The Affordable Care Act has accelerated demand for captives among healthcare organizations in the US—and a growing number of states are now offering themselves as domiciles. HRMR asks what makes captives attractive, and whether all domiciles are equal.
For some time the healthcare industry has demonstrated a growing interest in captive insurance. This interest has intensified with the arrival of the Affordable Care Act (ACA) and other healthcare reforms and the attendant challenges and opportunities they have brought to the industry.
The move away from a pay for service model, the introduction of accountable care organizations (ACOs) and the move towards employment of physicians by hospitals are causing organizations to reassess how risk management and the operation of a captive can contribute to the overall success of the system.
According to Mike Coulter, deputy managing director for Aon Risk Solutions, clients are asking questions such as: Can a captive be formed to cover an ACO that is contracting with my hospital to provide critical services? Can my existing captive be extended to include the ACO? How do we address the increased liability that comes with an employed population of physicians? We need to supply medical professional liability to employed physicians, can good risks be kept in house rather than transferring to the commercial market? And, how do I protect the hospital limits when an employed physician faces a suit?
“The changes in the healthcare industry are also leading to consolidation of some physician groups and systems that already operate captives. This creates issues, at the captive level, of consolidation of multiple captives, integration of best practices, and expansion or contraction of existing captive business,” he adds.
Captives offer healthcare organizations the control and flexibility needed to adapt and thrive in a changing industry. A captive can be an effective tool to mitigate premium fluctuations, fund appropriate risks, retain control of loss data, respond to rapid changes both within the system (such as increased physician employments) and in the industry (for example, tort reform) and produce savings and/or profit for the group.
“A captive can be used to integrate safety and continuing education into the culture of the system by offering or mandating loss mitigation education to insured physicians. As more healthcare systems move towards an enterprise risk management approach, the captive can be a vital tool in assuring long-term success,” says Coulter.
With the growth of interest in captive insurance comes an upsurge in the number of US states presenting themselves as desirable places to domicile a captive.
“There is a huge misperception that you might need to go offshore to place this type of risk,” says Dan Towle, director of financial services for Vermont Agency of Commerce and Community Development. “Healthcare captives have flourished in Vermont for decades. Our law is important, but so is our track record of making changes to our law when appropriate.”
A recent newcomer to the field is Oregon, which has looked to other states for insights on how best to structure its captive offering.
“One of the advantages of being a fairly new captive domicile is that we were able to review captive laws from other states and incorporate the best aspects of those laws into Oregon’s captive statute,” says insurance commissioner Laura Cali. “For example, Oregon does not impose a premium tax on captives. We also have low fees. Oregon’s captive law favours a competitive business environment.
“Oregon strives to continue our reputation for working with the industry to create a positive business environment. This starts with access to regulators that are available to listen to the needs of a captive and take action. We recognize that a captive that is successful, profitable, and complies with our statutes benefits the state as much as it benefits business.”
South Carolina has very successfully positioned itself as a domicile, and according to Coulter, this is due to a number of key elements, namely experience, industry expertise and the proper regulatory environment.
“South Carolina has the experience gathered from more than 10 years of the successful management and regulation of captives,” he says. “South Carolina has expertise in the healthcare industry—roughly a third of active captives here are healthcare-related. Captive managers, auditors, regulators, actuaries have all supported long-term efforts of captives in the state and will continue to aid and support captives going forward.”
He adds that the regulators’ support for the industry is evidenced by repeated assurances of support from Governor Nikki Haley and director of insurance Ray Farmer to create a progressive, business-friendly approach.
“Director Farmer, after discussions with industry reps and captive owners, recently hired William ‘Jay’ Branum as director of captives to centralize the captive department under one leader. The department also continues to evaluate and improve internal process and procedures. Support from the top and a desire for smart and prudent regulation make South Carolina an ideal place to domicile a captive,” Coulter says.
Tennessee is another success story, experiencing substantial growth in healthcare organizations domiciling their captives in the state.
“In addition to Nashville’s reputation as a healthcare center, the captive sector is actively encouraging the establishment of healthcare captives inTennessee,” says Michael Corbett, director—captive insurance for the State of Tennessee. “We have established or redomesticated several healthcare captives in the medical stop loss and medical malpractice arenas.”
Competition for business
Corbett puts Tennessee’s attractiveness down to its competitive captive legislation and support from the governor, an attractive business climate, a strong captive association committed to building capacity and support for the captive insurance industry, and a central location that is easily accessible.
“Governor Haslam and commerce and insurance commissioner Julie McPeak are focused on attracting jobs and investment to the State of Tennessee,” he adds. “The revision of Tennessee’s existing captive statute says volumes about this commitment. We created a best in class regulatory staff that can service and regulate the needs of captive insurance companies far into the future.
“Our staff understands, better than most, that the three-legged stool of a committed executive branch, legislative branch and business community (represented by the Tennessee Captive Insurance Association [TCIA]) is the ticket that will ensure that Tennessee will be one of the domiciles that experiences long-term success.”
Meanwhile Vermont, which has approximately 100 hospital and doctors’ groups that have formed captives for professional medical liability, has announced the licensing of its 1,000th captive insurance company. Cassatt Insurance Group is a group of nine independent non-profit hospitals in south eastern Pennsylvania that share risk in providing medical liability coverage for 1,200 physicians.
Towle says this is not a new trend. “Hospitals setting up captives as a way to better manage their professional medical liability has been a strong growth sector for Vermont. It is fitting that our 1,000th captive is in the healthcare sector.”
Controlling growing risks
Interest in captives from the healthcare sector is strong for a number of reasons, says Towle. “The healthcare sector has continued to see increases in its insurance cost with little relief on the horizon. With the continued increases in the cost of insurance and the ACA, hospitals are looking for tools to help them be better prepared. A captive gives a hospital more options in better managing and controlling those risks.”
Eric Dethlefs, president and CEO for Cassatt RRG Holding Company, says that Cassatt has been able to provide its hospital owners not only with an insurance program that performs consistently well but also, just as importantly, risk management and patient safety initiatives that are essential in today’s healthcare environment.
“Patient safety is at the top of our agenda and at the top of our owner hospitals’ agendas, and the captive structure, perfected in Vermont, helps us to keep it there,” he says. “The number of states and other countries that allow formation and operation of insurance captives has grown by leaps and bounds, but Vermont’s understanding of captive insurance, its receptiveness to sensible innovation and the professionalism of the regulatory leadership there make it the domicile of choice for Cassatt.”
With so many attractive options within the US, it is by no means necessary to look abroad to domicile your captive. But whatever location you choose, it is vital to surround yourself with qualified people and do proper due diligence.
“The better the planning that goes into setting up a captive, the better it usually performs in the long run,” says Towle. He adds that the captive insurance industry moves very quickly, so it is advisable to choose a domicile that will grow with you and will react quickly to changes in the marketplace.
“I also suggest speaking with the domicile’s regulator to make sure it is familiar with your unique risks, and finding out what is their experience in regulating that risk,” he adds. “Choosing the appropriate consultants and domicile is an important part of ensuring that your captive is successful.”
Affordable Care Act, captives, domiciles