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Financing small group health benefits in a captive

An alternative approach

By Michael J. Moody, ARM, MBA

One of the most challenging problems for a health insurance producer today is finding a viable solution for national associations to deal with their members’ rising health care costs. A comprehensive solution that can apply to the entire association has eluded everyone who has tried to put a program in place. One problem is that there are no providers in the marketplace today that can satisfy the mandates of all 50 states. Even if there were, that would not provide any true value to the association members because they would still have to be rated as individual small groups.

The only viable solution was to build a qualified ERISA program: a true self-funded program that can meet the mandates of the federal govern-ment. The challenge was how to do this and still make it a viable product for the small employer who can’t assume much risk. Figuring out how to overcome that hurdle has prevented many providers from developing an appropriate program that will solve the small employer’s problem.

Tim Johnson and Ron Fuhrman, health producers from TrueNorth, a mid-sized agency in Cedar Rapids, Iowa, have made it over the hurdle. With the help of The Groom Law Group of Washington, D.C., and with a reinsurance company that has an entrepreneurial attitude, they have built a vehicle to solve all the problems that have prevented other agencies from finding the “Holy Grail” with respect to small group health coverage for association members.

Issues remain

To the surprise of many industry experts, the movement of ERISA-based employee benefits that are being financed in a captive has lagged behind early projections. Furthermore, most of those who have availed themselves of this approach have limited the involvement to either term life coverage or long-term disability (LTD) coverage. And for most employers, neither of these coverages would be considered hard-core HR problem areas.

This, of course, is in sharp contrast to the situation in employee health insurance. Most employers today believe that controlling these costs is one of their most vexing problems. With double-digit premium increases over the past several years, cost control may well be the key to the profitability of a large number of companies. And for smaller employers, controlling employee health coverage costs may even be essential to the company’s survival.

A road less traveled

Like many mid-sized agencies and brokerages, TrueNorth was hearing from its customers that rising employee health care costs were putting them in critical condition. Johnson notes that most small employers “were forced to take the community-developed rates,” thus foregoing any advantage of good loss experience. Not only were the rates established with little regard for individual experience, but there was also limited flexibility with regard to plan design, says Johnson. From the carrier standpoint it amounts to “one size fits all,” regardless of the employer’s needs.

Mid-sized agents and brokers are hearing not only from their customers, but from a number of trade associations as well, remarks Johnson. A case in point is The National Systems Contractors Association (NSCA), which has 2,500 members in 50 states and is a client of TrueNorth. The association members, Johnson notes, are constantly pushing the management to “find a better way to manage their health insurance programs.” Over the years the association has looked into, and even started to implement, other programs, but it has been disappointed with the lack of progress.

Two years ago Johnson and Fuhrman were asked by the NSCA to develop a health care coverage solution for its members. They believed they could find a way to provide small group health insurance in a cost-effective manner. The producers teamed up with Jon Bourgault of The Groom Law Group to explore the possibilities. Groom, the nation’s largest law firm specializing in employee benefits, has done the legal work for a number of companies seeking the Department of Labor exemptions that are typically required for a captive to reinsure its parent’s employee benefits program. These earlier transactions generally involved either LTD or term life coverage, but the firm has recently begun working with several clients to explore how captives could expand their focus to support an employer’s health coverage. Working with Groom, Johnson and Fuhrman determined that smaller employers could obtain affordable health coverage if they established self-funded health plans that would purchase stop-loss insurance from an association captive.

Cost-effective coverage

According to Fuhrman, program savings come from three major sources. The first involves a basic commitment to wellness, early detection and a consumer-driven approach to health care. The plan is structured around the wellness concept and benefits from these kinds of services. The second major source of cost savings is group purchasing power. The simple act of self-funding, even for a small employer, will provide some incremental savings. Savings are usually derived from the ability to control plan design and reduce the total cost of insurance. Most small group health plans today are insuring high-frequency and low-cost office visits. The real savings, however, says Fuhrman, come from negotiating basic services such as third-party claims handling (TPA) on a group basis. Another key savings opportunity is the ability to purchase stop-loss coverage from a captive insurance company.

Obviously, a key question is what kind of savings are possible with this program structure. Fuhrman indicates that, for small employers (25 employees or less), their employee health program may be running expense factors of around 35% to 40%. Based on projections for the TrueNorth approach, expense factors could be in the 10% to 15% range. And it’s not just the cost saving that is noteworthy, Fuhrman points out. Individual small employers “are at the mercy of the community market,” with few plan design choices available to them. Under this new program, employers typically will see better coverage, with uniform benefits countrywide, “regardless of the mandates of the individual state insurance regulators,” says Fuhrman. And thanks to the combined purchasing power of the group, service typically improves as well.

Current status

Currently, TrueNorth has one association group health captive licensed and running. The agency is actively working on others, and from this research other health-related captive opportunities have developed and been implemented for similar problems that the industry has been unable to overcome until now.

The key to the program’s success is the active participation of the association. The association will typically have some additional administrative duties related to the promotion and implementation of the program. Most associations, however, are eager to find a way to help their members solve their employee health insurance problems. This value-added service alone should be worth the effort. The association clearly has a critical role in this program. This means that appropriate educational efforts must be initiated, says Johnson. This is also the most time-consuming aspect of program implementation. Bottom line, Bourgault points out, “The association must be willing to drive the transaction.” He goes on to note, “The association must want to assist its members in this critical area,” and buy-in must occur early in the process.

Summing up

Employee health benefits have long been the bane of most employers and particularly small employers. Health insurance premium increases have averaged in the double digits over the last 10 years. At this pace, the cost of health insurance will be higher than most employers’ payrolls in another 10 years. Very few employers will be able afford health insurance for their employees. Programs like the one Johnson and Fuhrman have implemented put the control back into the hands of the employer and away from the insurance companies. And employees are much more willing to control costs by using proactive wellness programs if they know it will have an impact on their costs. Johnson and Fuhrman have given employers and employees back the reins so they can have control of their destiny.

Any program that can provide association members meaningful reductions in escalating health insurance costs should receive careful attention. Further, if the program is implemented correctly, associations can enhance their image among members by providing this critical value-added service. And while the program does have “a number of moving parts,” according to Bourgault, it is based on a solid foundation. *


TrueNorth Health Producers Ron Fuhrman (left) and Tim Johnson.


“The association must be willing to drive the transaction [creation of a captive for members].”

—Jon Bourgault
The Groom Law Group