A sure way ahead

Change in the US healthcare landscape has triggered an increase in the number of mergers & acquisitions between healthcare bodies. Insurance products are helping the industry find certainty amid rapid change, as Kieran Dempsey and Nancy McMahon from Ryan Speciality Group explain.

Fundamental structural changes to the healthcare landscape in the US, driven largely by the Patient Protection and Affordable Care Act (PPACA), aka Obamacare, have triggered a trend towards mergers & acquisitions (M&A) in the sector. 

The insurance industry has, in turn, responded to the challenges many organizations face when structuring such deals and ensuring a clean slate is achieved going forward.

That is the view of Kieran Dempsey, a managing director within Ryan Specialty Group responsible for leading the RSG Underwriting Managers’ healthcare and life sciences underwriting companies, which currently include Sapphire  Blue and LifeScienceRisk.

“Healthcare companies and systems in all senses are trying to deal with what have been fundamental regulatory changes in recent years. Among the advantages in this new landscape are economies of scale and we are seeing M&A activity occurring at all levels in the sector as healthcare facilities merge with other practices and they bring physicians into their portfolios.

“This creates a number of challenges which the insurance industry can be instrumental in solving,” Dempsey says.

Nancy McMahon, president and CEO of Sapphire Blue, also notes that more healthcare facilities are looking to provide the full spectrum of service now from acute care to home health. But as organizations grow, diversify and merge with other providers, this creates a number of challenges.

“We are seeing facilities provide services all through the healthcare chain. This makes a lot of sense in the context of new regulation but insurance becomes an important part of the solution for such bodies.”

Buying certainty

There are a number of types of insurance critical to such deals happening in an efficient and smooth way and the market has improved its offering in recent years in terms of the pricing, limits available and sophistication of such products. Sapphire Blue has a product to address coverage on historic liabilities such as medical malpractice claims with its Extended Reporting Period (ERP) Policy. This type of policy can be structured to cover any claims emerging from before the deal took place—something that is common in the healthcare sector.

“This type of policy covers claims that emerge over time but which are not yet reported,” Dempsey says. “The policy can cover a fixed period of time that might range from five years to 20 years, but it can also be bought for almost unlimited periods.”

McMahon also notes that the actuarial expertise around this product has also improved dramatically, allowing clients to buy relatively bespoke products with pricing on an individual basis. “This means the terms can match what the client really needs and each product is underwritten on its own merits,” she says.

She adds that an additional important point of this product is the fact that it is written with the backing of the Lloyd’s Market. “It is a long-tail product; in some cases for example where there might be potential pediatric exposures, it can be unlimited,” she says. “If you are buying a policy with such a long span, having the certainty of a 300-year-old market behind you gives you that reassurance.”

Dempsey adds that even a few years ago capacity was limited for this type of insurance and policies were therefore expensive. Instead, organizations would simply place a sum of money in escrow in the hope it would be adequate to cover any historical unexpected liabilities as they arose.

Now, however, these policies are a lot more affordable, and Sapphire Blue offers this product. “There is more capacity and availability of this product now, which means it has replaced the need for funds to be placed in escrow,” Dempsey says.

“This product is vital for deals. Healthcare is such a complex industry with so many regulations that apply so it is important to cover any historical liabilities in a robust way.”

He also notes that such a policy is important for the peace of mind of both buyers and sellers. It is also the perfect risk for the insurance industry to deal with, he says, as claims are potentially very large but also very infrequent.

“Any risk that is high severity but low probability is perfect for insurance,” Dempsey says.

“The industry is going through massive change and this product can give both parties certainty when coming together in a transaction. There are many stories around unknown liabilities coming back to haunt organizations.

“This policy means they can sleep at night and just concentrate on providing high quality healthcare.”

Sapphire Blue is a managing general underwriter specializing in developing creative solutions to the complex risk management challenges facing the US healthcare industry.

Known for its creative solutions for long-term care facilities, it also has a long history of developing specialty coverage enhancements such as evacuation expenses, defense for adverse media events, liability exposures that may occur during acquisitions or mergers, and risk inherent in businesses with global facilities.

Coverages are written on a non-admitted basis (except Kentucky) through underwriters at Lloyd’s, London. All London syndicates are rated A (Excellent) by AM Best.