HEALTHCARE CAPTIVES
DEALING WITH THE "NEW NORMAL" IN HEALTHCARE
William M. Cassetta
IMAC 2013
Pre-Forum Tutorial
Grand Cayman
December 3, 2013
HEALTHCARE CAPTIVES – THE NEW NORMAL
Historically, the institutional
healthcare system has been
designed to heal and cure
patients, with a focus on services
in the acute care setting.
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HEALTHCARE CAPTIVES – THE NEW NORMAL
In the “new normal”, institutional
health care will focus on
“population health management”.
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HEALTHCARE CAPTIVES – THE NEW NORMAL
Healthcare captives were formed
primarily to help manage medical
professional liability risk.
4
HEALTHCARE CAPTIVES – THE NEW NORMAL
In the “new normal”, captives will
be challenged to help manage
financial risk that extends far
beyond medical professional
liability.
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HEALTHCARE CAPTIVES – THE NEW NORMAL
 Don’t risk a lot to save a little.
 Retain risk that is controllable and predictable.
 Transfer risk that is volatile or unpredictable.
 Retain “owned” risk and transfer “non-owned” risk
Will these continue to be the precepts
of alternative risk financing in the “new
normal”?
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HEALTHCARE CAPTIVES – THE NEW NORMAL
 Employing physicians in large numbers
• Perfect Storm – health systems want to provide full
range of services; physicians fear payment changes if
they remain in private practice
• Is it really “employment”?
 Integration into corporate culture of parent?
 Willingness to adapt to working for someone else?
 Compensation models often resemble private practice
‒ So, newly “employed” physicians have demands that cannot
be ignored
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HEALTHCARE CAPTIVES – THE NEW NORMAL
 Tail Coverage
• Commercial market prices tail coverage unrealistically
• Cost of tail coverage is often a critical factor in the
employment negotiation
• Physicians might have potential personal benefits if
they remain insured by their commercial carriers
What about providing tail coverage
through our captive?
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HEALTHCARE CAPTIVES – THE NEW NORMAL

Distinguish ability to provide tail coverage from
advisability of providing tail coverage
•
Limited opportunity for coordinated defense
•
Was physician’s prior practice in an unfamiliar/adverse
venue?
•
Does the medical specialty have an especially long tail?
•
Was the physician insured under a policy with a “claims
asserted” trigger?
•
Does the sponsoring organization wish to assume risk for
practice outside the sponsor’s facilities?
•
What if the physician quits/is terminated?
•
Premium tax/potential income tax issues
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HEALTHCARE CAPTIVES – THE NEW NORMAL
 Potential New Best Friend – Physician Insurance Companies?
•
New willingness by physician carriers to entertain collaborative
arrangements with health systems

Concerns about shrinking non-employed physician market

Recognition that “preferred provider” status with predominant health system
may produce greater market share

Apparent willingness to consider nearly any proposed program structure

‒
100% risk transfer
‒
Quota shares
‒
Assumption of prior acts liability only
‒
Access to underwriting services
Reluctance due to historical animosity between hospitals and physicians’
carriers
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HEALTHCARE CAPTIVES – THE NEW NORMAL

New Exposures/Threats
•
Class action claims
‒
Will current opportunity to limit retained risk be available in the future as excess carriers reconsider “batch”
coverage provisions?
•
Negligent credentialing claims
•
New “agency” theories in clinically integrated networks and ACOs
•
Claims alleging failure to provide care based on economic incentives
•
Antitrust claims for excluding/terminating providers from CIN/ACO
•
Privacy breaches
‒
Who “owns” the electronic medical record that can be accessed by multiple unrelated providers?
•
eMedicine
•
Quality Improvement fatigue
•
Increasing role of non-physician providers
•
Aggressive tax enforcement
•
The insurance market cycle
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HEALTHCARE CAPTIVES – THE NEW NORMAL
IT WON’T BE EASY, BUT IT
WILL BE INTERESTING!
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WWW.HONIGMAN.COM
Healthcare Captives –
Dealing with the “New Normal” in
Healthcare
Tom Hermes
Director - Towers Watson
IMAC 2013
Pre-Forum Tutorial
Grand Cayman
December 3, 2013
14
Uncertainty Effects Healthcare Captive Programs

Worldwide economic instability continues


Insurance cycle turning??


Real and manufacturing crises continue
Could affect availability and affordability
Affordable Care Act (AKA Obama Care)

Major restructuring of healthcare industry
– Potential changes to historical risks are not represented in current data
– Changes generate new potential causes of loss requiring coverage – no data
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The Medical Professional Liability Cycle

Is the Medical Professional Liability (MPL) insurance cycle turning

Property, workers compensation, and commercial auto markets firming

Last MPL cycle turned positive in 2002 (12 years ago) – change is due

Tort reform erosion continues

Major healthcare restructuring creating potential new liability issues

Never events (absolute liability?)

Systematic risk (E.D. System flaws)

Government scrutiny/reporting requirements (Section III) (stents)

Increased public awareness of outcomes (higher expectations)

Some evidence that large claim severity is increasing (while frequency flat)

Increased frequency of class action/batch cases (cardiac stents)
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Hard Market Cycle Generally Requires a “Perfect Storm”


Substantial increases in frequency and/or severity of claims

Early cycles were frequency driven

Most recent cycle was large loss severity driven
Significant decline in investment return affects leverage


Excess market capacity limited (market demands high attachments/prices)


Cash flow underwriting allows loss ratios excess of 100%
Historically insureds buy down (per claim/agg. limits) during soft market
ultimately resulting in significant working layer losses for excess market
Adverse loss development on prior years loss reserves

Often driven by late reserve development on large cases
HOWEVER
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Hard Market Cycle Generally Requires a “Perfect Storm”
(continued)

While there is some evidence of increased severity of large claims,
overall trend indications remain moderate (≤ 5%)

Investment returns remain low but relatively stable

Commercial underwriting is more stable – significant excess capacity


As systems have formed, insureds have taken larger retentions with no
aggregates – excess markets are not in the working layer

Low investment income requires better underwriting

Actuarial data improved substantially

Claims reporting, settlement and payment patterns accelerated

Increased healthcare risk management/safety focus has lowered trends
Loss reserve development on prior years is still favorable (graphs)
18
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Medical Malpractice Ultimate Loss Est. by Coverage
Year/Valuation Date
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Medical Malpractice Ultimate Loss Est. by Coverage
Year/Valuation Date (continued)
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The New Normal
Healthcare captives under Affordable Care Act
Primary Challenges


Physician “Employment”/Alignment
Mergers/Acquisitions/Affiliations/Partnerships/JOA’s/Management
Agreements/Purchasing Agreements

Other healthcare systems/hospitals

Other healthcare entities

Supply chain
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The New Normal (continued)

Current Issues

Combining coverage for taxable/non taxable/Governmental entities

Mergers result in multiple captives requiring consolidation

New acquisition currently participates in a group captive with multi-year
withdrawing commitments

Deals negotiated without risk management involvement or review

Branding/agency theories – don’t own or control it but legally responsible

Managed care exposures/credentialing risk

Diversity of coverage (system at $100M, affiliated/owned entity at $1M)
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The New Normal (continued)

“New” exposures/threats

While professional liability remains the primary focus of healthcare captives,
other exposures will take on increased significance
– Cyber liability
– Managed care liability (provider/insured)
– Medical stop loss (employee/provider?)
– E&O/D&O/EPL
– Governmental Errors & Omissions
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Don’t Forget the Mission
Captive Mission Statement (in 10 words of less)

Minimize risk

Minimize cost of risk

Support parent business (mission)
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Bill’s Precepts Still Important When Considering
Coverage

Don’t risk a lot to save a little

Retain risk that is controllable and predictable

Transfer risk that is volatile or unpredictable

Retain “owned” risk and transfer “non-owned” risk
25
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© 2013 Towers Watson. All rights reserved.
Healthcare Captives –
Dealing with the “New Normal” in
Healthcare
Shulamith Klein, Chief Risk Officer
Emory University – Emory Healthcare
IMAC 2013
Pre-Forum Tutorial
Grand Cayman
December 3, 2013
Facts & Figures
• Academic health system (Atlanta, GA)
• Clinical arm of Emory University
• 6 hospitals (tertiary, geriatric, orthopaedic)
• Multi-specialty, primary care outpatient clinics
• Nursing & rehab
• Clinical & research affiliates
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Facts & Figures
• $2.4 billion net revenue
• $72 million charity care
• 15,000 staff employees
• 1,300 employed physicians
• 1,900 hospital beds
• 61,700 inpatient hospital admissions
• 3.8 million outpatient service visits
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Conservative in purpose,
broad in scope
excess
reinsurance
(commercial)
$3mm/$3mm
buffer layer
(captive)
$3mm/claim
(captive)
•
•
•
•
•
medical professional & general liability
staff & employed physicians
course & scope of employment
no prior acts coverage
full program limits for all insureds
____________
•
•
•
•
•
batch coverage
clarity around clinical trials
volunteer activity
punitive damages
patient’s personal property
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The perfect storm
•
•
•
•
•
•
•
Weak economy
Workforce shortages
Baby boomers retiring
Rising healthcare costs
Market consolidation
Health care reform
Stress on AMC tripartite mission
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The end of the ball for all Cinderellas
• Transition from fee-for-service to accountable
care
• Payment models based on clinical outcomes,
service, and safety
• Less revenue per patient
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Emory Healthcare strategy
• Demonstrate VALUE by providing highest
quality care cost-effectively
• RE-INVEST in select capital projects and
tripartite AMC mission
• GROW STRATEGICALLY by participating in
market consolidation
32
New normal #1
“clinically integrated network”
Old World
• employed and community
physicians with Emory
privileges
• limited clinical performance
data
• hybrid use electronic med
record and paper
New World
• employed, community, and
independent physicians
• founded on clinical quality,
efficiency, & collaboration
• quality data tracked for all
participants
• shared savings based on
quality metrics
• universal use of electronic
med record
33
New normal #2
“prior acts coverage”
Old World
• pre-employment tail
purchased through prior
carrier
• captive provides 1st dollar
coverage upon hiring
•
•
•
•
New World
community hires: preemployment retro date rolls
into MagMutual primary
policy
MagMutual provides 1st dollar
coverage for 2 years
excess through captive
post-2 years, tail options for
pre-employment includes
captive (except for ob’s)
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New normal #3
“collaborative physician insurer
relationships”
Old World
• MagMutual largest insurer
Georgia private physicians
• covers majority non-Emory
codefendants
• finger-pointing between codefendants
New World
• primary insurer for Emory
community hires
• clinical site visits
• valuable risk mgt resource
• residents participate in
Patient Safety Program
• open dialogue regarding
litigation strategy
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An enlightened liability program
excess
reinsurance
(commercial)
$3mm/$3mm
buffer layer
(captive)
• prior acts coverage for preemployment exposures
• increased risk of vicarious liability for
independent participants in network
• captive excess of MagMutual for
community hires
• filling gaps between captive &
MagMutual (“DIC”)
• collaboration with non-Emory codefendant
$3mm/claim
(captive)
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Developing areas potential exposure
•
•
•
•
•
Management liability errors and omissions
Clinical trials (other than bodily injury)
Healthcare regulatory liability
Third party legal advice
Miscellaneous errors and omissions
37
A team working together…
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