We are all feeling the impacts of inflation, and as the word “recession” continues to be a popular one among political, economic and social conversations, we thought we would sit down with our captive insurance experts (Karin Landry, Prabal Lakhanpal and Peter Johnson) to get their two cents on how a possible recession or economic downturn interplays with risk and financial management tactics, with a focus on captives. Here’s what they had to say.

1. What are some possible impacts of a recession on captive insurance companies?

Peter: Changes in risk profiles driven by economic changes (examples include commercial auto frequency moved down then up, cyber ransomware on the rise, healthcare workers’ compensation programs utilized, excess liability/umbrella rates increased substantially, etc.). This also impacted the commercial market and captives often stepped in to fill the gap.

Prabal: Changes in exposure units: a recession may lead to reduction in workforce and therefore a change in insurance spend. On the employee benefits side, during times of uncertainty we typically see an increase in disability claims as well as a spike in usage of health insurance. When taken together with the change in exposure units, benefits programs may see a reduction in performance.

Karin: A continued increase in captive interest. Clients are looking at different ways to save money during a recession. For those organizations that already have captives, risk managers will need to prove the value of the captive, as typically there are a lot of dollars funding reserves that management wants access to in order to improve cash flow during a period like a recession.

2. Are there steps captive owners can take to safeguard their captive against a recession? If so, at what point should they implement them?

Peter: We recommend having service provider and reinsurer relationships in place to be enable the ability to make quick changes and file a captive business plan change to adapt according to the market.

Prabal: For existing captives, we advise undertaking a captive optimization or “refeasibility study” every few years, and this will be especially important if we enter a recession. This process assesses captive performance against original goals, aims to realign the captive according to changes in corporate objectives or priorities, evaluates impacts from recent regulatory changes and/or market trends, considers additional lines, analyzes the domicile, and so forth. Captive optimization helps organizations understand the vulnerabilities of your captive and help you shore them up.

Further, have your actuaries undertake stress testing of the captive to ensure financial stability and consider getting rates as a captive, where appropriate. Then, implement a dividend return policy, which ensures that in the time of need, there is a clear outline of how the parent organization can access any surplus in the captive. Be careful here as you don’t want the parent entity drawing down the surplus so much that the captive loses financial strength.

Karin: Risk managers should determine whether or not their captives are optimally funded. They should calculate the value of the captive to the organization before it becomes a management issue. They should explore other lines of coverage to determine whether or not it will save money, improve investment income, and/or increase cash flow for the organization going forward.

3. How would a recession affect underwriting?

Prabal: Insurance companies have two main revenue streams: 1) underwriting income and 2) investment income. In a recession environment, investment income becomes less likely or harder to come by. Therefore, underwriters are laser-focused on ensuring underwriting income, resulting in tighter underwriting standards. For example:

Peter: Carriers often tighten underwriting standards and may refuse to underwrite certain risks and/or business types all together. We’ve seen this for certain casualty lines like cyber, GL, and excess liability. Carriers may also be forced to remove manual rate discounts and/or increase rates all together while narrowing coverage at the same time.  

Karin: Because underwriting practices may tighten, risk managers must understand their organization’s risks better than the marketplace.  You could find that your experience is better than the book of business at the carrier level. If this is the case, a captive may make sense.

4. What about reserving?

Peter: To the extent a carrier’s or a captive insurer’s reserves are in a strong position due to favorable experience, reserve releases can be expected and may offset some of the poor 2022 investment experience we’ve experienced. The opposite also holds for exposures with loss trend on the rise that are driving up overall loss costs.

Prabal: Actuarial stress testing of the captive also comes into play here to ensure stability and dividend return strategy so that there is a consistent approach.

Karin: For captives that book discounted reserves, changes in the discount rates will affect the level of reserves captives carry. For those lines of coverage that are sensitive to recessions like workers’ comp and disability, the impact of negative experience should be factored into the reserving process.

5. Could the economic environment cause changes in captive methodology or the lines placed within a captive?

Peter: We’ve seen captive owners become more interested in captive utilization particularly when they feel like carrier coverage and pricing is unjustified based on their own loss experience.

Prabal: Captive optimization helps with optimal capital utilization. In a recession where capital is scarce, companies benefit from being efficient with how they use it.  

6. What sort of pressures might captives face during a recession in terms of loan backs or dividends to the parents, or any impacts on capitalization?

Peter: We’ve certainly seen dividend policies put into place for certain clients that have been hit harder during the recession than others. Some have looked to access their captive capital that was built up to significant levels over the years.

Karin: As noted earlier, management may see the reserves of the captives as a pot of money to access; proving the value of the captive negates that issue.

7. The Great Recession around 2008 caused a stall in captive formations. Do we think that could happen again?

Peter: It seems fairly unlikely to have a similar scenario to 2008 since a portion of the collapse was driven by extremely poor mortgage underwriting standards in place. But anything is possible.

Prabal: Further, unlike in 2008, the commercial markets are still in a hard market cycle. This will likely be accentuated in a recession and therefore yield an increase in captive formations.

Karin: Because capital is scarce during a recession, this may spur the use of cell captive programs as opposed to pure captives to meet the needs that risk managers have to control costs and minimize price increases.

8. Anything else related to economic volatility that captive owners and risk managers should keep in mind?

Prabal: One thing would be the potential to free up captive capital by using loss portfolio transfers. The current interest rate environment is likely to create a preferential market for these opportunities.

Karin: Organizations’ hurdle rate might change as a result of the recession. This would necessitate looking at the opportunity costs associated with captives and their reserving process. Additionally, organizations should evaluate their insurance partners to make sure they are sound as they will be grappling with some of the same recession issues noted here. I wouldn’t be surprised if some of the insurers experienced difficulties and either left the marketplace, contracted and changed the coverage levels that they offer, and/or focused in on certain risks while excluding other risks from their policies in accordance with market shifts.

Whether or not we have seen the worst of The Great Resignation, savvy employers are not new to adjusting their benefits and “perks” programs to better align with workforce desires. At the Disability Management Employer Coalition (DMEC) Annual Conference last week in Denver, I spoke specifically on whether Flexible Time Off (FTO) has taken over as the frontrunner, versus the more traditional Paid Time Off (PTO) approach. I thought you might be curious to know the answer, at least in my opinion, so I’m jotting down the key points from my presentation here.

Background

As with so many things in business and in life, in order to clearly understand the current state of PTO, it’s critical to look back at the history of the concept. In 1910, President Taft proposed 2-3 months of required vacation, “in order to continue his work next year with the energy and effectiveness which it ought to have.” Countries like Germany, Sweden, and others were no strangers to this idea, and set forth on setting global standards regarding minimum levels of vacation. Today, the U.S. is one of only six countries in the world – and the only industrialized nation – without a national paid leave policy. So, what gives?

At least on paper, Americans seem to prefer work over vacation. You may be laughing or rolling your eyes, but it is a fact that significant time off goes unused at the end of the year (people choose to lose it rather than use it). In some cases, this may be the result of a corporate culture that, while they may document PTO programs, do not actually encourage the use of that time. If you’re expected to work while on vacation, you may not feel it worthwhile to take said vacation.

PTO

Over the years additional policies popped up to fill some of these gaps, such as leave related to COVID-19, sick leave, disability, parental leave, and family leave. Many organizations arrived at a PTO program in which an allocated number of days account for different types of leave which vary by employer, but might include vacation, bereavement, sick and personal leave. While this creates efficiency and reduces unscheduled absences, this design (perhaps inadvertently) encourages working while sick, as employees do not want to use days within their bucket when they have a cold, since those same days could be used on a tropical vacation or, on a less happy note, in the case of a personal or family emergency. This flaw went from acceptable to unacceptable in light of the pandemic, and turned some organizations off of PTO and on to FTO.

FTO

Flexible Time Off (FTO) allows for ultimate flexibility in the volume of “vacation” time taken. With the expectation that employees do their jobs, meet deadlines and achieve their individual and corporate goals, time for rest is scheduled at the discretion of managers. FTO however is not to be confused with unlimited vacation days. While a nice idea, some challenges exist around FTO, including:

Given these factors, however, FTO plans can be a powerful organizational tool. If you’re considering FTO, I recommend first answering the following questions:

The Big Reveal

FTO can bring a lot to the table for an organization: it is unlikely to result in more time off (than before), it is financially savvy, a good recruiting tool, and relatively easy to implement. On the flip side, however, I noted some real challenges. In the end, and if you read this article for the clickbait title, my investigative answer is no: FTO is not the new PTO. It should however be considered as one tool within the absence management toolbox, and assessed according to your individual employer needs and priorities.

After a short hiatus, The Disability Management Employer Coalition (DMEC) was able to host their 2022 Annual Conference in-person for the first time since the pandemic started. DMEC is one of the leading organizations in the paid leave industry and their annual conference brings together employers, vendors, government officials, lawyers and more to network and discuss leading trends in the business. This year also marked the 30th anniversary of the creation of DMEC, furthermore solidifying itself as a staple in the world of disability management. It was great seeing so many familiar faces from the industry and learning more about what’s keeping industry professionals up at night. This year’s conference took place in Denver, CO and Spring had the pleasure of both exhibiting and presenting.

Although this year’s conference covered a wide range of topics, I noticed the following three key themes.

1) FMLA & ADA Challenges

Although compliance is often a hot button topic at DMEC, this year there was a specific emphasis on maneuvering around FMLA & ADA challenges. Presenters tackled FMLA & ADA challenges from a range of angles including changes in guidance, a Q&A with federal agency leaders, and a mock trial where the attendees acted as the jury. Some of the of the FMLA & ADA related presentations this year included:

2) Support for Caregivers and Healthcare Workers

Although COVID has settled a bit in severity, caregivers and healthcare workers are still facing high rates of burnout and overworking, without receiving much federal support. Also, in the past 50 years we have seen the highest rates of children and elderly parents in the home, often requiring some type of care, most often unpaid care by a family member. During this year’s conference, presenters tackled the issue of mental health for employees assuming the role of a caregiver and how employers can offer needed support. Below are some of the groundbreaking presentations tackling this issue.

3) The Future of Leave

As we tentatively look beyond the COVID-19 era, there was a huge emphasis this year on what we can expect from the disability and leave management industry moving forward. During the pandemic many employers adjusted to remote/hybrid leave policies, introduced new mental health resources and navigated changing COVID regulations. But as we slowly move into a post-COVID world, many speakers, such as those noted below, looked at new-age alternative leave policies and what we can expect for the future of leave.

a) Utilizing Tech & Data

When looking at the future of leave management, we are seeing a giant increase in leave related tech and software, which allows employers to better understand leave trends and preferences within their workforce. Although tech and data collection software are not new in the industry, we are seeing constant updates and an influx of new software that help measure different facets of absence management policies. Below are a few tech & data related sessions we wanted to spotlight.

b) Moving Past COVID-19

As many organizations slowly move back into the office, employers have been developing and reassessing return-to-work programs and reevaluating leave policies to keep their workforce happy. On a national level, we are seeing changes in COVID-related compliance and a big push to retain talented employees through enhanced benefits packages. Here are some noteworthy sessions related to adjusting to a post-COVID world.

All in all, being back at the DMEC Annual Conference in-person was a powerful experience! This year I saw so many young and enthusiastic faces which is a good sign for the future of the industry. DMEC never fails to provide innovative insights into the absence and disability management landscape while providing a fun and interactive experience, and I am already looking forward to their next event.

Cell Captive Overview

A protected cell company (PCC) is a legal entity that can be considered as a condo of insurance. A PCC facilitates a turnkey solution for companies by offering clients an individually protected cell that is insulated from the risk of other cells within the PCC; each condo operates as its own captive (with certain restrictions) and does not share risk or rewards with the other condos in the building (PCC). PCCs can vary in type and operational structures. The underlying principle of a PCC is that they are established by a sponsor that funds the capital required by the core. The sponsor is also responsible for ensuring other captives operate within the business plan parameters of the PCC. Clients benefit from a PCC as they spend less time and resources on the operational and establishment activities for the program.

When cell captives were first introduced to the market, they were largely in the form of unincorporated cells, where participation and service provider agreements worked to protect the sponsor’s investment rather than through structural protections.

The model for cell captives has evolved to allow more control for cells with the establishment of incorporated cells. Incorporated cells allow cells to even have their own Board of Directors at the cell level.

Regardless of the type, any cell captive structure allows constituents to benefit from pooled administration, but not from pooled risk, as each cell is independent. Sometimes a company will own multiple cells within the PCC, which are all treated individually.

Cell captives are attractive risk funding vehicles because they offer:

In addition to being a great solution for small and mid-sized companies, cell captives align with a range of other use cases and can be flexible in structure and purpose, for example:

Cell captives were once most commonly leveraged by mid-sized companies entering captive funding for the first time and seeking lower barriers to entry and extra assistance. While still a great fit for mid-sized companies, market conditions are driving more and different types of organizations toward cell captives.

The Surge in Cell Captive Demand

In more recent years, we have increasingly seen large multinational organizations entering the cell captive space, in establishing and owning the entire structure as part of their enterprise risk management strategy. In addition to the basic cell captive advantages listed above, other driving factors that may be of interest include:

Hard insurance market conditions as well as the landscape for emerging risks are making cell captives even more attractive. While often a good fit for more traditional lines, more and more cell captives today are being used for risks like voluntary benefits, cyber insurance, and excess liability. Further, more domiciles have passed cell captive legislation in recent years, opening doors to many.

As with any assessment regarding alternative risk financing, always start with a feasibility study. While cell captives are growing in popularity and advantageous for many, a thorough analysis of the pros, cons, and other contributing factors specific to your organization, its risk and its objectives, is necessary before any decision is made.

A critical starting point in setting up a captive is the captive feasibility study. Captive feasibility studies come in many forms, and there are no industry standard report formats. As a result, many captive owners do not know what to expect as a final deliverable, and we see many feasibility reports that are severely lacking.

The feasibility study forms the cornerstone for the establishment of a captive and is usually one of the first documents that would be requested for in the event of an audit by the IRS.

Every captive actuarial study should include both qualitative and quantitative aspects. Not only should it clearly map out expected financial results, but it should also highlight important insurance considerations that ensure an appropriate and compliant captive structure.

To help provide a framework, here are five key questions that captive owners should be able to answer based on their captive feasibility study.

1. Do you have appropriate data?

As part of the captive feasibility study process, captive owners should work closely with their current insurance carriers to gather as much high-quality data as possible. The study should reflect at least the following for all proposed lines of coverage:

This data will be used to develop future loss estimates once the coverage is placed in the captive. All of it should be readily available, and organizations should be reviewing this data regularly, regardless of whether it is undertaking a captive feasibility study. 

2. Has an actuary reviewed your loss experience?

Once you’ve gathered the necessary experience data, it is important that an experienced actuary review it. All experience reports are different in layout and content, and an actuary will know best how to interpret the data, develop the best estimate of future losses, and ask the right questions of the carrier.  A captive feasibility study should always include a robust actuarial analysis.

A good actuary will ensure that plan changes, rate changes, and overall population changes have been properly reflected in the experience report.  If they aren’t, the actuary can make the necessary adjustments.

The actuary should also review the claim reserves that the carrier is reporting.  In our experience, carriers typically overstate reserves due to conservative assumptions, inflating the loss ratio. A good actuary will independently calculate reserves to compute a more accurate estimate of historical loss ratios and future losses.

3. Do you have a clear sense for the expected administrative expenses – at the start of the program and ongoing?

Administrative expenses related to operating an employee benefits captive include actuarial, captive management, legal, audit, letter of credit (if used for collateral), carrier fronting fees, premium taxes, captive domicile fees, taxes, and state procurement taxes (if domiciled outside of home state).

These fees play a large role in determining whether the captive will be profitable at fully-insured market rates.  If your captive charges rates higher than market rates to turn a profit, then the fees are too high. Carrier fronting fees are typically the largest expense and the most important to get right. Captive owners need to understand how these fees were determined in the captive feasibility study and if they are market competitive and realistic.

We always recommend that a company placing employee benefits in their captive conduct an RFP process to select vendors, and that includes competitive fee arrangements.

4. Is the party that conducted your feasibility study independent, or could there be a conflict of interest?

We have seen many captive feasibility studies completed by non-qualified entities or by organizations that have a vested interest. For instance, many insurance brokers will conduct a high-level analysis to conclude a captive program is not feasible. It is essential to understand the interests of all stakeholders and to work with organizations that have the appropriate credentials to help you make an informed decision.

Find an independent party who can provide an objective, transparent, and unbiased recommendation.

5. Will the coverage qualify as insurance?

Every captive feasibility study must comment in detail on the qualitative aspects of captive insurance including what it means to qualify as insurance. This is an important consideration from a captive owner’s perspective and must be fully understood. There are many case laws that have commented on the lack of understanding of insurance company operations.

For instance, an important aspect of any insurance transaction is that it must achieve risk transfer and risk distribution. There are a few industry-accepted risk transfer tests that will demonstrate that the coverage adequately transfers risk from the insured to the captive.  The “10-10 Test” is the most common, determining whether there is a 10% chance of a 10% loss.  Alternatively, there is the Expected Reinsurance Deficit (ERD) Test where the threshold is an ERD ratio of at least 1%.

Risk distribution requires that the captive distribute its risk among several insureds.  Typical risk distribution tests are meant to ensure that no more than 30%-50% of the risk is from the same insured, and if the captive is a brother-sister insurance company, there must be at least 12 participating entities, each having no more than 15% of the risk.

We also recommend the Coefficient of Variation test to better understand the impact of the law of large numbers.  As the number of independent exposures increases the less volatile actual loss experience will become and therefore more predictable.

Employee benefits or not, all captive feasibility studies should address whether there will be adequate risk transfer and risk distribution.

To summarize, a captive feasibility study is one of the most salient parts of placing employee benefits in a captive.  Captive owners should aim for feasibility or refeasibility studies that are transparent, objective, highly robust, and consider all aspects of the captive transactions.

I had the pleasure of speaking at The New England HR Association (NEHRA)’s Annual Legal Summit a couple weeks ago. The summit brought together attorneys, CEOs, insurance experts and HR professionals to discuss changes in regulations and laws that directly impact the workplace experience of employees. Some of the major topics discussed included how to adapt to a hybrid workforce, how to know who to hire during and cultural and legal considerations when facing substance use and mental health issues in the workplace. All in all, the conference was a great success and allowed for fantastic networking opportunities and provided guidance around a range of compliance considerations that apply to countless employers nationwide.

During NEHRA’s Legal Summit, I presented on, Piecing Together the Puzzle of the Paid Leave Landscape, in which I dove into history of Paid Family & Medical Leaves (PFML) in the US and explained the current landscape of which states provide PFML (and to what degrees). I moved on to show breakdowns on a global level for paid leave for new fathers, new mothers and for an employee with a health problem. As you’ve probably heard, data shows that the US is far behind when it comes to enacting federal legislation that provides paid family leave in comparison to the rest of the world. Without federal paid leave policies, it has fallen on individual states to create, enact and enforce paid leave policies. Of the fifty states in the US, 23 have rejected PFML proposals and have no safety net for employees who face medical or family issues that would require time off work, unless a program is provided by their employer.


After addressing some of the global and national trends, I explained some of the barriers of access to paid family leave within the US. For instance, women are 20% more likely to leave their jobs when they don’t have access to paid leave and 25% of new mothers return to work less than two weeks after giving birth1. Additionally, when breaking down access to paid leave based on race, research conducted by the National Partnership for Women & Families found that 28% of black respondents reported having requests for leave denied, compared to 9% of white workers. It is clear even within states or organizations that provide some form of paid leave, many Americans are facing very different realities when trying to utilize or understand their paid leave options.

As this was a legal summit, I tackled some of the major questions employers ask about leave surrounding compliance, costs, and leave options if they reside in a state that does not provide PFML. I reviewed some best practices employers can take when developing and evaluating leave policies such as leveraging benchmarks, looking into funding options (e.g. self-insurance, captive insurance, etc.), and utilizing technology and appropriate metrics to evaluate financial impacts. I also noted that different perspectives must be considered when developing leave policies. For instance, employees have different priorities; they are often worried about job security, getting paid and workload upon return when assessing taking paid leave. On the flip side, navigating leave from an employer perspective can be a daunting task when having to traverse FMLA, state laws, ADA/ADAAA, HIPAA, discrimination laws and more; so, it is essential to utilize resources to make sure your company is abiding by all regulatory standpoints.


All in all, I was in great company at the NEHRA legal summit! As per usual, NEHRA hosted some of the leading experts in the field and tackled major topics employers and HR professionals are facing currently. I hope to see many of you again during NEHRA’s 2022 Annual Conference in October.

In April of 2022, the Bureau of Labor Statistics reported that inflation hit a staggering 8.5%. If current projections hold true, this year will have the highest inflation rate since 1981. COVID-19, supply chain problems, Russia’s invasion of the Ukraine, housing price increases, and more predictable market cycles are some of the driving forces behind such high inflation. In our line of work – insurance, risk management, and employee benefits – macroeconomic factors like these are seen in the challenges our clients face and they solutions they prioritize. To complicate things, the property and casualty realm is also subject to things like natural disasters, climate risk, changes in societal litigiousness, and ransomware/cyber risk. That said, we sat down with Peter Johnson, Spring’s Chief Property & Casualty Actuary, to discuss how this challenging environment interplays with his work in the captive insurance space.

Q: Is inflation having an impact on underwriting and pricing?


A: This is case-by-case between captives but as an overall average, yes. A captive in a strong surplus position and favorable historical loss experience will still be able to provide favorable pricing even when the industry is seeing high loss trend and rate increases. Higher frequency and/or severity trends are certainly still impacting pricing needs for certain lines, such as cyber and excess liability where experience isn’t frequent in nature and the credibility of a single company’s experience is low. Specifically for cyber, ransomware loss costs have grown exponentially over the last 3 years and rate increases are being observed by both commercial carriers and captives. Further for both cyber and excess liability where commercial market pricing issues exist capacity has also shrunk and captive are being looked to, to fill the gap.

Q: Is inflation currently impacting reserving and if not, do you think it will in the future?


A: In general, yes, for many casualty lines where loss trends are high or increasing, but this is also a case-by-case basis since captives with good data credibility and stable historical loss experience can respond to their actual loss development and may not have a need for much, if any, reserve increases due to inflation. Cyber liability, commercial auto liability and excess liability are three lines in the industry with increasing severity trends and captive reserving practices often consider industry trends when company experience isn’t fully credible by itself, so I would expect some reserve strengthening for these lines due to trend assumption increases. Supply chain issues have been an obvious issue in the used car market and depending on a captive’s auto exposure and experience, there may be both increasing auto rate levels and reserve levels for the captive.

Q: Some analysts have suggested that while commercial market insurers are concerned about inflation, the impact might be offset to some extent by the benefit of higher interest rates in their investment portfolios. Would you expect captives to realize a similar investment benefit? Would you expect it to be significant?


A: To the extent a captive’s investment portfolio is invested in higher yielding fixed income, securities or other investments that are inflation sensitive then yes, there would be some offset.

Q: Are there specific coverage lines in captives that will be more affected by inflation than others?


A: Cyber, excess liability/umbrella and auto liability have seen higher trends than workers’ comp. Geography is an important factor as well since certain areas have seen noticeably higher/lower trends than the industry average. For example, medical professional liability severity trends have increased, but this varies significantly by region. Some states are seeing double digit severity trends and rate increases while others are experiencing very modest increases. Difference in litigiousness and jury awards drive much of these state-by-state differences. Property is certainly impacted by inflation with increases in cost to build, but natural catastrophes such as hurricanes, wildfire and wind/hail have typically had more of an impact and to compound things the current supply chain and inflation issues immediately after a disaster can lead to even costlier natural disasters. According to NOAA National Center for Environmental Information 2021 came is second all-time with 2020 coming in first as far as the total number and total cost of these disasters.

Q: Would you anticipate any changes in captive strategies in response to inflation?


A: For captives with active investment advisors, I’d expect a response on the investment side depending on their current investment profile and the surplus and loss reserve position of the captive. There certainly could be a variety of responses on the insurance risk side, particularly if inflation is driving up claim severity and significantly changing the risk profile of a captive. Capitalization, limits, retentions, reinsurance, and pricing are all potentially impacted and would need to be considered.

Q: Is there any advice you’d offer captive owners regarding inflation strategy?


A: In general, it is important to sensitivity test your proforma projections every few years based on practical adverse loss outcomes and investment income scenarios. These financial projections can consider higher than anticipated inflation trends over a multi-year projection horizon. This will help determine appropriate captive capitalization levels, reinsurance, pricing, and risk margin to protect against possible adverse events.

Q: Any final thoughts on the subject?


A: Firstly, large jury awards remain top of mind for many company executives and boards. Although the impact on industry combined ratios is less obvious based on what I’ve seen, this continues to be a big concern and is part of the driving force behind pricing increases in the commercial market for certain liability lines.
Secondly, as carrier capacity presumably decreases and underwriting profit margins increase for certain carrier lines where rate level increases outpace loss trend, captives will continue to be utilized to insure more risk and recoup underwriting and investment income related profits otherwise going to commercial carriers.
There you have it. While there are many negatives that sprout from inflation, one positive is that it allows captives to continue to elevate their status as a strategic risk management and financial tactic for organizations of all kinds, and help companies better face the difficult economic climate.

A recap of the Boston Business Journal Future of Healthcare Event on April 7th

Spring was proud to sponsor the Boston Business Journal’s breakfast event earlier this month. The title, “The Future of Healthcare,” is a critical point of discussion for our team and our clients day in and day out, and carries more weight now since the pandemic highlighted critical system gaps. Our consultants continuously look for innovative solutions that help organizations mitigate the impacts of rising healthcare costs, attract and retain employees, address behavioral health, and ultimately frame insurance and employee benefits in a more strategic way. Our work closely aligns with the market and what is trending with key players, such as insurance carriers, healthcare providers, technology vendors, and more. As such, we were delighted to get the inside scoop directly from industry partners.


The in-person (refreshing!) event provided much food for thought and called upon the sentiments of a range of stakeholders. Michael Dandorph, President and CEO at Tufts Medicine, provided the healthcare provider viewpoint. Andrew Dreyfus, President and CEO of Blue Cross Blue Shield of Massachusetts (BCBSMA), an industry veteran, brought the health plan perspective to the table. And Ali Hyatt, General Manager of Provider Commercialization and Marketing at Amwell, a telemedicine company, rounded out the discussion.

While the panelists all brought different points of view, there was a clear consensus as to what areas of healthcare need the most attention, and where the industry should focus in order to shape a more positive “Future of Healthcare.” A common thread was the need to view healthcare through the lens of the consumer (the patient) and find ways to improve that experience. We repeatedly heard the word transformation, meaning we all need to reframe our thinking and our approach to address the following key areas:

Affordability


It’s no surprise that affordability was front and center, as healthcare costs continue to climb. As Dreyfus pointed out, the problem only got worse when COVID-19 necessitated paying higher salaries to staff, and caused premiums to increase. The rise of high-cost specialty drugs, which now represent around 25% of healthcare spending, and the consolidation of healthcare systems add even more fuel to the fire. As a result, employers are increasingly shifting more of the health plan costs to their employees, creating real barriers to care. Dreyfus cited a survey that found that in Massachusetts, half of the public has delayed or avoided necessary care due to costs. And as Hyatt pointed out, access is the most important driver of affordability. It is lack of access that tends to escalate prices for all parties within the healthcare system.
But enough about the problem; we all know it’s grim. When it comes to solutions, the panelists had ideas. Amwell is focused on making things like follow-up treatment, appointment making and care regimens easier to build an infrastructure that yields better outcomes. Tufts Medicine is working to build trust with consumers to help them better manage their health proactively, so that perhaps the patient never has to come to the hospital at all. Dreyfus emphasized the need to move away from the current fee-for-service system, where physicians earn less if they can keep a patient out of the hospital, which is backwards. “We should be paying for health and outcomes,” stated Dreyfus. High costs in a pandemic-stricken environment have pushed people away from engaging with healthcare systems and added to stress, leading to increased issues surrounding…

Mental Health


The speakers came at mental health from multiple angles. There is the obvious problem, which is that COVID-19 took immeasurable tolls on mental health. For as much good that technology has done regarding the flexibility to “work-from-anywhere,” it has also been detrimental. Dandorph pointed out that remote work for many just means logging on earlier and signing off later, with almost no down time. Hyatt added that a recent Microsoft study showed that employees were pulling an additional “third shift” from 9-10PM, feeling the need to log back in at night after tending to family or other obligations. Beyond work pressures, we also have retirees and seniors to consider, who have been isolated, vulnerable and afraid since the onset of the pandemic, and have been exhibiting increasing signs of depression and/or dementia as they struggle with loneliness.
Then there is the more specific problem, which is burnout within the healthcare industry. Dandorph dubbed this the “pandemic before the pandemic,” with suicide rates among physicians more than double that of the general population. COVID-19 amplified things, and staff has been retreating ever since, adding to the labor shortage we are seeing across all sectors. To solve for this crisis, the panelists stressed the need to simplify processes to relieve the burden on healthcare professionals. They are looking at ways to eliminate clinicians spending hours on the phone for pre-authorization processes, or typing up notes, and ultimately remove steps when possible. By integrating automation technologies and digitizing routine tasks, not only will staff get back time, but administrative costs should also go down.


The good news is the stigma around mental health has fallen – maybe not completely, but significantly. For their part, BCBSMA has dramatically expanded their staff in this area, adding around 17,000 social workers, psychologists, psychiatrists and others. In some cases, the health plan is paying mental health practitioners more to bring them back into insurance networks, as they are often separate due to administrative burden. BSBCMA has also committed to pay at parity for mental health visits indefinitely.

The panelists agreed that all the touchpoints of healthcare are inter-related; you can’t have a strong system if one cog in the wheel is poor. Specifically, the mental health component can be helped in part by…

Digitization


Telehealth was a hot topic at the Boston Business Journal event. While it was even higher during the height of the pandemic, Tufts Medicine is still seeing about 80% of behavioral health visits and 15%-20% of all healthcare visits in a virtual format.
In summary, there’s no going backwards. Telehealth is here to stay, and Hyatt told a memorable story highlighting its value beyond mere convenience. She described a patient treated by Amwell who, at the time did not have a primary care physician (PCP) and was struggling with bronchitis systems. He was a smoker, mid-50’s, with various health issues such as emphysema and high blood pressure. He remembered he had access to Amwell and through his virtual visit, the clinician was able to discern that his nebulizer tubing was cracked, that he was not taking his blood pressure medication, and that his wife’s cuff he had been using wasn’t the right fit. After the visit these problems were resolved and he was enrolled in a care management program through the insurer from which he receives nutrition tips, reminders about appointments, and more. As Hyatt put it, “This was a consumer who would have gotten lost in the system.” Dreyfus agreed that seeing patients in their home environment can be extremely valuable, as the clinician can do things like look into their fridge to get a gauge of their diet, look into their medicine cabinet to understand drug-to-drug interactions, or flag things like rugs that could cause a fall.
Telehealth does not work for every medical issue, and some still prefer in-person care. Importantly, Dreyfus flagged up that someone seeking mental health services, for example, may not be comfortable doing so in their home, which could be the source of their stress. But as Hyatt pointed out, we shouldn’t be viewing it as telehealth versus in-person care, but how it all works together. The panelists think of telehealth as the beginning of a series of services that are more focused on the patient experience with the goal of increasing…

Consumer Engagement


As Dandorph explained, a virtual healthcare visit is one aspect of where the future of healthcare is going, but we need to think about digital more broadly. He pointed out that in the tech industry for example, they have figured out how to engage consumers and be a regular part of their lives without being intrusive. Healthcare isn’t there yet. But if we can engage patients with their health early and often, and make their care needs and system navigation easier to understand, the result will be better outcomes and lower costs across the board. Dandorph introduced the concept of food as medicine and suggested partnerships that could enable all types of populations to eat healthier.


There are myriad ways to achieve such engagement, and one of them pitched by Dreyfus is to make the home the new locus of care. We were able to figure out at-home COVID-19 tests, so why stop there? Are there other tests or treatments that could be out-of-the-box? With the appropriate clinical support, better outcomes may be more likely in a home environment, and could be more comfortable for the patient and convenient for unpaid caretakers. This is especially true for elders, where the panelists agreed that long-term care needs to be a big piece of this puzzle as we move forward.


To bridge the consumer engagement gap, Tufts Medicine is thinking differently regarding hiring and leadership. Dandorph and his team brought in leaders from outside the healthcare realm, more familiar with consumer markets, who could think differently about making those connections and building brand recognition. Hyatt echoed this sentiment. At Amwell, they prioritize having a mix of staff; a balance of those from healthcare who understand the realities and the regulatory environment, and those from outside the industry who can bring fresh ideas and rethink the consumer experience. Hyatt noted that the biggest issue at a health system in New York was around payment and billing, where patients were frustrated with the complexity. We again get back to simplicity.


While all of these innovations are fantastic, we need to remember that they are not all equally accessible, which brings us to…

Inequity


Like mental health, health inequity was another issue unmasked by COVID-19. There is still a digital divide, where technology solutions may not be accessible for some. There are social determinants of health to consider, Dandorph noted, such as food access, safe housing, economics, and education. When we talk about Food as Medicine, as an example, it may not be simple for everyone due to costs or inconvenience. And as Dreyfus pointed out, we are still dealing with underlying racism in care. So, what can we do about it?

Recently collected all their member data – race, ethnicity, and other measures – and published it in a transparent way, highlighting where they stand now and where they need to improve equity efforts. They also developed similar reports for healthcare systems and vendors in the region. Then, they committed to using their value-based care programs to eliminate the inequities they found. The health plan made a $25 million grant to the Institute of Healthcare in Improvement in Boston. And starting in 2023 they will be the first plan in the country to pay hospitals more for achieving equity goals, as they have in the past to improve quality of care. Tufts Medicine is focused on developing more culturally competent services, as a start, but Dandorph stressed that health inequity is a societal problem that will require stronger…

Partnership


Yes, the healthcare system in the U.S. is broken in some ways. But it isn’t just up to hospitals and carriers to fix it. The panelists emphasized that things work better when silos are broken down, admitting even their organizations could work in closer collaboration, as they are aligned on priorities and direction. Dandorph explained the need for more partnership between the private and public sectors. For example, federal regulation is needed in the realm of high cost prescription drugs. Further, the government funds 40% of all healthcare in the U.S. through either Medicare or Medicaid, and many of its members are the ones suffering most from problems related to inequity and mental health. “These are macro societal issues,” said Dandorph, and as a society we need to elevate the economic status of those vulnerable communities and work on building trust between the people and the companies who can help them. This will take more work than any of the panelists’ organizations can do
alone. It will require community leaders. It will require businesses and employers to be more involved. Just like patients need help connecting the dots of their care, we need to connect the dots between each other.
Ultimately, the first 5 focus areas can be solved for only if #6 plays a larger role. Many of the objectives discussed – shifting from a sickcare system to a healthcare system, lowering costs, minimizing complexity, eliminating disparities, driving engagement in healthy behaviors – can only be accomplished through greater and widespread collaboration and connectivity.

In the United States, over 155 million people received medical and health-related benefits through some form of employer-sponsored program in 2021, according to the Kaiser Family Foundation. As healthcare costs continue to increase year over year, it should not come as a surprise to learn that after compensation-related expenses, healthcare costs are usually the second highest expense for most employers.


Employers are beginning to ask important questions about the future of their health care offerings and turning over every stone in an effort to control these ever-increasing costs. For employers that are currently leveraging fully insured plans, a prime opportunity to lower the total cost of healthcare exists through self-funding. By transitioning to a self-funded program, employers can achieve savings of anywhere from 5% to 15% depending on their program design and cost structure.


Self-insurance has become the most prevalent way to fund for healthcare benefits. Of those employers offering employer-sponsored programs, 67% choose to do so through a self-funded program. [1]

What is Self-Insurance?


Self-insurance, also known as self-funding, is a strategy used by employers to gain control over healthcare costs. In addition to control, the significant savings achieved through self-insuring is exactly why so many are considering a transition, as a viable alternative to manage and lower costs.


Self-insurance is the process of unbundling a fully insured plan, where employers use a third-party administrator to operate the plan from a benefits and claims processing perspective. This ensures that employees are not impacted by the change. The most significant difference pertains to how the program is funded; instead of paying a fixed premium amount, employers take a portion of the financial risk associated with the claims of the program, in exchange for lower overall costs.


The incentive for incurring this additional risk directly relates to the hefty charge carriers typically add on to their fully insured premiums. By taking on this extra risk, employers strip away these insurance carrier profits and are able to reduce their healthcare spending. To protect against the catastrophic losses that may occur due to higher-than-expected claims frequency or severity, employers typically take advantage of medical stop-loss coverage.


Groups looking to move to self-insurance should focus on understanding the financial and qualitative impact of this move. For this reason, we usually recommend groups that are larger (over 100 enrolled lives) to contemplate this strategy. The reason for this threshold is that most states regulations allow companies with over 100 enrolled employees (50 enrolled employees in some states) can request the insurance carriers for their historic claims information. This can then be reviewed by actuaries to help understand and outline the financial implications of potentially taking on some of the risk associated with moving to self-insurance.

Managing Risk – Stop Loss Insurance


The largest concern when considering a self-funded program relates to the risk of the program being impacted by unexpectedly high claims – be it due to the volume of claims or due to the exposure to a handful of large loss claims. One very sick individual or a series of unanticipated smaller claims could lead to a higher-than-expected claims level in a self-insured plan. Stop-loss insurance minimizes or eliminates this risk as well as dramatic fluctuations in claim costs over time, creating a level of predictability.


Aggregate Stop-Loss

Provides employer protection for the risk of catastrophic loss by providing insurance coverage for total group claims over a certain dollar amount. Stop-loss carriers issue policies that pay when the aggregate claims amount exceed a pre-determined percentage of expected claims levels. Aggregate stop loss is usually expressed as percentage of expected claims like 125%.


Specific Stop-Loss

Provides employer protection for individual catastrophic claims. Similar to aggregate stop-loss, financial protection is provided when the claim exceeds the pre-determined deductible or attachment point. Specific stop loss is usually expressed as a deductible amount like $25,000 per individual. For both specific and aggregate stop-loss, all claims exceeding the attachment point are covered by the stop-loss carrier and not the responsibility of the employer.

Benefits


Additional benefits to self-funding include design flexibility, cost transparency, and increased savings. Further, increased insight into the actual cost of care, administrative costs, and any loaded fees or additional expenses to the plan allow for more informed decision making.


Full Transparency & Increased Access to Data


Many fully insured employers don’t understand the true cost of their program or areas of claims concentration, or using a broker or advisor, as commissions are often loaded into premium rates. Additionally, obtaining claim information in a fully insured environment is challenging. Increased transparency and data with self-funding allows employers to analyze cost drivers and implement targeted programs to lower utilization costs, while increasing employee health and satisfaction. In a self-insured plan this information is easily available on a timely basis, thereby allowing employers to better understand their programs and make changes to cater to their unique demographic of employees before their next renewal.

Program & Design Flexibility


Every state has a unique list of mandated coverages that can add significant costs for both employers and their employees. Because self-insured plans are governed by ERISA and generally pre-empt state law, employers avoid these additional costs by allowing them to design plans that meet both employer and employee needs, increasing satisfaction for all stakeholders.

Financial Control


Better-than-expected claims in one year can offset next year’s expenses or reduce program contribution levels. In addition, employers may choose to purchase medical stop-loss insurance or a level funding arrangement to provide additional security and create consistency from a cash flow perspective.


Cost Savings


Typically, premiums paid in fully insured programs include loaded fees and industry loss trends. In a self-funded program, employers not only minimize or avoid paying these additional charges, but their costs are directly correlated to their specific experience, and not that of their peers. Tools such as consumer-directed health care, price transparency tools, specialty networks, value-based plan designs, and wellness programs all can be built seamlessly into a self-funded plan and help drive down utilization costs and the total cost of healthcare.

Want to learn more?


Self-insurance remains a powerful tool in an HR team’s arsenal to control and potentially reduce the burgeoning healthcare costs, as well as provide benefits that are targeted to their population. Employers who make the change can reap immediate advantages and avoid, or at least slow down, inevitable cost increases. Our client, edHEALTH, is a prime example of self-insurance done right, where their members were able to gain savings, offer enhanced coverage, and take a more targeted approach to employee benefits. Our Consulting Team is made up of highly trained risk funding professionals with years of experience. We help employers navigate the self-funding waters and to develop the best funding strategy to meet their individual needs.

1. 2021 Employer Health Benefits Survey. kff.org. https://www.kff.org/report-section/ehbs-2021-section-1-cost-of-health-insurance/.