The current trend for mergers and acquisitions in healthcare creates a number of challenges for risk managers which the insurance industry can be instrumental in solving, says Nancy McMahon, president and CEO of Sapphire Blue.
The US healthcare marketplace is facing a period of rapid consolidation as a result of regulatory changes, technological innovations and financial pressure. Spending more on healthcare than any other country in the world, US healthcare expenditures reached an estimated $2.8 trillion in 2013, according to PwC’s Health Research Institute. That’s roughly twice what other developed countries are spending. With expenses continuing to rise, the industry is searching for ways to operate more efficiently, lower unit costs and identify methods that will optimize the value of their resources and diversify their revenue stream.
Among the advantages of this environment are the resulting economies of scale. Significant merger and acquisition (M&A) activity is happening in today’s healthcare marketplace, and occurring at all levels. For example, hospital deal volume increased 14 percent from 2009 through 2013, according to Irving Levin Associates’ The Hospital Acquisition
Hospitals are acquiring physician groups and ancillary services such as ambulatory centers, diagnostic centers, home care services and durable medical equipment and wellness companies. Physicians are migrating from a private practice model to an employed one. Other physician groups are opening surgical centers, and long-term care facilities are acquiring home healthcare organizations.
The M&A trend creates a number of challenges for risk managers which the insurance industry can be instrumental in solving. There are a number of types of insurance critical to such deals happening in an efficient and smooth way. The insurance industry has improved its offering in terms of the pricing and limits available as well as the sophistication of such products.
Taking care of the long tail
Sapphire Blue has a product to address coverage of historic liabilities such as medical malpractice claims. Because healthcare is such a complex industry with significant regulation, those involved in M&A activity may struggle to assess the hidden risks accurately, such as the historical liabilities of an acquired company. In a merger or acquisition, the historical liabilities or long-tail medical malpractice claims are not known and will remain hidden or out of sight until a claim is made.
To provide buyers with peace of mind, Sapphire Blue, part of RSG Underwriting Managers, has created a unique solution: an extended reporting period (ERP) policy that specifically addresses these long-tail, historic liabilities.
The ERP policy can be structured to cover any claims emerging from before the deal took place. It covers claims that have not yet been reported, but may emerge over time. The policy covers a fixed period of time typically ranging from one to five years, but can be purchased for other periods as well. In addition, clients have the option of designing a policy with individual pricing that meets their needs specifically, and is underwritten on its own merits.
The actuarial expertise around this product has also improved dramatically, allowing clients to buy relatively bespoke products with pricing on an individual basis. Terms can match what the client really needs, and each product is underwritten on its own merits.
As a long-tail product, potential exposures can be unlimited. Sapphire Blue’s ERP product is written with the backing of the Lloyd’s market. A policy with such a long lifespan requires the certainty of a solid, stable market such as Lloyd’s.
Before this product was available, healthcare companies would simply place a sum of money in escrow, hoping that it would be adequate to cover any historical unexpected liabilities as they arose. Now these polices are a lot more affordable. There is more capacity and availability of this type of policy, replacing the need for funds to be placed in escrow.
There are many stories about unknown risks coming back to haunt organizations. The industry is going through massive changes and this product gives both buyer and seller peace of mind. Now healthcare organizations can concentrate on making the acquisition or merger work, and focus on providing high quality healthcare.
Nancy McMahon is president and CEO of Sapphire Blue. She can be contacted at: firstname.lastname@example.org
About Sapphire Blue
Sapphire Blue is a managing general underwriter (MGU), part of RSGUM Healthcare which was formed to bring together the expertise of Sapphire Blue and other underwriting teams, in part, because long-tail, historic liabilities aren’t the only challenges surfacing in today’s chaotic healthcare landscape. Known for its creative solutions for long-term care facilities, Sapphire Blue also has a long history of developing specialty coverage enhancements such as evacuation expenses, defense for adverse media events, and the risks inherent in healthcare businesses with global facilities. As the entire system redefines itself, the risk profile of healthcare companies is also evolving. Integrated delivery means integrated risk. Emerging liabilities may result from the same combination of factors influencing the change. Innovation and understanding of the forces driving these changes are critical to insuring healthcare companies in today’s marketplace.
Nancy McMahon, Sapphire Blue, Mergers & Acquisitions, US