Despite the bumpy rollout of the federal health insurance exchange, continuing legal battles and a delay in implementation of the employer mandate, the Patient Protection and Affordable Care Act (ACA) remains intact. Because the ACA continues to significantly impact company benefit plans and health care costs, now is the time to develop a health care strategy that meets your company’s long-term objectives while managing your cost. A few strategies employers have implemented are discussed below.
Captive insurance is a form of self-insurance where a company forms and funds a separate entity (a “captive”) to insure the company. Once formed, a captive operates much like any commercial insurer—it issues policies, collects premiums and pays claims on behalf of the company. Historically, captive insurance has been used as an alternative form of risk management for companies looking to self-insure against high-cost risks or risks for which the commercial insurance market does not offer a product.
In the past, few states had captive legislation and many captives were formed offshore in places like Bermuda and the Cayman Islands. Today, captive legislation is more common domestically with Vermont, Hawaii and South Carolina being the most popular domiciles for domestic captives. North Carolina passed new captive legislation in 2013.
Using a captive can offer the owner a number of benefits not provided by a commercial insurer, such as more control over the cost and administration of the company’s insurance along with certain tax advantages. On the other hand, forming a captive may mean high initial costs and an additional administrative burden. Other benefits and drawbacks include:
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Private Insurance Exchanges
Historically, employers have provided health insurance to their employees through an employer-based system, meaning that an employer selects an insurer or self-insures benefits, pays all or a portion of its employees’ premiums and an insurer or third-party administrator administers the plan. Year to year, the employer bears the risk of fluctuations in its employees’ health and the corresponding cost of health care.
An alternative to an employer-based system is a private insurance exchange. A private insurance exchange is a private, online marketplace where employees can shop, compare and purchase health insurance and other supplemental products like dental, vision and life insurance. Private exchanges are not a new concept (see www.eHealthinsurance.com), but rising health care costs for employers in combination with the insurance industry’s desire to preserve the value of providing group-based insurance have increased the popularity of private exchanges in the employer context. Under a private exchange, employers contribute a predetermined amount of money for their employees’ health care costs (also known as a “defined contribution”). The employees then shop the private exchange and use their employer’s defined contribution to purchase the health insurance products of their choice.
There are two main types of private insurance exchanges: single-carrier exchanges and multi-carrier exchanges.
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Private exchanges facilitate the move from a defined benefit model to a defined contribution model. This shift allows employers to cap the amount of money being spent on health care for individual employees and, at the same time, gives employees the power to choose from a variety of health care options. Employers have already begun to offer insurance through private exchanges. While experts generally expect more employers to utilize private exchanges in the future, the IRS recently issued guidance that strictly limits the use of nontaxable employer contributions and pre-tax employee contributions to purchase individual coverage. Similar to the benefits realized by employers when employers shifted from pensions to 401(k) accounts, employers understandably find the prospect of paying a defined contribution for health care costs each year enticing. That being said, the success of private exchanges will depend on the market’s ability to efficiently administer the exchanges, offer competitive benefits and convince employers that private exchanges are a better option for their employees than the public exchanges.
Some companies have taken the following steps:
- UPS eliminated spousal coverage when an employee’s spouse has another source of coverage.
- Trader Joe’s and Home Depot dropped health insurance for their part-time employees and encouraged them to use the public health exchanges.
- GE, IBM and Time Warner have decided to move their retirees to public and private insurance exchanges.
- Many other companies have sought to curb health care costs by implementing a wellness program that incentivizes employees to be more healthy.
Take advantage of the extra time provided by the delayed implementation of the employer mandate and fully vet your company’s long-term strategy for providing health care benefits. In doing so, consider how captive insurance, private insurance exchanges and the strategies that other companies have used might work for you.