Alternative Coverage Investments

Health plan affordability remains a top concern as employers respond to the economic downturn and tight talent market. The reality is many businesses have no room left for more cost increases and are looking for a viable exit ramp from year-over-year rising premiums, deductibles and copays.

For many business owners, reevaluating unconventional plan alternatives is essential diligence for their organizations this year. Here are three areas brokers are investing in to bring alternative coverage models forward.

Benefits Captives

Proprietary group benefits captives have become a mainstream offering among the leading benefits consultants serving the middle market.

A group captive minimizes volatility by allowing similar-sized employers to pool their risks. Participation provides a “shock-absorber” against a year with high claims. Unlike many of the self-funded plans from major health insurers, unused premium dollars are returned to the captive members as a surplus dividend, and the members retain the profit. Furthermore, under a captive solution, employers can see their fixed costs fall as low as 20% to 35% of their total healthcare spend.

This is a compelling narrative, so it makes sense that brokers are increasingly taking on the process of developing captives downstream for employers with 100-1,000 employees. What’s unique is that brokers are beginning to diversify their captive-related offerings, expanding their capabilities by offering new products and targeting niche industries. For example, HUB recently announced a new proprietary employee benefits captive for cannabis organizations last year. Earlier this year, NFP expanded its medical stop loss and self-funded group captive capabilities with the acquisition of East Coast Underwriters and Blue Ridge Captive Solutions.

Captives are serving as a wedge in a highly competitive market for brokers. By applying market knowledge and expertise to organize the myriad of capabilities needed to set up and differentiate these arrangements, brokers not only provide a long-term alternative to clients, but also a solution that drives better population health management through the availability of more comprehensive data that can provide a basis for loss projections along with various care and cost management resources.

Professional Employment Organizations (PEOs)

The shift in broker attitudes toward PEOs is well characterized by the cliché, “if you can’t beat them, join them.” A bevy of partnerships and acquisitions have been announced in recent months, such as OneDigital’s acquisition of Resourcing Edge in March. A top 25 PEO with a national footprint, OneDigital said the addition of Resourcing Edge’s technology and service model would “diversify OneDigital’s workforce product offerings enabling the company to dynamically service SMBs through a combination of consulting, administration and technology through their lifecycle.”

By way of background, PEOs provide comprehensive HR solutions for small and mid-sized businesses. These services frequently include payroll, employee benefits, HR, workers compensation, risk management, and more. With HR growing in complexity seemingly every year, PEOs are becoming a go-to solution for small employers struggling to cope with rising healthcare costs, new employee benefit trends, and changing HR compliance laws.

A July 2021 report from the National Association of PEOs that measured how PEO clients fared across a range of different measures over the course of the COVID-19 pandemic indicated that PEO clients better managed business operations, changes in employment, and access of major government support programs than other comparable small businesses not in a PEO.

According to the report, PEO clients:

• Are 58% less likely to have permanently closed;
• Are 32% less likely to have seen a negative overall effect on business from the pandemic;
• Are 82% more likely to have business operations back to normal (or better);
• Have had employment grow by 1% since early 2020 (compared to a 6 percent decline for comparable small businesses);
• Have a rate of employment growth over the last 6 months that is 81% higher;
• and are 18% more likely to have had their 2020 PPP loans forgiven.

Currently, there seem to be two emerging models for brokers considering PEO as a new business solution: partnering with a PEO that works exclusively with brokers or purchasing a PEO outright.

The broker-only PEO model appears to be the more common avenue, however, in the coming months, more of the top 25 brokers dedicated to the small business segment may move to acquire PEOs to differentiate themselves.

Supplemental Stop Loss for Pharmacy Risk

Self-funded employers face skyrocketing prescription benefit costs driven almost exclusively by specialty drug claims. According to a Segal report, specialty drug prices were projected to rise 11.5% in 2021; in 2022, they are projected to increase another 13.4%. Comparatively, non-specialty prescription drug costs are only projected to rise 4.6%, according to the report.

One emerging cost management strategy is supplemental stop-loss insurance, which can offset the volatility of the traditional stop loss insurance market. RxPharmacy Assurance, a sister company of RxBenefits, Inc., announced in October 2021 that its stop loss supplement to manage high-cost specialty drug risk would now be available to brokers and their self-funded employer clients across the nation, regardless of client size. Supplemental stop loss, much like self-funding, has become a vehicle that isn’t just for employers with more than 5,000 lives.

While traditional stop-loss insurance is important, it is more often not a complete solution to address the rising costs and utilization of specialty drugs. Stop-loss coverage plans are renewed annually, which can result in a large claim being covered for just a few months before the patient is lasered. That process covers individual participants—based on prior claims experience or known conditions—at a higher deductible than the rest of the group, which leaves the employer exposed the following plan year. That type of exposure combined with the prevalence of catastrophic claims is prompting brokers and employers to look for additional risk management solutions that complement existing stop loss coverage and cap what plans or stop loss carriers are required to pay for covered specialty drugs.

It is important to note that there is a spectrum of risk and innovation. Employers have more flexibility to choose cost management solutions that align with their organization’s goals. As the market continues to evolve—powered by more transparency and information access—it will be interesting to see how access to pricing and cost information informs the decisions that employers make and if that will drive them to seek new health plan models.