7 December 2015Actuarial & underwriting

The ACA: how captives can benefit

Following extensive public debate, on March 23, 2010 US President Barack Obama signed the Patient Protection and Affordable Care Act (ACA, also known as Obamacare). Ambitious in its scope, the ACA sought to provide near-universal healthcare coverage while also reducing healthcare expenditures.

At its core, the ACA carried its most controversial premise—that the young and healthy would subsidise the insurance premiums of citizens more likely to need access to healthcare: namely, the elderly and those with pre-existing conditions that would otherwise bar them from obtaining insurance coverage.

In the subsequent five years, public wrangling over the ACA has to an extent subsided. More significantly, the ACA has weathered several challenges from the congressional and judicial branches. To that end, the US Supreme Court upheld various provisions of the statute in 2012 and in 2015.

Coverage options

It’s increasingly clear that the ACA will probably remain intact. As a result, captive managers need to be aware of some of the ACA’s positive consequences, foremost among them the possibility that loss severity may be dampened in the future.

"The defence can argue in some jurisdictions that many elements of a plaintiff’s life care plan would be covered simply through the purchase of an ACA-mandated policy."

This is because although the ACA mandates that all citizens must carry healthcare insurance, it also ensures that a government-funded insurance mechanism will provide a minimum amount of coverage, regardless of any pre-existing condition that would otherwise cause a private insurer to deny coverage.

Moreover, the ACA provides a supplementary benefit by capping the maximum amount that any individual can pay for out-of-pocket expenses.

Under the ACA, one can choose from four types of coverage:

Bronze, which 60 percent of costs;

Silver, which covers 70 percent;

Gold, which covers 80 percent; and

Platinum, which covers 90 percent.

Because the ACA now makes a wide range of healthcare available for all, there exists an enormous potential impact on claims for future medical care costs made by plaintiffs in bodily injury lawsuits. Historically, the ability to ‘blackboard’ large future care costs has fuelled plaintiffs’ ability to generate large settlements and jury awards. Through the ACA, defendants now have the ability to erase many of those costs.

The impact on claims

Consider a hypothetical lawsuit arising from an automobile accident in which the plaintiff is rendered catastrophically injured, with extensive neurological impairment that results in extensive hospitalisation, a long period of rehabilitation and the need for lifelong care.

Typical in such cases, the plaintiff would likely require one or more of the 10 essential benefits mandated by the ACA. Many of these essential benefits are those that would typically appear in a plaintiff’s life care plan, encompassing such areas as emergency department visits, outpatient care, inpatient hospitalisations, physical therapy and prescription drugs.

As a result, the defence can argue in some jurisdictions that many elements of a plaintiff’s life care plan would be covered simply through the purchase of an ACA-mandated policy. Viewed in another light, one could contend that the true cost of future care is not represented by the sum total of the component parts of a plaintiff’s life care plan, but rather the premium associated with the purchase of a policy under the ACA; or, in the alternative, the amounts actually paid under the ACA for the benefits provided the plaintiff.

As to be expected, plaintiffs have resisted, and will continue to resist, this approach. They claim that the common law ‘collateral source rule’ prohibits the ACA from being applied in such a way—specifically, that the wrongdoer should not profit from benefits that have or will be conferred upon an injured party.

They also point to another age-old legal concept—that of subrogation, through which a benefit provider is able to recover payments from the person or entity that created the harm. The examples are well-known and obvious, such as a private health insurer in the above example holding a lien for payments it made for payments stemming from the accident.

Nevertheless, defence lawyers have had some success in overcoming these arguments by asserting that in today’s world defendants are justified in seeking a reduction in recoverable damages. They also assert that because the ACA is compulsory and imposes a tax on those who do not purchase insurance, and no insurer can deny coverage, the collateral source rule no longer applies. This is because the collateral source rule originated in an era in which health insurance was rare; consequently, plaintiffs recovered medical damages directly from defendants to pay bills they had incurred.

Over time health insurance has become increasingly common. Now, with the ACA, defendants will rarely encounter an uninsured plaintiff. Also, the ACA has further solidified now accepted practice—that medical bills are not reimbursed at rates billed to the patient, but rather at discounted or pre-negotiated rates between payer and provider.

Recognising the inequities of continuing a system that could award a plaintiff an amount greater than an insurer might actually pay for medical services, many states have modified the collateral source rule to allow defendants to discount medical bills to the amount actually paid; or, in the alternative, to the amount of the premium paid for health insurance coverage.

Best practice

As the two sides wage their battle in federal and state courts, we are seeing the following best practices being employed by lawyers who defend captive policyholders:

Pointing out during mediation that the ACA applies to future care costs. Doing so could cause plaintiff to withdraw or at least reconsider claims for future medical costs;

Developing evidence as to ACA applicability, such as submitting to the plaintiff interrogatories that question his or her eligibility under the ACA as well as the existence of any other policies that may provide coverage for future medical expenses;

Retaining a life care planning expert fully conversant in the ACA to develop an alternative life care plan, critique that proffered by the plaintiff and provide to the jury a true picture of those costs borne by the plaintiff; and

Where applicable, asserting in pleadings plaintiff’s duty to mitigate damages as evidenced by the federal requirement to purchase health insurance.

As the ACA will evolve over the coming years, so too will its impact on bodily injury lawsuits. One illustrative area is seeing how case law develops and discovering whether other states will join California, Michigan, Illinois and Ohio in having legal decisions favourable to applying the ACA to future medical costs. Another lies with the individual jurors who will ultimately decide how much to award an injured plaintiff, based on their first-hand experience with the ACA as a consumer—and in knowing the precise benefits that compulsory insurance provides.

In the meantime, we urge captive managers to keep the ACA ‘front and centre’ in their case management involving claims for future medical expenses. Additionally, we recommend that captive managers consult defence counsel as to how a particular jurisdiction may treat the ACA in this context.

Tim Fletcher is a claims manager and vice president in Gen Re’s Atlanta office. He can be contacted at: