30 June 2014Actuarial & underwriting

Health care reform: a quickening pulse

The Affordable Care Act (ACA) is heralding significant change in the captive space, with the health care industry in the US undergoing profound change. One of the key outcomes of that change will be consolidation, as the provision of health care is brought under the aegis of larger health care systems and accountable care organisations (ACOs). As Michael Maglaras, CEO of Michael Maglaras & Company explained, “The ACA is really about the management of large and increasingly urbanised populations. These reforms are in turn driving consolidation of health care organisations, with the big fish eating the little fish.”

Tom Jones, partner at McDermott Will & Emery, said that “The belief is that bigger is better when it comes to navigating the turbulent waters of health care reform—although the idea itself is as yet unproven.” Nevertheless, reforms have prompted considerable consolidation among health care providers and the drawing together of previously independent physicians groups under the banner of large ACOs. As a result, a number of health care systems—and their associated captives—will “fall by the wayside as independent entities”, while risks will generally be amalgamated within a single integrated ACO captive. Maglaras predicts that in the short term the number of health care liability captives will decrease, but added that there are opportunities for the captive sector in the medium term, particularly with capacity needs.

Steve Pelletier, vice president, sales and marketing at ELM Exchange, said that the commercial market for medical liability is experiencing considerable shrinkage among physician’s groups as a result of the reforms, with these groups moving from standalone entities to employees of large health care organisations. “Physicians are being rolled into the insurance programmes of large hospital systems, with their associated risks migrating into the hospital’s captive.”

Not that doing so will be without its complications. As Pelletier explained, “When physicians come under the oversight of a captive, it is often their first experience of life as a hospital employee. They are typically not used to this relationship and it takes some work to get them to comply with the rules and procedures of the health care system.”

This in turn throws up considerable complications regarding exposure to, and provision of, medical liability coverage—issues that the ACOs captive must cope with. Many of these new participants in the ACO may also work offsite and in remote locations, said Pelletier. “With physicians located in dispersed locations it is difficult to know, understand or respond to the risks in their medical practice.” Captives of ACOs will therefore face considerable challenges.

The reforms are also prompting a rethink among health care organisations regarding how they deal with new risks and how this might fit into their captive. Jones said that many of the larger health care organisations are “going back to square one and evaluating with new eyes the potential uses of their captive and are trying to be more creative and expansive in their use”. ACOs are tending to consider two approaches to the changing landscape. The first is to bring all risks into a single, scaled up captive.

The second approach is to retain existing hospital risk within an existing captive and place new risks and liabilities into cell structures linked to, but segregated from, the existing entity. Which modality becomes the prevalent form remains to be seen, said Jones—who equates the position to the second of nine innings in a baseball game—although he leans towards single risk pool captives coming out on top.

“I suspect that single parent captives will be the prevalent modality for ACOs,” he said, adding that risk retention groups, particularly reciprocals which best accommodate a combination of taxable and tax-exempt charitable entities, could also prove a strong fit for multifaceted ACOs operating across the health care space.

Maglaras said he anticipated both single parent and cell structures being considered, predicting that the vast majority will be sizable single parent captives, with consolidation creating even bigger Class 1 players in Bermuda. Not that single parent structures will be the only modality. As he explained, Bermuda has a “fine segregated company account capacity, which is a robust tool that can easily segregate risks associated with changes under Obamacare, from the plain vanilla book of your captive”. Some health care organisations may well opt for such an approach.

Despite the initial threat posed by consolidation, Maglaras said that health care reform will also present opportunities for the sector over the medium term. “The good news for the industry is that those captives that remain will be bigger and will need a larger suite of services. As they grow and become more complex, what they won’t grow is the size of their facility-based risk management departments. ACOs are lean organisations and will want to do more with less.” This is where third party administrators, risk management consultants, captive attorneys, and insurance and reinsurance brokers can expect to benefit.

“They are going to want more unbundled services—more reinsurance, more accounting, more legal services and more claims handling,” said Maglaras. Service providers are going to be the major winners of health care reform. Pelletier concurred, arguing that “there has been a lot of consternation at the risk management level as the number of physicians these health care organisations have brought on board
has doubled or tripled, without an increase in risk managemvent staff”. This is likely to represent a considerable opportunity to the captive service community.

As Maglaras outlined: “Watch for some constriction and thinning in the captive ranks, but for those that remain, they will get bigger, will purchase more reinsurance and services and their net premium revenue will increase dramatically—while the need to bear more risk will be absolutely present. We are about to embark on a renaissance for captive service providers in the health care space.”

Bermuda has an opportunity to capture a significant portion of this business, particularly as the need for reinsurance coverage among these larger health care organisations rises. The Island’s main rival in the space is Cayman, but as Jones explained, “Cayman has no intrinsic edge—Bermuda can do everything Cayman can do”, with a significant part of the challenge being one of perception.

Maglaras was bullish about Bermuda’s prospects. He said that Bermuda’s proximity to the US is a major advantage, as health care executives will be looking to limit the amount of time they are away from the office. They can also access the Island’s significant reinsurance market, with the ability to “get full capacity for all their limits without having to shop anywhere else”.

New entrants can also expect to find a vibrant health care liability sector in Bermuda that simply doesn’t get the same kind of publicity as the Cayman market enjoys, said Maglaras. “Frankly, Bermuda should be welcoming changes under Obamacare and marketing its credentials in the health care underwriting space.”