Seismic changes in the US healthcare landscape will create both challenges and opportunities for those captives willing to grasp the nettle. US Captive explores the liability challenge as captives begin to work with emerging ACOs.
The US healthcare system has been transformed under President Obama, with new accountable care organisations (ACOs) redefining how care is delivered to Medicare patients in the US. Uncertainty reigns regarding their likely heading—even as to whether they will survive in their present form, with a number of pioneering organisations already looking to change tack in the face of some of the challenges associated with running such entities. However, the purpose behind the implementation of accountable care remains unchanged and captives must now grapple with the emerging nuances of ACO liabilities. As it does so, the industry faces considerable uncertainties, but behind all the risks are considerable opportunities.
As William McDonough, managing principal and executive broker at Integro made clear, around 70 percent of healthcare exposures are insured through self-insurance vehicles at present—a trend that began back in the 1970s with the formation of CRICO by the Harvard medical community in 1976—and it seems likely that the exposures of ACOs will in time find their way increasingly into the captive space.
As he explained, “Most healthcare organisations that have opted to self-insure, view their captive as a strategic vehicle to match and complement the strategic needs of the parent—there to meet the liabilities and exposures of the parent.” As such, if captives and parents can marry their strategic ambitions in terms of extending accountable care and driving down associated risk, “captives have the potential to be an ideal complement to ACO development, meeting the increasing levels of insurance need at such entities”, said McDonough.
"If they can deliver better results than the market then captives will be tempted to bring more of that risk in-house and perhaps develop further by line."
It sounds like a strong union, but the fit between captives and ACOs is not without pitfalls. As Deana Allen, senior vice president, national healthcare practice at Willis North America cautioned, “With all the uncertainty around the potential claims we are going to see with ACOs—which echoes the uncertainty felt around cyber exposures a few years ago—the underwriting community is still trying to fully understand the extent of potential claims associated with their liabilities.”
The challenge will be around understanding likely losses, their frequency and severity and means of controlling loss, said Allen, particularly considering some of the intricacies associated with ACOs and care providers throughout the care continuum.
Nevertheless, captives do offer the potential to “free up money that can be re-invested into the ACO and may give it more control over claims”, she said, although much will depend on risk appetite. Risk appetite is likely to be more pronounced among captives that have already been dealing with such risks for years—only in a rather different setting.
As Fay Rozovsky, president of the Rozovsky Group indicated, “Most of the more mature captives have been dealing with liability issues involving hospitals and physician groups for years. But the question remains with these new organisations: how, from an actuarial perspective, can one forecast these losses? Can one go by what one is accustomed to as a large medical group or hospital, or is the field going to be learning on the job?”
McDonough agreed that uncertainty will be a major challenge, but argued that such issues have been faced and resolved by the industry in the 1990s. “We went through similar challenges then—we might not have had ACOs, but the risks were very similar if not the same.” It seems past experiences could be a telling guide for the future as healthcare organisations, ACOs and providers generally grapple with ACOs and resulting liabilities.
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One of the major challenges for ACOs considering self-insurance of their liabilities will be risks linked to co-opted physicians, associated organisations, care providers and external practitioners, who do not necessarily fit directly under the remit of the ACO. Under the scope of accountable care, ACOs are involved in the whole lifecycle of the provision of care, but in many instances its delivery may fall outside the immediate remit of the organisation—whether it is in a care home, through a private physician, or in the provision of ambulatory care. ACOs and their captives therefore need to grapple with whether such risks can be placed within the captive or actively kept out.
McDonough explained that there are presently two leading approaches that ACOs and captives are taking when it comes to this particular challenge. The first is ACOs viewing their captive as an opportunity to bring all parties together and to offer a liability umbrella over the managed care network. Such an approach supports joint defence and helps to drive down costs for associated physicians. It also creates an ‘all-for-one’ approach to defence and liability claims, but there are risks.
As Allen explained, as the scope of accountable care expands, so too will the potential scale of liability exposure. “Liability risk has broadened within ACOs to include the complete continuum of care and across all settings. As a result we may need a bigger defence table because there are probably going to be more parties being brought in when someone alleges harm,” she said. This will be another issue captives will need to grapple with as they consider whose liabilities they want to potentially include in the programme. Are they likely to spill into an ACO’s captive regardless of possible ring-fencing? If so, does this mean collective defence is the best approach?
At the same time McDonough outlined that there are significant risks associated with the tail exposure of associated and co-opted physicians. “They represent the unknown. If you don’t know the practitioner, you could be bringing something potentially catastrophic into your programme and frankly there isn’t enough funding or premium to collect on the front end to cover such a claim.”
With medical malpractice settlements being so costly this is a unique challenge for captives, particularly as ACOs look to attract the best practitioners, extending attractive cover as an incentive.
And physicians aren’t the only group that need to be considered. As Allen explained, “Not everyone is aware of how important specific groups are to the ACO.” Captives will need to consider other groups linked to the provision of accountable care when exploring the issue of liability.
Opting to take someone onboard will inevitably come down to selection. As Rozovsky explained, “This is about credentialling and the screening of participants in and around the ACO. In the Medicare Shared Savings Program, nothing is mentioned about credentialling by ACOs. Instead, the focus is on integrity screening in the provider selection process. The question then becomes how involved the captive can become in that process.” In an ideal world captives should consider suggesting to the ACOs what criteria to include in the provider selection process.
The second approach ACOs can take regarding the liabilities of external care providers is to place immediate ACO liabilities within the captive and to pass the liabilities of associated organisations into the commercial market, said McDonough. This enables them to ring-fence their liabilities, but the lack of clarity around ACOs could nevertheless leave organisations on the hook for associated liabilities. Allen warned, “Captives have the potential to offer a solution, providing the option to have a joint defence of claims, avoiding the kind of finger-pointing that has been known to happen in litigation.” Captives will need to weigh up the potential benefits and negative implications associated with providing broad coverage and defining insureds.
The challenges aren’t limited to care providers. As Rozovsky explained, “ACOs will not be able to hand-select or ‘cherry-pick’ Medicare patients. Yes, payment is meant to be risk-adjusted, but how reliable are such measurements?” As such, captives will face an uncertain risk future, one that creates further challenges in terms of liability coverage and accountable care.
Liabilities have the potential also to spill into the cyber sphere, with electronic medical records and financial information creating an additional layer of risk to consider. ACOs may opt to seek such coverage in the commercial market, but they could opt for their captive— although this is likely only if they have existing cyber experience.
Rozovsky agreed that ACOs need to be “cognisant of issues around data and need to harden their IT capabilities in the face of the new healthcare environment”. There are even issues around patients opting out of information sharing in Medicare Shared Savings Program ACOs, which opens up still further concerns around such data and the implications for ACOs’ and captives’ oversight of risk.
Not without challenges
It is evident that there are considerable challenges for captives considering taking on ACO liabilities, but already some are rising to the challenge. As McDonough indicated “Many healthcare organisations out there are writing five or 10 lines of business through their captive and view it as a means to better understand and control their risks. Captives have proved themselves again and again for these kinds of healthcare organisations and their practical application to ACOs is gaining traction.”
While ACO captives aren’t necessarily taking on all their risks at once, said McDonough, they are exploring their options in order to examine and better understand their potential exposures. “Many are taking retentions or large deductibles into the captive, with the intention being to take on larger elements of risk over time.” As they do so, they will look to the commercial market to complement their coverage and their understanding of the emerging risks around ACOs, he said.
Many ACOs are likely to explore such a blended approach, with captives “adjusting their retentions over time according to how they perform, their risk appetite, and how the market responds”, said Rozovsky. If they can deliver better results than the market then captives will be tempted to bring more of that risk in-house and perhaps develop further by line.
As Rozovsky made clear, “by taking on more financial risk, the ACOs are incentivised to take a disciplined approach to risk and claims management”. This is where captives come in and the enterprise risk management feedback they can instil into ACOs is likely to be a significant benefit to care organisations facing an increasingly accountancy-based environment.
ACO, healthcare, Integro, Willis North America, Rozovsky Group