How the US government will use captives to tackle the crisis in social care

The US government will be forced to intervene to avert a deepening crisis in social care for the elderly, and captive insurance companies will be the key to turning around this ailing industry, according to Michael Maglaras, the principal of Michael Maglaras & Company.

Maglaras says: “I am predicting more continual and more robust intervention by the federal government in managing senior care operations. Pay-for-performance in Medicare and Medicaid already exists, but I am predicting that the US government will, in many respects, become the major catalyst for the growth of captives in this sector.”

Maglaras knows as much as anyone about how US government agencies can use captives. As the superintendent at the captive insurance company Connecticut Foundation Solutions Indemnity Company (CFSIC), he has overseen the use of government funds to provide remediation where the commercial market could or would not.

Iron sulfide mineral pyrrhotite had been discovered in the foundations of homes in Connecticut, causing costly structural damage. When the insurance companies said policies did not cover it, CFSIC stepped up.

“At CFSIC we showed how government funds can be privately managed, via a captive, to achieve a social benefit,” says Maglaras. “We can do the same thing with senior care.”

This is an issue that should be of interest to everyone. An estimated 10,000 people in the US turn 65 every day. Most people hope and expect that when they reach that age they will be in a position to live with dignity and be well cared for.

Captives are the answer
Maglaras argues there is a regrettable cycle playing out in the US, where seniors have been left to see out their golden years in substandard care facilities, while the insurance market refuses to offer coverage to protect them. There is, he believes, only one logical conclusion to this situation, and that is the formation of captive insurance companies.

“This is a quality issue,” he says. “High levels of staff turnover and inattention to quality are the key indicators of loss. Substandard care, in the for-profit as well as tax-exempt sectors, leads to tort action and claim settlements. It has also led to the remaining sources of market capacity insisting on greater amounts of skin in the game.”

Maglaras argues captives can be part of the solution here because they force greater discipline in claims and risk management.
“With a captive, every single paid claim has a direct impact on the balance sheet of its parent, and thus creates the ultimate incentive to improve levels of care,” he explains. “Captives owners get nothing of any real value if they are unwilling to learn from their claims.”

Once this lesson has been learned, however, and once captives owners get into the habit of improving performance through claim activity, they never go back, says Maglaras. “This is why so many captives have survived during years of prolonged soft market cycles.”

Around 70 percent of senior care in the US is in the for-profit sector, Maglaras notes, and this sector needs to get its risk management act together.

“Forming a captive on its own will not fix the problem. Addressing why claims occur, how they can be mitigated, and what techniques can be employed to improve risk profile, is the solution.”

An old problem, made worse
This is a problem that predates COVID-19, but the pandemic is certainly making the situation worse. Less than 1 percent of the US population is currently in a long-term care/continuum of care environment but, according to the Centers for Disease Control, eight out of every 10 COVID-19 deaths involve people aged 65 and older.

Meanwhile, the senior care liability insurance market, whether at Lloyd’s or in the domestic US market, is in a state of implosion, says Maglaras.

“Underwriters are dropping out of the senior care marketplace, and COVID-19 has only made the problem more profound,” he says. “This implosion now means, for the first time, that even the best risks cannot find coverage. This has created the ultimate opportunity for captives to replace this capacity.”

Maglaras notes that there is still ample capacity in the medical professional liability market for acute care hospital systems. “There are still plenty of underwriters active in this space, although offering reduced limits and greatly increased pricing,” he says.

“The only part of the medical professional liability market that is experiencing the meltdown is senior care, where you can count the number of consistent market participants on the fingers of one hand.”

While there is much talk across the industry about the emergence of a hard or a hardening market, Maglaras dismisses such talk.
“We are not in a hard market, I’ve experienced hard markets,” he says. “This is a ‘course-correcting’ market, notably for lines such as cyber, D&O, and other management liability.”

The exception, he says, is senior care. “For senior care this is not a course-correcting market. This is a very hard market.”
Captives can be the saviour in this story, Maglaras says, and once again ride to the rescue to provide coverage in a hard market, where insureds have nowhere else to turn. It is a trend that is already starting to play out, he adds.

“At Michael Maglaras & Company we have long served the senior care sector as consultants, and until around four years ago our captive insurance premium volume in this sector was about $8 million,” he says.

“Today it is around $100 million, which gives a sense of the growth potential for captives in this space.”