Cons of a Captive Trust

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Employee Benefits Strategic Partner
Lumity, Inc.

If the marketing messages surrounding health insurance captive trusts sound too good to be true, you’re right to be skeptical. 

I understand why the over-simplified messaging resonates. Insurance underwriting is dry stuff. Health plan mechanics are excruciatingly complex. So there’s a temptation for employers to hand off the tangled ball of yarn to a firm that talks a good talk.

You’re likely being told:

  • You’ll have more control over medical costs.
    Counter point: cost predictability is not the same thing as getting a fair rate. When your group isn’t taken out to other carriers for a competitive bid, you lose negotiating power and leverage. (Plus, there’s no flexibility to offer differential benefits packages if you have two distinct workforces).

     
  • You’ll receive returns on underwriting profits.
    Counter point: you’ll have to trust the captive on this—because you won’t get your claims performance data.

     
  • You’ll be better protected than on a self-funded plan.
    Counter point: this is flawed logic. At 250 employees, in most cases, self-funding is less expensive. But brokers rarely tell you this because they don’t make as much money off a self-funded plan. (And, there’s an additional catch. You need your claims data to assess if and when it makes financial sense to move to self-funded, but you won’t get this from a captive trust).

But, there’s a much, much bigger issue to point out.

The Inherent Conflict of Interest

Captive trusts exist when a given advisor is running their own pool and they act as both your adviser and underwriter. It's a classic conflict of interest. It’s the equivalent of a real estate agent working on both sides of the transaction.

Favorable risk profiles suffer. 

Your group could be healthy and running quite well, but your rates won’t reflect your group’s favorable risk profile. It’s similar to being placed back in a small group, and your rates help subsidize other groups in the pool.

The trust is always looking to exploit existing customers to get newer customers in at better rates. The incentives are misaligned; and, the larger you are, the worse off you are. 

As a PEO-type arrangement, a captive trust might make sense if you’re at 50 employees and holding. But I suggest choosing a solution that can cost-effectively scale as you grow. Because, if you're over 100, you certainly don't want to be held captive in a trust. It’s not just the pricing. It's commissions.

Built on the Back of Tech Companies

In tech, where employee populations overwhelmingly skew young and healthy, you’re subsidizing other groups in the pool instead of getting the best rate possible for you and your employees. And, you’re very likely overpaying by six-figures.

By design, captive trusts are difficult to leave. 

Most insurance policies can be terminated at any time. Not so with captive trusts, where you tend to sign up for a year at a time. But it is possible to escape one. We helped Enjoy, a 500-person tech firm in the bay area, save $816k on its health plan renewal by leaving. Check out our Enjoy case study for details.

Claims Data Drives Better, Fair Rates

At the end of the day, the key to controlling your insurance costs is claims performance data, and you’ll have no visibility into your data in a captive trust. So, if you’re considering one, I hope this blog gives you pause. And, if you’re already locked in, the right partner can help you out.

Either way, we’re here if you’d like to understand your options. And we always provide a health plan and benchmarking analysis upfront, so you know what results you can expect before you decide whether to partner with us.

Want to Learn How A Transition From PEO Would Work For Your Company? Schedule a Free Benefits Consultation Today.