Significant health care reform is afoot in the US under the guise of the Patient Protection and Affordable Care Act. Developments are likely to have significant implications for Cayman and international captives.
Cayman continues to play a dominant role in captive health care, particularly that with a North American flavour. Of the 730 captives licensed in Cayman in 2011, 256—or around a third, writing $3 billion worth of premium—are healthcare captives, with Cayman continuing to lead innovation and the development of risk management in the global captive healthcare sector. And 2011 has been a good year for Cayman, with formations and redomestications reaching record levels. The Cayman Islands Monetary Authority (CIMA) recorded 29 new captive licences in 2011.
With its reputation for health care expertise and a regulatory environment that understands the nuances of captive healthcare,Cayman has over the years emerged as the US offshore domicile of choice. Ninety percent of captive business in Cayman emanates from North America, with 660 North American captives domiciled on the Islands, accounting for more than $8 billion in premiums, according to statistics from CIMA.
With 90 percent of premium originating from North America and 35 percent of total captive business providing coverage for medical malpractice liabilities, developments in US health care have evident implications for Cayman’s captive sector. Therefore it would appear that President Obama’s Patient Protection and Affordable Care Act (PPACA) is likely to be a game-changer for the sector. Billed as the most significant health care reform since the introduction of Medicare in the 1960s, the PPACA looks set to create both opportunities and challenges for the captive sector as industry players respond to changes to care provision ushered in by PPACA
Among the changes that need to be considered are new entities, which may, or may not, opt to employ captives to insure their risks. The first of these new entities are exchanges, which will serve as state-wide marketplaces for individuals to purchase medicalinsurance. Insurers will extend standard plans through these exchanges, which individuals can then buy into. Exchanges will give employees the option to purchase their own insurance policies outside employer-issued schemes. Exchanges may encourage employers to close captives that had previously provided coverage to employees now opting for exchange coverage. Captive owners and managers will have to carefully consider how they respond to these new entities and examine how they can differentiate their coverage from that extended by such exchanges.
"the unlimited maximum benefit exposure that PPACA ushers in could leave captives on the hook for significant pay-outs."
The second entity outlined under PPACA is the cooperative (CO-OP), a not-for-profit organisation that will extend health care provision to both individuals and groups. CO-OPs will benefit from a tax-exempt status, federal grants and a loan programme, which will assist with start-up costs and maintaining statutory solvency requirements. It is as yet unclear whether captives will be able to insure and/or reinsure CO-OP entities, but there appear to be opportunities for captives and risk pooling with such entities.
The third and final entity is the accountable care organisation (ACOS), which includes physicians groups, hospitals and other care providers. Under the terms of PPACA such organisation’s financial risks need to be reflected in the care provision delivered. The financial-risk element of ACOSs presents significant opportunities for the captive sector. Medical practices traditionally don’t have much experience in mitigating financial risk, meaning that captives will be able to play a part in reducing risk either through risk pooling, the creation of a new captive or the evolution of an existing entity.
Opportunities and concerns
As yet however, there has been little guidance from Washington as to whether captive entities can take on the risks of newly created entities. Evidently there are opportunities, but whether this will translate into actual additional business remains to be seen. That being said, examining the current make-up of US health care provision there is reason to be confident that captives can play a significant role in developing health care risk transfer.
Statistics from State Health Facts indicate that 54 percent of Americans currently use commercial insurance, while 17 percent are presently uninsured, with the remainder made up by Medicaid, Medicare and other government programmes. One of the PPACA’s stated intentions is to increase access to health care and health insurance and with 17 percent of the population—just shy of 50 million people according to State Health Facts statistics—without medical insurance there is significant scope for captives to get involved in the expansion of health care provision. Meanwhile, the act will limit employers’ ability to restrict the eligibility of those seeking coverage, suggesting that companies are likely to be obliged to purchase more coverage for those employees rejected under previous terms. Employers will also be obliged to provide coverage, or else face penalties under the act. Again, there are opportunities inherent in an extension of coverage.
Drilling into the specifics, for single parent captives there will likely be some concerns regarding the unlimited maximum benefit exposure that PPACA ushers in. This could leave captives on the hook for significant pay-outs. At the same time, newly created exchanges could affect risk costs and increase the variability of results. Captives will probably have to respond by purchasing (more) reinsurance to cover increased exposures and high-cost claimants, who would have previously been excluded from the programme. This situation is likely to mean that parents will have to increase the level of premium paid to their captive in order to cover additional risk exposure and generally enhance the capital position of their captive in order to absorb those increased risks generated by the increased remit set out by PPACA.
Such a situation is also likely to make risk pooling more attractive. This will enable captives to spread their risks and limit volatility year by year. A rise in risk pooling will likely attract smaller parents, which had previously not considered establishing a captive entity, creating evident opportunities for those managing captive entities. Similarly, PPACA’s emphasis on the creation of not-for-profit CO-OPs could also lead to captives—risk pooling or otherwise—stepping into the breach, with the act requiring a licensed insurer be involved in the CO-OPs coverage.
How PPACA will finally pan out remains to be seen. Captives would do well to position themselves to provide risk transfer capabilities to those entities that opt for captive insurance. Should they do so, Cayman certainly has a role to play. PPACA may yet prove a boon for the industry, but it seems likely that understanding its implications and preparing for its ramifications will be key if captives are truly to benefit from Washington’s drive for health care reform.
US, healthcare, Obamacare, Cayman, captive, insurance