In today’s business landscape, business owners and leaders are grappling with the ever-increasing challenge of curtailing the relentless rise in healthcare premiums. One innovative approach gaining traction is the use of captive insurance companies for employee healthcare. A report by Aon urges businesses to examine strategies to better manage this cost while also pointing to data from its Global Risk Management Survey that shares growth in employee benefits risks placed in captives–specifically healthcare. As healthcare costs continue their upward trajectory, businesses are exploring alternative strategies to offer quality healthcare without breaking the bank. In this article, we delve into the growing trend of captive insurance for employee healthcare and its impact on businesses, with a compelling example from Russell Sewell, CFO of Arizona Auto Parts.
Rising Healthcare Premiums: A Pressing Concern
The escalating cost of traditional health insurance plans has become a significant concern for employers and employees alike. According to a survey by Mercer, employer healthcare costs have consistently outpaced inflation and wage growth. This has made healthcare a significant operating expense for businesses and has left many employees struggling to afford the coverage they need. In this challenging landscape, companies are seeking innovative solutions that provide quality healthcare while keeping costs manageable.
Arizona Auto Parts: A Case Study in Employee Healthcare Transformation
To illustrate the effectiveness of this evolving approach, we turn to Arizona Auto Parts, a company that has successfully harnessed the power of captive insurance for their employees’ healthcare needs. Their journey towards improving employee healthcare and reducing costs began with a stark reality.
Russell Sewell, CFO of Arizona Auto Parts, recounted their initial struggles. “Even when we were smaller, with 100 employees, only seven participated in our healthcare plan,” he said. “The insurance we provided was subpar, unattractive and unaffordable, leaving many employees without adequate coverage.”
Employees were burdened with exorbitant premiums, making essential healthcare out of reach for many.
A Paradigm Shift: From Need to Desire
Sewell and his team decided to take a different path. They established a captive insurance company and consulted with healthcare insurance experts. The results were transformative.
Sewell explained, “We realized that we would have access to the best and largest healthcare network in the country at a significantly reduced cost, with more comprehensive coverage. It required a fundamental shift in our company’s mindset: health benefits were no longer something we had to provide but something we wanted to provide.”
Their approach engaged employees in the decision-making process, and they witnessed immediate benefits.
One employee, burdened by high premiums and medical bills, shared how he couldn’t afford insurance, and his wife had undergone a costly gallbladder surgery, leaving them with a $300 monthly bill for an $80,000 procedure. With the captive insurance plan, Sewell explains it’s now just $189 a month and provides far better coverage than they ever had before.
Impressive Results and a Win-Win Situation
Today, Arizona Auto Parts boasts 350 employees and has experienced astonishing growth—seven times in revenue over seven years and tenfold in profit. Their captive insurance plan now boasts over 60% participation, a testament to the value employees see in the program. Notably, the plan has covered employees facing various forms of cancer, providing access to top-tier medical facilities.
The benefits of the captive insurance program are undeniable: a larger network, reduced costs for employees, and superior coverage. Many have found solace in the plan, as they can now afford essential surgeries and medical procedures.
How Captive Insurance for Employee Healthcare Works
Shifting employee healthcare into a captive insurance company entails the creation of a subsidiary entity to oversee and tailor healthcare coverage for the workforce. Under this approach, employees contribute premiums to the captive, which then assumes responsibility for covering their healthcare expenses, including medical bills and other relevant costs. Notably, this strategy grants the parent company greater control over the insurance program, affording opportunities for cost management, negotiating favorable rates and implementing wellness initiatives to reduce healthcare expenditures.
To mitigate the risk of exceptionally high claims, captives may opt to purchase reinsurance as an additional layer of coverage.
Overcoming Barriers and Achieving Success
Despite the impressive results, the question remains: Why don’t more companies adopt this approach? Sewell explains the barriers to entry. There are fixed costs to assume upfront, and it doesn’t become financially viable until a company has at least 75 employees. Many organizations view their insurance plan as a mere benefit, overlooking the economic sense it can make.
Sewell advised, “You need a good broker who understands captives to guide you through the process. Our captive insurance company became a valuable referral source, connecting us with experts who knew how to make this work.”
The Future of Employee Healthcare
As the trend of exploring alternative solutions for employee healthcare gains momentum, more businesses are likely to explore innovative approaches. The example of Arizona Auto Parts serves as a testament to the potential of this strategy to improve employee well-being and enhance a company’s financial stability. In an era marked by the need for healthcare cost containment and innovative solutions, this trend is set to redefine how employers provide for their employees’ healthcare needs, securing a brighter future for both businesses and their workforce.
