A changing landscape

As the far-reaching effects of the Affordable Care Act, aka Obamacare, continue to unfold, a pattern is emerging in healthcare providers’ approaches to captive insurance. While the Bermuda Monetary Authority (BMA) has not seen a significant increase in healthcare captive formations since the advent of Obamacare, the Bermuda market is seeing the results of a trend for consolidation in the US health industry, which is resulting in significantly larger captives taking a more expansive approach to their risk.

A corresponding effect is an increased interest from healthcare organisations in finding other uses for their risk management programmes, says Shelby Weldon, the BMA’s director of licensing & authorisations.

“According to the latest available statistics, Bermuda has around 50 captive licences which are owned by hospitals or health maintenance organisations writing nearly $11 billion in gross premiums, and holding $16 billion of capital and surplus,” he says.

“As a whole, Bermuda continues to see captives represent a significant portion of various markets while covering a wide range of risks. We’re also seeing a steady demand from emerging markets such as Latin America and Canada.”

Overall, the Bermuda market in 2015 continued to attract new captive registrations in the ongoing soft commercial market. How do healthcare captives fit in to this wider picture?

Interlinked forces

For Adrian Lynch, managing director with Aon’s captive and insurance management and also coordinator of Aon’s global healthcare alignment practice, the key to understanding the way that healthcare captives are developing following Obamacare is to look at three main effects of the

Affordable Care Act: significant provider and payer consolidation; the consequences of the expansion of the actual health coverage; and new provider payment models.

“Each of these drives certain other elements and considerations for utilisation of the existing alternative risk vehicles,” Lynch says.

He agrees with Weldon’s view that healthcare organisations with existing captives are now exploring their potential for addressing additional risks.

“Through our consulting group they are looking a lot more at captive optimisation strategies; they are looking at their existing captives around capital efficiencies, and asking what other coverages they should be writing.

“In the case of risks such as medical malpractice, the fact that the hospital is now larger and financially stronger allows them to formalise a larger retention or deductible within the captive which then allows the hospital system to negotiate a better deal from the insurance or reinsurance marketplace.”

Placing further risks into a captive can have some interesting knock-
on effects: for instance, the ability to provide physicians’ medical malpractice through a captive can boost the recruitment activities of these newer, larger systems.

“Instead of buying their coverage in the marketplace, physicians and doctors are now being incentivised into joining hospital systems by the option to become part of their alternative risk arrangements within their captive insurance structure,” says Lynch. “It’s a very interesting tool to attract and retain top quality physicians.”

Weldon agrees that medical malpractice risk is increasingly being covered by existing captives.

“Specifically in Bermuda, a significant portion of healthcare captives are used to cover medical malpractice liability, general liability, workers’ compensation and property risks. Bermuda-based reinsurers also provide Bermuda captives with excess medical malpractice liability coverage,” he says.

“Bermuda’s captive market offers a wide range of solutions to healthcare clients who are looking to tap into one of the world’s top three re/insurance markets—home to 15 of the world’s top 40 reinsurers.” Standing strong

Another significant effect of the Affordable Care Act is to force a lot of hospital systems into an environment of commercial maturity, says Lynch.

“By that I mean less dependence on the state in terms of being bailed out,” he says. “As a very basic example, take of one of our healthcare clients, which was a state-owned facility. A new CEO came in and found they weren’t even collecting co-payments. There was the perception that at the end of the year the government was going to give them a cheque anyway.

“They didn’t have a formalised financial department to collect co-
payments, which meant the liquidity base of the hospital wasn’t good enough. There is now an expectation from Obamacare that there will be a material expense reduction; hospitals are going to be expected to be able to stand on their own two feet.

“The reimbursements will come but I think each hospital’s system is going to have to be able to prove that it has the infrastructure in place that allows it to maximise efficiencies around costs and expense reduction.”

The placing of more risks into captives fits with a more mature, price-conscious and self-sufficient financial model. The related push towards clinical and financial transparency and accountability is having a further interesting effect: it is driving the consolidation of healthcare providers to create the kind of larger organisations which are increasingly open to placing a more risks within their captives.

At the root of this change is a new attitude to data.

“A lot of the historical financial data that was being provided from the healthcare market was not as credible as it should have been and frankly was quite opaque,” says Lynch.

“There is now an expectation that the data are going to be far more credible and transparent and as a result of that there is going to be far more investment into areas such as IT infrastructure and process improvement.”

Lynch predicts that the accountability behind the care provided by these organisations will need to be driven by quality metrics and efficiencies, as compared to the historical focus, which would have been on volume and unit pricing.

“There are going to be far more performance-based payment and other alignments across all providers and care settings, among multi hospital and multi physician groups.”

Parties are being forced to work together far more transparently in terms of economies of scale, and to take a more ‘macro’ perspective on the market.

“We have seen some of our larger healthcare clients being hugely acquisitive—and in the same breath we have seen some of our smaller healthcare clients being almost swallowed up because they weren’t sufficiently financially viable to be able to sustain what was required for the future within Obamacare,” says Lynch.

Enterprise risk management

In Vermont, Cayman and Bermuda, between 20 percent and 40 percent of Aon’s captive book is healthcare business. This generates a significant amount of data that can be used to identify the coverages that cause these clients the most anxiety.

Key areas of focus include enterprise risk issues such as reputation, financial security and compliance, with cyber being a particular concern.

“We are very fortunate that on an annual basis, within the Bermuda captive market and the others, we get to sit down with the C-suite of each hospital system and discuss what they need to do with their captive,” says Lynch.

“We use that board meeting as a chance to address issues such as D&O liability, cyber, management E&O, insurance captive E&O, fiduciary liability, managed care and the actual physician liability that exists out there.

“We see it as our responsibility to be driving a lot of those conversations at board level to ensure that our clients have been anticipating what these changes are and, more important, that they are aware of what their peers are doing within the industry.”

The hospital system’s chief risk officer usually has a seat at the table — a reflection of a growing focus on enterprise risk management in response to the changes ushered in by Obamacare, changes that can make captives seem an increasingly attractive way to address certain risks.

“Captives have operational advantages, such as maintaining insurance capacity, rates stability—particularly for risk managers who are examining their enterprise risk management programmes—and assessing which exposures should be insured or self-insured,” says Weldon.

“For healthcare organisations, there could be a number of reasons to utilise a captive insurer to manage and mitigate its risk, including the rates available in the commercial sector.”

As more risks are brought into a healthcare captive it is vital to proceed with caution. The captive will inevitably be paying claims so it is important that quantification and analyses in terms of retentions are extremely credible, says Lynch. Some risks fit better within a captive than others:

“The last thing you want to do is to start to increase retentions and take more risk in the captive if ultimately those claims start to perform particularly badly.

“We are always at pains to point out to the captive parent that the types of healthcare risks you want in the captive must be actuarially quantifiable. It’s probably best for them to be more frequent than severe because if you end up putting losses through the captive that are highly severe in nature then that’s going to have a negative impact on the financials of the captive.

“That’s the first tenet of looking at the role the captive plays. The second is cash flow, which needs to be able to adapt to the exigencies of Obamacare; you need to be able to invest in your business in terms of your IT architecture, your financial systems to collect payments, and collect data—all at the same time as improving the existing servicing model that you have for your patient base. All of that requires a lot of cash, and a lot of investment.”

What’s needed, he says, is a medium to long-term strategic review, from both a captive and an Obamacare perspective.

This fits with what Weldon is observing in the market:

“We are seeing organisations taking a long-term view of risk management solutions and captives remain a viable strategy in this regard,” he says.