30 November 2012Analysis

Obamacare and its implications

The Patient Protection and Affordable Care Act (PPACA)— Obamacare—has been controversial since its inception, but the Supreme Court ruling in June, which narrowly approved the Act, suggests it will become a permanent feature of US healthcare. This will have significant implications for care organisations and those providing insurance coverage to such institutions, but even before the ruling, captives have been weighing up the potential implications of PPACA. As Steve Pelletier, vice president, sales and marketing at ELM Exchange outlined, PPACA has prompted the beginnings of a “vast consolidation” in US healthcare, with significant future opportunities for captives. However, many captives continue to take a wait-and-see approach, fearing that elements of the Act, or the Act in its entirety, may be repealed.

For captives that have responded to the Act, “demand for stoploss captives and self-insureds needing stop-loss coverage has grown significantly”, said Karin Landry, managing partner at Spring Consulting Group, with expectations being that demand will continue. Les Boughner, executive vice president and managing director of Willis Management, spoke in a similar vein, indicating that “consumers of healthcare are looking at reinsuring stop-loss, or joining group captives providing stop-loss coverage”. As Landry outlined, “selffunding their own plan gives companies more control than being part of the system”.

The system has changed rather dramatically too, as Pelletier explained: with PPACA encouraging more consolidation and physicians being taken on in employed positions, there will likely bea shift away from the commercial market and greater deployment of captive insurers. PPACA looks set to create larger healthcare institutions, which will be more likely to want to self-insure their risks. This will provide them with greater control of their costs and increased oversight of their clinical and financial risks.

"Taking charge of their own destiny will be a major motivator for all US healthcare institutions considering employing and using existing captives."

The way that captives are deployed will also change. “With physicians becoming employees and insureds of large healthcare systems, employers are going to have an obligation to proactively mitigate risk,” Pelletier said. “Captives need to get better at proactively preventing claims and reducing human and financial loss. Our clients are shifting away from using their captives as simply a pile of money used to pay claims. Such an approach is a losing strategy.” And as Landry made clear, taking charge of their own destiny will be a major motivator for all US healthcare institutions considering employing and using existing captives.

PPACA has prompted a rise in demand for captive insurance and new formations, but recent uncertainty has not encouraged seachange. Landry reported “a number of formations in the small and mid-sized marketplace and agency programmes for their clientele. We are also seeing movement in the larger market where clients are beginning to put stop-loss in their captive”. For smaller, local companies the changing US healthcare landscape has been the most significant driver of this increased interest and deployment, while for global firms the major motivators were the need to control healthcare costs and understand losses, she said. Pelletier added that going forward “PPACA will likely fuel the growth of healthcare captives in the US—both in terms of new captives formations and growth of existing captives”.

A number of new institutional types have emerged following the introduction PPACA, including accountable care organisations (ACOs) and state exchanges, which promise to challenge the existing healthcare landscape. Their impact upon the captive sector has so far been limited, but as Landry outlined: “ACOs will ultimately provide a competitive alternative to the traditional insurance sector. There will likely be a need for ACOs to provide excess coverage and stop-loss to employees, and for employers to use captives for their own stop-loss, so I think they represent a good opportunity for the sector.”

Addressing state and private exchanges, Landry said that they would start as “non-risk bearing entities”, but that there was also potential for them to employ captives to insure some of their risks in future. Outlining the likely timeline of captive development in the healthcare space, Landry said that “groups and individual employers are setting up captives for their stop-loss risks right now. ACOs were first licensed in January so they are starting to take off and consider captive insurance, while the next institutional group to consider captives will be the exchanges, with private exchanges likely to consider captive insurance first”.

Pelletier was rather less bullish in his view of the likely potential changes under PPACA, arguing that implications for the captive sector are very much “a wait and see”. He said that the captive and commercial sectors are both uncertain about how exactly they intend to deal with ACOs: “Our clients are still sorting it out—are ACOs independent of the health system or are they part of it? These are important underwriting considerations.” Until further clarification is achieved, it seems likely such uncertainty will act as a brake on further captive take-up and deployment.

The reforms ushered in by Obamacare have nevertheless prompted rising interest in the potential of group captives and risk retention groups, said Landry, with much of this interest attributable to the changing landscape. Boughner, however, argued that despite PPACA there has been no “structural change in healthcare funding vehicles”, although he agreed that there is still “material interest in risk retention groups and cell structures”—captive types that have experienced strong growth in recent years. Whether take-up reflects the recent increase in interest, it will undoubtedly be a beneficial development in raising the profile of captive insurance.

Addressing the potential of healthcare reform to strengthen the home state advantage that has emerged under the Nonadmitted and Reinsurance Reform Act (NRRA) provision of Dodd-Frank, It will not necessarily be the case that states will opt to domicile their healthcare captives at home, he said. Rather, many would prefer the option to choose mature domiciles with a reputation for captive healthcare.

Landry said that captive owners should “consider” their home state when picking a domicile, but added that many would find it difficult to compete with some of the more mature domiciles, which boast enviable capabilities. Boughner concluded that he thought it “doubtful” that there would be any home state advantage afforded by Obamacare and NRRA, as necessary regulation inevitably follows captive formations. He agreed that there may be a rise in branch formations—a nod to NRRA—but nothing further.

The future nonetheless looks bright for healthcare captives. PPACA is likely to be a spur for further growth in the medium term and demographics and rising healthcare costs will help to encourage more firms to consider the benefits of running their medical risks through their captive. As Boughner indicated, “healthcare captives have always grown, and we are experiencing increasing activity as existing strategies are modified due to the changing healthcare landscape”. Now seems an exciting and dynamic time for the sector, and following June’s Supreme Court ruling, a clear course for further development appears to be on the cards.