1 January 1970Analysis

Obamacare: bedding in

With President Obama winning a second term in office, the healthcare landscape in the US is likely to continue on its path towards reform, as the Patient Protection and Affordable Care Act (PPACA) brings a further 40 million Americans under the banner of Medicare. Although controversial in some quarters, the new measures will create a growing pool of insureds and significant opportunities for captives and insurers in the medical space.

As Simon Kilpatrick, director and executive vice president at Crusader Group explained, captives offer significant benefits to healthcare organisations, predominantly when it comes to pricing stability. “The primary benefit of healthcare captives continues to be their ability to provide their insureds with relatively stable and predictable premiums relative to the commercial market.” This is in spite of the current soft cycle in the commercial market but, as Kilpatrick explained, the market will in future, inevitably, turn and then a captive’s value proposition will be all the more telling.

"Physicians are being snapped up by hostpital groups, with practitioners likely no either to purchase liability coverage from the commercial markets, or else to seek coverage through a hospital's captive."

When markets turn, “healthcare providers purchasing their liability coverage in the marketplace will have no choice but to pay the higher premiums the market dictates, while captive owners can use their own loss experience to set their premiums” he said. At the same time, during profitable years the captive can pay dividends back to the insured, a factor that is “particularly attractive to those in group healthcare captives”. Kevin Poole, manager at Kane (Cayman) spoke in a similar vein, arguing that the value of a captive in the healthcare space is the same as it is elsewhere in the captive sector—“with its ultimate goal being to lower the overall cost of risk”.

However, benefits are not simply restricted to pricing. As Kilpatrick explained, “Captive insurers have their interests more closely aligned with those of their insureds and may choose to aggressively defend cases to protect a physician, rather than settling quickly to protect the company’s bottom line.” And in what is an increasingly litigious area of law in the US, a captive’s proactive defence of its client’s interests will prove all the more attractive.

Change has come

Obamacare is set to have far-reaching consequences for the healthcare sector in the US. The increasing numbers of patients now falling under the remit of Obamacare will likely lead to an increased volume of claims, said Kilpatrick. And change will not be limited to the number of insureds. As Poole indicated, “We have already started to see some industry consolidation as a result of cost containment and efficiency efforts, and also because of potentially declining Medicare reimbursement. We are also seeing independent physicians becoming employees of hospital/health systems in order to implement accountable care organisation-integrated clinical services and respond to financial incentives.” Such consolidation is likely to result in larger, more outcome-driven organisations, whose insurance needs will expand as such care entities grow, while reducing the number of smaller, independent physician practices.

There will also be a greater focus on patient outcomes, with reimbursements “based on the quality and cost of outcomes, rather than paying a fee for each service performed”, said Kilpatrick. Those involved in healthcare provision will also have to share in such reimbursements, he said, with the trend encouraging consolidation on a “massive scale”. Physicians are being snapped up by hospital groups, with practitioners likely now either to purchase liability coverage from the commercial markets, or else to seek coverage through a hospital’s captive. “These captives will see a significant increase in premiums, but will also have to adjust their business plans to account for the shifting makeup of their insureds,” said Kilpatrick. “Physician group captives will come under increasing pressure as the numbers of their insureds dwindle and it is likely that there will be consolidation of these captives as they either join forces or are acquired by other companies.”

Not that it is all bad news for physicians groups. “For physicians that become employees, being part of a hospital system should help offset rising practice expenses and the cost of increasing technology requirements. The more significant cost savings, for which there is a track record, are in professional liability costs. By bringing physicians into a more structured risk management system, they can benefit from joint defence of medical malpractice claims,” said Poole.

With a greater focus on quality of care, captives can expect to come into their own. As Kilpatrick outlined, “Captives will be used by healthcare providers to invest more in their loss control efforts, in order to drive down error rates and unnecessary expenses. The new reimbursement model does not compensate or reward excessive and unnecessary procedures so it is hoped that hospitals will better streamline their care. These two factors combined may actually lower the overall costs of providing healthcare services to the population, which would be a welcome development.” Healthcare costs are set to rise significantly in the coming years, so any control of healthcare bills will be a welcome shift in US provision.

All of this suggests that captives need to prepare for significant change—both in the nature of those organisations exploring captive insurance and the number of patients benefiting from insurance. However as Kilpatrick indicated: “On balance, Obamacare will be positive for the captive industry due to its flexibility and ability to adapt, although there will be some casualties.”

Cayman’s excellence in healthcare

All this is good news for Cayman, which has for some decades been the leading centre for healthcare captives and innovation in that area. As Poole outlined, Cayman established its first healthcare captive back in 1976 and has since then “cemented its leading position by successfully attracting a broad range of healthcare-related expertise to its shores and building a reputation for service excellence in the captive arena”.

Lending further strength to Cayman’s hand is the capabilities of the regulator, the Cayman Islands Monetary Authority (CIMA). As Kilpatrick indicated, “The regulator has an excellent understanding of the healthcare industry and the issues it faces. CIMA is receptive to new ideas and has the confidence to make quick decisions on business plan changes.” It is this ability to innovate, respond and extend relevant expertise that continues to set Cayman apart as the captive healthcare domicile of choice.