Changes in healthcare bring captive solutions to the forefront
There is little doubt that the business of delivering healthcare has changed dramatically over the past ten years. From Obamacare to physician employment, the landscape is shifting. In 2015, the American Medical Association (AMA) reported that approximately 57% of physicians were still practicing in a physician-owned setting.
In the past physician practices focused primarily on quality patient care. Now, physicians practicing as a physician owner must not only focus on quality patient care but also on customer service, cost reduction, efficiency in operation, and development of new revenue streams. The number of challenges in running a physician-owned practice continue to rise due to increasing federal regulations and decreasing reimbursements. As a result, physician-owned practices have begun to reevaluate all aspects of business, including the delivery and structure of medical professional liability insurance.There is little doubt that the business of delivering healthcare has changed dramatically over the past ten years.
Over this same time period, changes have also occurred in the professional liability industry, from the abundance of consolidation in the industry to the dramatic decrease in the frequency of medical professional liability claims, traditional insurance companies must look outside the business norms to serve their physician clients. These trends in both business sectors have created the perfect opportunity for using alternative risk markets. One way to obtain such collaboration is through a captive insurance vehicle.
Although there are several viable paths for collaboration, for the purposes of this article, the focus will be on the protected cell captive model as it offers unique flexibility. A protected cell captive is an increasingly popular vehicle for physician groups to participate in a captive without having to incur the full expense and capital outlay of forming and maintaining a stand-alone or pure captive. Protected cell captives are often sponsor-owned facilities that permit the medical practice owners to retain their own insurable risks in a formal insurance environment. The assets of each individual cell are protected from other cells and from the core captive entity. Each cell in the captive operates much like an independent insurer, but often with common management and service agreements that can provide operational expertise and efficiencies.
Though there are benefits to both the physician practice and the insurance company within the protected cell captive solution, creation of a protected cell captive is not a casual decision as true risk is retained at the captive level. The physician owned group, through its protected cell captive, will be held responsible for the risks of its insured owner or owners and any affiliates similar to that of an insurance company. When a claim is covered under the captive policy, the protected cell satisfies the claim. Therefore, the capital requirements of the captive must meet thresholds based on the risks insured by the captive, and to satisfy regulatory requirements.
When physician practices collaborate with professional liability markets to form a protected cell captive, it creates a true partnership toward enterprise risk reduction. The long term benefits of rigorous enterprise risk management, although difficult to quantify, are critical to the success of the practice. The results of a unified collaboration with strategic focus on enterprise risk management will likely result in better margins, operational efficiencies, financial improvements and most importantly, increased patient safety.
From the insurance perspective, retaining the appropriate level of risk is of upmost importance. The captive manager collaborates with the captive owners to provide an ongoing evaluation of the cell captive’s financial strength, capacity analysis, claims handling, physician education, and risk management services. Although these are all services provided to the physician in the traditional insurance setting, the weight of those services is much more impactful when the economic cost of a claim is not just that of an increase in the physician’s professional liability insurance premium but rather a cost shared among risk takers-including the cell captive. This shift in exposure causes the focus on risk prevention to become laser focused in all aspects of the business. In addition, a protected cell captive offers the following considerations:
• Financial Capacity: A physician-owned protected cell with limited capital, needs to dial-in on assuming policy risk commensurate with the level of capital in its cell. Traditional insurers, with solid financial resources and quality A.M Best ratings generally partner with the cell captive to absorb excess frequency of loss as well as the responsibility for severity in claims.
• Financial Strength: Insurers are often measured in terms of financial strength and are evaluated by regulators and rating agencies on this basis along with other enterprise value metrics. Financial strength is anchored by the insurers’ surplus (or equity) in relation to its premium volume, reserves for unpaid claims, credit and investment quality and other factors. Deterministic and stochastic modeling also help evaluate the financial strength of the insurer, including the cell captive insurer.
• Captive Management: Professional captive management is key to operating a successful captive. Expertise in the regulatory landscape along with underwriting, claims management, finance, accounting, and risk management is of great benefit to the captive. Often, cell captives are managed and operated in alignment with the “core” cell in a cost effective manner that adds value and improves the bottom line. Legal, actuarial and tax professionals play an important role in realizing the goals of the owners of the cell captive.
• Claims Handling Expertise: Claims handling is part of the captive manager’s role and can be seamlessly coordinated with the risk-bearing entities to optimize outcomes. This expertise not only includes the steps that need to be taken to evaluate a claim but also to set reserves for expenses and indemnities and, most importantly, to obtain qualified legal counsel to defend the malpractice claim.
According to the 2011 RAND study, 75% of physicians in low-risk specialties and 99% of physicians in high risk specialties age 65 and older have been sued. While claims of malpractice are often stressful for physicians, the frequency is simply not enough for the typical practice to staff an employee for the sole purpose of claims handling.
• Physician Involvement: Physicians are the primary investors in their business and expect to be involved in all key decisions that affect it. This often includes medical professional liability risk. A protected cell captive offers the opportunity to closely monitor risk management practices with a “skin-in-the game” approach to risk measures.
Partnering with medical professional liability insurance companies, who have educational offerings for all aspects of patient safety, risk management, and specialty-specific information raises awareness and helps minimize risk. Of course, these educational offerings also satisfy much needed continuing medical education (CME) credits for the physicians in the practice, providing a service the physicians are required to obtain, often at no additional cost to the practice.
• Risk Management Services: Risk management services include on-site consultations, site assessments, and benchmarking data to aid the practice in their strategic analysis of the practice needs and to mitigate litigation exposure. Rigorous risk management practices and procedures can directly impact the frequency and severity of malpractice claims with benefits inuring to the cell captive’s finances as well as companion risk partners.
In summary, as physician owners continue to reevaluate costs and the professional liability industry continues to look outside the norm for opportunities to serve clients, the protected cell captive provides both the practice and the insurance company with the solutions to achieve their strategic objectives. Physicians may receive a lower overall cost with the same or higher value product, while the professional liability company has an alternative method to add value its client base. The shift in liability exposure provides an increased benefit by collaborating with an organization who has the expertise to protect the practice through underwriting, claims handling, risk management and physician education. Should a claim occur, the experience of professional claims management and the financial backing of the insurance partner will aid the physician practice in a resolution with an outcome that satisfies all parties involved. While a cell captive strategy isn’t right for every practice, for those physician owners with the financial capacity and a willingness to take risk, this option is certainly one that should be considered.