A Recap: The Rise of Alternative Funding
According to recent survey results about healthcare benefits, the pandemic has only added to the uncertainty and perpetual growth in costs many employers are facing. Surveys suggest no end on the horizon to healthcare costs exceeding both the general rate of inflation and wage increases.
Emerging strategies that have until recently been unknown or unavailable to small and mid-sized employers will be examined closely in the coming years. Not coincidentally, the marketplace has continued to position itself to meet the increasing demand for alternative methods of financing healthcare benefits. Two specific strategies have gained traction: level funding and benefit captives. Each presents an opportunity for employers to truly regain control of healthcare spend and even bend the cost curve.
Last month, we reviewed the advantages and considerations of level funding. In the second article of a two-part series, we’ll review benefit captives as another alternative strategy employers may consider.
Advantages of Benefit Captives
Benefit captives may be more attractive to an employer already experienced with self-funding and the world of stop-loss insurance.
There are several variations of captives. The most common strategy is one where an employer opts to join other like-minded employers to essentially create their own insurance company. This group purchasing of stop-loss insurance to finance expected claims and build up reserves for unexpected, catastrophic claims becomes more affordable because of the scale. In addition, the captive members receive perks and terms they would not otherwise be able to obtain on their own. As an independent insurance company owned by the captive members, the members have voting rights and an opportunity to implement aggressive cost management programs and wellness initiatives, which can lead to efficiencies of scale, risk management emphasis, and ROI.
Like level funding, a captive member might also receive financial rewards for the captive’s performance. Contrary to level funding, a decision to participate in a captive is best considered as a long-term strategy because of the objectives and upfront investment an employer will be required to make as a condition of membership. A captive can offer significant savings and become a substantial long-term investment.
Explore What’s Right for Your Company
A thorough analysis of the captive strategy is strongly recommended. At a minimum, understanding the various components, operational aspects and the captive objectives deserve experienced consultation. To learn more about whether benefit captives are right for you and your company, reach out to a Johnson Financial Group advisor to discuss alternative funding strategies.