2014
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SUMMARY
• Understand your organization’s risk tolerance
• Know the risk that your captive will assume
• Engage leaders across the organization to
ensure visibility, buy-in, and ultimately success
• Monitor the changing external healthcare
environment
• Care management is critical
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