With increasing health care costs, smaller employers are exploring innovative approaches to fund their employee benefit plans to save money. Risk retention groups (RRGs) or “captives” can generate savings for some larger employers that self insure their plans. Captives are now catching on with smaller employer groups between 25 and 500 employees. Smaller employers are becoming more educated and starting to understand how risk management works with their health plans. By pooling their employees and risk with other employers within a captive, it can be a creative way to save.
Now, smaller employee groups are gaining access to those same cost reduction strategies that were only being provided from larger employers through these risk retention groups, or group captives, says Steve Freeman, president of USI in San Francisco.
“For employers that want to influence their claims and have a direct impact on their total cost, a captive may be a great alternative,” says Freeman. “However, if employers are risk averse and are fine with paying premiums with no underlining data or guarantee of the next renewal, this is not for them.”
Smart Business spoke with Freeman about how a risk retention group can give employers more control and create greater transparency in their health insurance plan.
How does a risk retention group work?
An RRG is a liability insurance company owned by its members, which are employer groups. These captives are now being developed for groups of smaller employers, which allow them to self-fund and to participate in the profits of their stop loss premiums. Variability in smaller groups is higher and predictability is lower, giving smaller employers the opportunity to pull themselves into a larger group to reduce their risks.
For example, a company with 10 employees has a 10 percent chance that claims in a given year will exceed the expected amount by at least 70 percent. With an employer of 100 people, that number falls to 5 percent, and, at 1,000 employees, that risk is less than 1 percent. By banding together to create a larger pool, smaller companies can reduce their risk.
How can a company get started?
Employers have established these captives with other employers that are typically in the same industry, share similar risk characteristics, or that are located in the same area. If a company is part of an association, it can start there. Because captives are fairly new, the association may not be aware of one, but the employer can ask whether there are any other employer groups of the same size and industry that would be interested in self-funding, and thus starting a captive.
Obviously there are laws governing RRGs since you are creating an insurance company that you are a member of and that you own, so there are risk and reserve requirements. You have to work with someone who understands those laws, how the RRG should be administered and how profits are paid to participating members. It is critical to work with someone who’s done this before and who understands the laws regarding these programs.
How can an RRG help create transparency and lower costs?
The real premise behind the popularity of these programs is that they allow smaller employer groups the ability to pool themselves into a larger group, self insure and obtain data on their claims utilization, allowing them to influence employee behavior, which drives down health care cost.
Smaller employer groups typically don’t get claims data and have no idea what their underlying claims experience is, so can’t act to influence it. Transparency allows employers to see the actual use of their health plan. For example, the volume of inpatient and outpatient claims, the number of office visits of primary care physicians versus specialists and types of ER visits. If the ER is being overused, you can provide motivation for employees to seek other methods of more efficient and cost-effective care. Employers also can see the types of drugs being used, and whether employees are using brand name drugs versus generics. If there is a high number of individuals with chronic conditions who are not enrolled in disease management programs, an employer can provide incentives to enroll folks, which will improve employee health, productivity and absenteeism rates and lower costs.
At the end of the day, if you can reduce your claims, you will reduce your costs.
How can employers determine if this is right for them?
If employers are looking for short-term cost reduction, a captive isn’t for them. Employers need to have a commitment to the long-term success of the captive. This is not a one-year solution or a short-term view. A captive is not for all small businesses.
It’s all about risk management and being able to manage your claims. The largest piece of insurance premiums — 85 percent — is claims. So if you can impact claims up to a certain level, you can reduce costs.
Within the captive, you may have a 50-person employer that can only take on $20,000 of liability per person, and a 200-lives employer that can take on $100,000. Each employer wants to make sure that the risk corridors are properly set for their risk tolerance, and premiums will be based on the amount of risk that each company adopts. Each employer group is underwritten independently at a different rate, depending on the level of risk it wants to take, demographics and plan design.
As employers seek cost-effective ways to continue offering health care benefits to their employees, RRGs, or captives, are becoming a more attractive option. A captive allows employers to share the cost of their liability for funding their benefits plans by pooling costs with other employers. And by providing transparency, it allows employers to target wellness and disease management programs right for their population, resulting in a healthier work force.
Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or [email protected]