A brave new world

How has the Affordable Care Act (ACA) changed the landscape for healthcare risk managers? William Lape from R&Q Solutions suggests that captive insurance is the perfect fit for the fragile and as yet unproven model of ACOs.

Risk management is the fundamental activity of healthcare. It is central to every customer encounter. “Is this immunization safe?” “Where does it hurt?” “Do I order $50,000 in tests, or send this old fellow home with an aspirin?” Like nuclear energy and Mars exploration, risk management in healthcare is not just an activity—it is the central intellectual activity of the whole healthcare enterprise.

Until recently this was never broadly appreciated. In those fat and happy days of double-digit annual cost increases risk management served as a sort of street sweeper at the end of a complex parade of private financial impulses, unlimited customer choice, infinite specialization, and mind-boggling inefficiencies.
All of this stood in stark counterpoint to a rich and aggressive plaintiff’s bar. US healthcare still lays claim to the planet’s most absurdly inefficient lottery for managing quality control. But this paradigm is changing dramatically. Either in response to the Affordable Care Act (ACA) or in spite of it, that $2.5 trillion three-ring circus known as the US healthcare economy is fundamentally restructuring—and rapidly.

The pundits are beginning to paint this as a $1 trillion disruption, a market contraction, where clever entrepreneurs are able to harness the power of integrated health IT, and harvest 20, or 30 or even 40 percent cost savings without compromising the customer experience. Today’s most dominant healthcare enterprises, both provider and payer-focused have taken note, as they enrich legions of consultants to help them figure out that most simple and central question: “what business are we in?”.

So here’s a thought. Everyone is now in the risk management business. Period. The barriers to entry are lower than in those earlier eras, and traditional capital markets and insurance infrastructure simply do not fit the new methods of doing ambitious and complex cross-enterprise healthcare tasks, such as ‘integrated population management’.

While no-one can confidently predict the winners and the losers here (and there will be plenty of losers) the successful healthcare enterprise of the post-ACA era will be able to do two things.

1. It will be able to manage risk; and

2. It will be able to align the deep and sometimes mercenary financial incentives of its participants.
For example, the concept of an accountable care organization (ACO) has become the rallying cry, both for health insurance organizations whose business models are now constrained by 80 percent medical loss ratios, and for hospital-driven integrated delivery networks which understand that an ACO may be the perfect means of monetizing the financial ‘bet’ they’ve been making via years of consolidation, IT investment and clinical integration effort. 

The practical evolution of the ACO idea is still unfolding. For those who have embarked on the ACO path the early development has focused almost exclusively on:

• Clinical integration of providers and their workflow;

• Health IT and interoperability to support the desired collaborative workflow;

• New payment methodologies to incentivize the ACO participants; and

• Ambitious data warehousing and analytics tools to fuel the other consensus big ideas of healthcare reform:

o Evidence-based medicine; and
o The medical home model.
Notwithstanding all of these noble and worthwhile efforts, the ACO concept remains fragile and unproven. ACOs that do succeed will have business models and critical financial infrastructure that explicitly consider certain nuances of the healthcare business:

• The healthcare business is a risk management business. Every patient encounter is fundamentally an exercise in risk management.

• The healthcare business is a cross enterprise business … fundamentally. You can’t succeed without working closely with others who don’t work for you.

• Improving population health while lowering costs takes time. It can’t be limited to a one-year contract period.

• No ACO can succeed without aligning the long-term financial interests of its participants.

• There needs to be a longer-term bonus apparatus to appeal to the diverse interests of all the caretakers.

• ACOs will soon usher in a free and equitable ‘market in blame’ for payers as well as providers.

• Even the best positioned providers will experience major earnings and cash flow disruption before they can emerge as successful ACO-driven entities.

• Successful organizations must be equipped to place multi-year financial bets on their ACO models.

• In ACOs the historic distinction between health insurance risk and medical malpractice risk begins to blur.

ALTERNATIVE RISK VEHICLES: ESSENTIAL FINANCIAL INFRASTRUCTURE FOR ACOS
Captive insurance companies offer an essential new toolkit for ACOs. The captive insurance industry (also known as the alternative risk industry) has become an accepted, efficient and highly transparent global financial market. Captives are particularly well suited to address the unique needs of ACOs. 

• Captives are perfect multi-party joint venture vehicles.

• Captives allow for a long-term funding of risk.

• Captives create access to new capital via the global reinsurance and securities markets.

• With a captive the ACO is not limited to off-the-shelf, year-to-year insurance industry products.

• Medical expense (contracting) risk and medical malpractice risk can both be dealt with by a captive. 

Q&A on captives
We are a provider organization. We don’t want to be in the insurance business. If you are launching an ACO you are now in the insurance business whether you want to be or not.
We don’t want to launch our own health insurance product and compete with our carriers. Captives allow you to actually partner with your carriers in a mutually beneficial way.

I already have an ACO contract with my major carrier. Captives give you the ability to move beyond one or two-year bonus arrangements allowing you to negotiate multi-year deals.

Can a captive help me address the prior acts liabilities of acquired MDs? Yes, a captive can be used to fund out these liabilities much less expensively, especially if the acquired practices are above average risks.
We already have a jointly owned LLC structure for our ACO. Why do we need a captive? An ACO can be a captive or it can own the captive. The captive is the critical funding vehicle that further cements the long-term business commitments of the LLC.

What are cell captives? Segregated cell captives (aka rent-a-captives) are well established risk management vehicles. They spread the costs and the regulatory burden of the captive across multiple parties, and they allow for particular risks or business deals to be confined to particular cells.

How does a captive offer me new capital? The risks that are assumed by the captive are often spread further by buying reinsurance or by issuing insurance-linked securities. 

What types of risk can a captive assume? More or less any kind of insurable risk. You decide.
Can the captive (or a cell) be owned by not-for-profit entities as well as taxpaying entities? Yes.

I already have a captive. What’s the big deal? In a post-ACA context captives are much more than a traditional self-insurance tool (a value they still deliver). Captives are multi-party legal structures that efficiently allocate capital to risk, enforce the discipline of long-term risk funding, and potentially smooth earnings. Captives also open a window to completely new forms of capital investment. They are suddenly central to the conversation.
Healthcare risk management is now strategic, and alternative risk vehicles are an essential toolset. Captives are strategic. They serve as a sort of blank sheet of paper that enables healthcare executives to build completely new business models, business models for which the risk of a population’s health is the central variable.