While captive insurance companies were once considered quite daring, today they have become commonplace in the property and casualty marketplace. And while they were once viewed primarily as an antidote for hard market displacement for property and liability coverages, corporations have now expanded their captives' usage to much more strategic endeavors. Many of the current crop of captives are being established to enhance holistic approaches such as an enterprise risk management program.

Along those same lines, more and more corporations have begun searching for additional ways to utilize their captives in the employee benefits area. While there is specific methodology available for incorporating employee benefits into a company's captive, a key element involves gaining approval from the Department of Labor, a task that continues to remain very onerous. As a result, captive owners are looking for less arduous approaches.

Current landscape
The administration's attempt to increase health coverage appears to have passed muster with the U.S. Supreme Court. Over and above the Patient Protection and Affordable Care Act (PPACA), there are some market trends that will dominate the direction of the health care industry, regardless of any regulatory efforts. According to Samuel H. Fleet, president of AmWINS Group Benefits, "The health care world is in the process of change, irrespective of state or national laws." And he notes, "At this point, there is no going back." He says this change centers on "a titanic shift as to where risks will be assumed." And, he adds, "This is being driven by the U.S. deficit."

Fleet points out, "The deficit will have profound, long-term effects on our health care." Today, he says,"49% of our health care payments come from governmental programs." Compassionate programs such as Medicare, Medicaid and Social Security "if left unchecked will eat up to 100% of our federal budget by 2052." Obviously, this cannot continue, according to Fleet and, "This is going to drive changes within traditional fee-for-service organizations." At the end of the day, he says this transition will result in significant modification of those who will be assuming the risk within this industry."

For the most part, we have established programs to handle health care for the elderly and the poor via Medicare, Medicaid and Social Security, but he says we now have little to no money left to maintain these programs. Since we have shrinking dollars available, "we will begin to see these compassionate programs be displaced with economic dispassionate programs." Ultimately, Fleet thinks that this will result in a change in "the way we assume risk and/or shed risk within the A&H marketplace."

Recently, the health care industry has come to the realization that it now may be time for those organizations that are providing the care to assume more of these risks as well. Fleet indicates that this trend may well be the driver for most of the large-scale changes within the industry for the foreseeable future. He also points out that "the way reimbursement is handled by health care providers now will actually continue to see further modification." As a result he says, "This will ultimately alter the way we take risk," and, he adds, "We are starting to see this occur already."

Health care providers of all types are now recognizing the transformative opportunities that are available today. Fleet notes that "more and more we are seeing hospitals moving to more administrative service contract type arrangements where they are beginning to take some of the financial risk with regard to Medicaid patients, as well as more risk with Medicare reimbursements." He also points out another significant trend where hospitals are beginning to purchase clinics and these clinics are beginning to assume some of the financial risk, as well.

New approaches are required
All of these transformative events can provide an unprecedented opportunity for forward-looking brokers. The reshuffling of risk financing within the health care market is providing corporations with a chance to review their own approach to risk. And according to Fleet, "In most instances they are not happy with the results." In general, he notes, "Corporations are 'control freaks,' controlling every aspect of their business." But when it comes to health care, their second highest expense, "they are sending insurance premium dollars to an insurance company. There is no control there," Fleet says, "and it makes no sense." These costs have gotten so high that corporations can no longer afford to let this important cost go unchecked. This has resulted in a renewed interest in self-funding employee benefits.

"Self-funding for health benefits has been around for larger employers (i.e., those with 250 lives and over) for quite some time," he notes. But now it's the small to mid-sized employers that are interested in self-funding. This then leads naturally into the captive marketplace. Fleet, whose company provides a full array of services and products to assist in the formation of group solutions, points out, "One size no longer works for all group situations." Actually one of the major advantages to the self-funding/captive approach is the flexibility that it can provide. In the case of small to mid-sized employers, group self-funding is typically an excellent idea. The captive, which can be either a group captive or a risk retention group (RRG), would be involved with providing the medical stop loss coverage for the group self-funded program.

In the past, the brokerage community has been reluctant to embrace the captive approach in general and more specifically for employee benefits. Fleet says that these situations obviously involve a long-term sale and, for the most part, are usually a more difficult sale as well.  "When coupled with the fact that most brokers received less commission, it is not difficult to see why they were not too eager to get involved with alternative risk-financing approaches." However, times have changed, and he indicates that commissions are coming down on fully funded programs. "Add to this the fact that one of the PPACA provisions requires major medical carriers to hold administrative costs to 20% for individual and small group programs" and some brokers are beginning to see the advantages of the group captive approach.

Fleet suggests that it may be time for A&H brokers to reassess their approach to this business. While there are a number of groups that influence the decision to establish group solutions, the ultimate decision is typically driven by the broker. However, it should be noted that there are others that can greatly influence the purchasing decision. Among these, Fleet notes, "Frequently, it is a trade association that has involvement in the early stages of development." Another group that should be very active in the expansion of the captive concept is existing risk retention groups. He points out that they are already doing group purchasing, and it would be quite easy to expand into the group medical stop-loss area. Fleet also believes that large A&H carriers will become players in this market. He says, "Most have already established captives for their client base, and these could easily be expanded to segregated cell arrangement for groups." He indicates that several carriers are doing this already. More and more, he says, the A&H insurance marketplace has begun to offer products that are designed specifically to support the medical stop-loss market.

Conclusion
Status quo within the health care marketplace is no longer. The current U.S. debt and its effect on the health care market conditions will force change. The industry will no longer be able to "kick the can down the road"; indeed, change is inevitable. How the players react to the changing landscape will determine their future success in this new, emerging marketplace.

One thing is certain, Fleet points out. "Captives will be a huge part in the upcoming A&H marketplace." While it still represents a "leap of faith" for most brokers to start down this road, Fleet believes it is one that they should take. At the end of the day, he says, "it will be those brokers who can pull all the pieces together who will be the ones that succeed in this new landscape."