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COVID-19 and the Case for Employee Benefits Captives

November 9, 2020


COVID-19 has brought unprecedented changes to the healthcare landscape, and all corners of the industry are working to navigate the short- and long-term impacts of the pandemic. While insurers find themselves facing high costs and strict regulatory demands around COVID-19 treatment, utilization rates and spending on non-COVID-19 testing and treatments across the industry have declined significantly.

In April 2020 alone, there was an historic 38 percent drop in personal consumption expenditures on healthcare services over the previous year.

Spending on physician services and hospitals saw similar declines. Both providers and patients have driven this decrease. Many hospitals and other healthcare facilities temporarily halted non-emergent services, such as elective surgeries. At the same time, patients responded to calls to “flatten the curve” by avoiding routine and preventive services. Many avoided healthcare settings all together for fear of increased exposure to the virus.

What It Means for Employers
Employers and benefits plan administrators are taking note of this decrease in healthcare utilization. Fewer doctor and hospital visits means fewer claims. Yet with traditional insurance structures, the insurance companies are the ones benefitting from the historic dip in claims.

That’s the reality for fully insured employers. Next year almost always means a rate increase – this year it just may be a smaller increase than in years past.

But for employers utilizing a captive for employee benefits, there’s greater potential to capitalize on this decrease in healthcare spending and utilization. The increased control associated with these programs offers a significant advantage in today’s healthcare climate.

What Is an Insurance Captive?
An insurance captive is an insurance entity established by a group of like-minded employers. Rather than paying premiums to an insurance company, the employers contribute to a shared pool and pay only based on actual claim activity. When claims are low, self-insured companies save money. A captive increases control and cost transparency while creating the potential to drive down costs through sound plan design and management.

The Benefits of Captive Insurance
A captive insurance structure has a number of benefits that have become clear advantages amid the COVID-19 pandemic. The most significant is reduced cost. The employer retains profits when claims are low and benefits from decreased state taxes, reduced or eliminated state mandated coverages and risk selection. In many cases, the costs for self-insured organizations are up to 10 percent lower than fully insured plans.

It’s one reason why 94 percent of large employers are self-insured.

An additional benefit is increased control and access. Employers in a captive or self-insured structure can see exactly how COVID-19 has impacted their members over the past year. There’s an opportunity to share learnings and best practices among members of the captive and ensure all participants are taking the right steps to address current risk and plan for future uncertainty.

The Role of Employee Benefits Captives in a Post-COVID-19 World
COVID-19 is sure to have lasting effects on healthcare and employee benefits. The increased control offered by captive insurance structures will continue to offer benefits as organizations navigate these new realities. Companies will be able to better tailor their risk and coverage needs based on factors such as increased remote work, staffing changes, the potential for future pandemics and more. As organizations navigate the economic downturn and other effects of the pandemic, the improved cash flow and limited volatility are other aspects that make captives an attractive option. Additionally, there may be added tax benefits and relief funds available to captive entities and their members.

Employers using captives will also be able to benefit from improved wellness and disease management programs.

They’ll have a greater opportunity to reap the long-term benefits of promoting preventive care, vaccines and other wellness initiatives with their members. Healthy employees don’t just generate less health care costs, they are also more productive and more satisfied on the job. This is another area where shared best practices among captive members offers an additional advantage.

The COVID-19 pandemic has created tremendous uncertainty in the healthcare and employee benefits space. A captive insurance structure allows organizations to reclaim cost savings and control and minimize that uncertainty when it comes to benefits plans and future risk.

To learn more about captive insurance options and their advantages amid uncertainty in the healthcare market:

Please contact a Conner Strong & Buckelew representative.

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