Taking care of the workers
It has been a more than 30-year marriage between captives and healthcare. Monique Jackson examines how over that period the relationship has evolved.
Healthcare providers and captives have been fond friends ever since the first medical professional liability captive was formed in March 1976 by Harvard Medical School. Other hospital systems have since adopted this same structure and this was the foundation of the healthcare captive insurance industry in the Cayman Islands.
As we know, the impetus for this development was the crisis in the professional liability system, due to an unexpected increase in liability claims and a corresponding increase in the cost of commercial insurance. The hospital systems were particularly affected and the health administrators were becoming increasingly disillusioned with the spiralling number of malpractice suits. However, they were hampered by concerns about the reimbursement of their costs under Medicare and other third-party payment mechanisms. By the mid-1970s, Medicare cost reimbursement rules had changed, permitting the use of captives. They then began to seek alternative insurance solutions such as forming their own captive insurer. This not only allowed them to obtain insurance coverage, but to also provide enhanced financial and risk control over their insured risks. Captives also allowed healthcare providers, rather than insurance companies, the opportunity to realise the benefits of investment income generated by cash reserves.
The second wave of formations came in the hard market and physician liability crisis of the late 1990s and early 2000s. this time, physician groups and nursing homes and assisted living facilities made major forays into the captive sector. According to a 2003 American medical Association (AmA) survey of the 50 US states, some 18 states had serious medical malpractice liability insurance problems. Another 26 states were on alert with indicators suggesting a serious and worsening situation. there were a number of alleged causes for that situation: 1) Litigation: lawsuits, the rising costs of defending malpractice claims and excessive jury awards were increasing potential loss severity; 2) the economy: the ‘bull’ market of the 1990s funded insurers’ market share acquisition and facilitated competition that led to underpricing, while lower returns on investments in a ‘weak’ economy added to deteriorating financial results; 3) insurers: the addition of new players in the market led to intense price competition and the eventual deterioration of financial results; and 4) physicians: technological innovations and institutional constraints have limited the amount of time doctors can spend with patients, and this has contributed to medical errors and more lawsuits, and a feeling by patients and their families of a lack of care. this situation led to significantly higher premium costs and an increase in doctors going ‘bare’ (i.e. without liability insurance) or ceasing to practise. This in turn led to a decrease in the availability of medical care, especially in rural areas. The use of captives has helped to partly reverse this trend.
Nursing homes were also affected and were subject to insurance premiums that were as much as 10 times the level of previous years. Litigation activity against nursing home providers for negligent care and abuse increased dramatically in the late 1990s, particularly in certain states. In Florida, for example, a patients’ rights law had made it easier for patients to sue nursing homes, causing many liability insurers to leave the state and premiums to sky-rocket. I even recall a nursing home client telling me about a billboard that had been erected near its facility by a legal firm, encouraging family members of the nursing home residents to pursue legal action for any perceived injuries. These scenarios opened the door to the alternative market, including the use of captives. Cayman stepped through that door as a supportive friend and the rest, as they say, is history.
This friendship strengthened over time and has now blossomed into a fully-fledged romance. Healthcare captives now form 14 percent of the approximately 5,000 captives worldwide, and the Cayman islands is the largest domicile for these captives, with 263 healthcare captives out of a total of 729 licensees. Collectively, these captives write in excess of $3 billion in premium. these healthcare captives cover risks of healthcare providers from 45 of the continuous US states, with the majority covering risks in the states of illinois, pennsylvania, michigan, texas and Ohio. Healthcare captives have been formed by non-profit healthcare institutions, large for-profit healthcare systems, small and mid-sized healthcare systems or hospitals, group excess programmes for healthcare institutions, long-term care facilities, physician groups and managed care entities.
But why were these captives formed in Cayman? One of the reasons given is that the other domiciles don’t have as good a grasp of the nature of the long-tail business as do the regulators in the Cayman islands, given our long history with healthcare captives. Cayman regulators recognise that as a pure captive, with the parent company’s focus on risk management and claims control,healthcare captives do not require high levels of capital. This in turn leads to more efficient use of that capital and a focus on adequacy of reserves. As a wise man I know likes to say, the two important sections of a captive’s balance sheet are cash/investments and loss reserves—maximise one, minimise the other, get it the right way around and you will have a successful captive. It is in this vein that captives benefit from the insight of our experienced insurance managers, who have worked with a variety of structures and programmes over the last 30 years. This insight can be invaluable to younger and new programmes.
"Medical malpractice captives and the risks they insure will probably jump over the next few years as fledgling healthcare networks move to take advantage of new risk-sharing opportunities."
Healthcare captives have also benefited their parent companies in terms of claims control. We have often seen hospital captive boards go though the claims review process at board meetings and realise that the largest portion of claims are from a particular specialty or risk segment. This in turn leads to enhancement of the risk management programmes in that area, which in time will help to reduce indemnity costs. Over the years, we have found that having physicians on the board of directors or even just attending board meetings also assists in areas of risk control. Once these physicians see the effect of claims on the financial success of the captive, they will in turn press their physician colleagues with large claims to resolve any deficiencies in surgical processes, charting, adherence to policies and procedures, or even bedside manner. After all, cost savings realised by the reduction of claims can lead to increased funding being applied to patient care. This then benefits the physicians directly.
Cayman’s hospital captives have on a whole been so successful over the years that in this time of economic uncertainty, a number of them they have been easily able to offer further benefits to their corporate parent through dividends, grants or parental loans. Of course, approval of such must be granted by the regulators and consent is not granted lightly. But after almost 30 years of overseeing these captives, the regulators have well-developed processes for vetting such requests.
This brings me to another benefit of having a healthcare captive domiciled in the Cayman Islands—personal interaction with the regulators. The Cayman Islands Monetary Authority believes that meetings with the captive owners, directors and consultants are an important oversight tool. The benefits flow both ways as the captives are able to directly communicate with their regulators and the regulators obtain a greater understanding of the captive’s structure, programme, and industry concerns and developments.
This was echoed by Dick Dixon, senior vice president, financial operations at Scott & White Healthcare (S&W), which has had a captive in the Cayman Islands since 1987. S&W is the largest multispecialty practice in Texas and the sixth-largest group practice in the US. When asked why S&W decided to domicile in the Cayman Islands and why it remains here today, Dixon noted that initially it was attracted by the emphasis on healthcare and reasonable cost in comparison to elsewhere. It has reviewed this decision over the years as part of its corporate governance and still believes that the Cayman Islands is the domicile of choice for S&W. “The experience and quality of the service providers and regulators are unsurpassed in relation to healthcare captives. We value the periodic meetings with the regulators and find them to be very knowledgeable about our industry.”
The close relationship between our healthcare captives and their insurance managers and other Cayman service providers can also been seen in their support of the Cayman Captive Forum (CCF) held in early December each year. Pertinent healthcare topics fill one of three tracks presented at the conference and will generally be presented by a number of major hospital systems willing to offer the benefit of their expertise. This year, the topics include healthcare reform, physicians’ roles in captive operations, turning around a financially challenged healthcare system, injury reduction programmes, and insuring more than medical malpractice through a captive. The support of the presenters and attendees has helped to develop the CCF into one of the premier conferences for the captive industry.
What does the future hold? Observers say that the number of medical malpractice captives and the risks they insure will probably jump over the next few years as fledgling healthcare networks move to take advantage of new risk-sharing opportunities opening up as a result of national healthcare reform. Hospitals, physician groups, nursing homes and managed care organisations may for the first time choose to pool their numerous risk exposures in one medical malpractice captive. Some of these new captives will very likely decide to make the Cayman Islands their home. And we will certainly welcome them as the domicile of choice for the healthcare industry.
Monique Jackson is chairman of the Insurance Managers Association of Cayman. She can be contacted at: firstname.lastname@example.org
Taking care of the workers