Captives Offer Sound Solutions for the Healthcare Industry Insurance Crisis

This article originally was published on Captive.com and is reprinted here with permission.

Crises are nothing new to healthcare leaders, who have experienced pandemics, significant changes in federal regulations, shifts in policy and economic fluctuations. Today they’ll tell you one of the biggest threats to their profitability and continued viability is the chaotic insurance market.

Long before the COVID-19 pandemic, medical malpractice claims and litigation began rising sharply, with the number of verdicts in excess of $25 million more than tripling from 2014 to 2018. Add to that the pandemic’s pressure on the healthcare system, the global mass job exodus known as The Great Resignation, and rising costs of commercial insurance. We’ve entered an era of unprecedented problems for healthcare systems trying to secure cost-effective insurance, leaving many organizations to pay impossibly high premiums.

Medical Malpractice and Litigation

The healthcare industry has also seen a dramatic rise in medical malpractice claims and other litigation. From 2010 to 2019, $42 billion was paid to victims of medical malpractice, and from 2014 to 2018, the number of verdicts in excess of $25 million tripled.

According to Justpoint, a medical malpractice research group, the vast majority of medical malpractice claims from 2013-2017 were due to diagnosis error (33%), surgical errors (24%), and improper treatment (14%). Add in COVID-related claims, which made up five percent of medical malpractice lawsuits by the end of 2020, and we’re seeing healthcare organizations reeling from the added strain.

Commercial Insurance Costs Rising

The American Medical Association has reported sharp rises of insurance premiums, with 26% in 2019 and 31% in 2020. Premiums are climbing in all industries, but why is healthcare seeing steeper increases? Technology advances have led to doctors seeing more patients and spending less time with each, leading to more errors and additional litigation. Nationwide changes in the reimbursement system, plus higher costs for coverages needed to continue delivering care, create increased financial pressure on hospitals.

Additionally, healthcare organizations are consolidating, leading to jumps in patient care cost ranging from 11% to 54%. As hospitals merge, more physicians become employed rather than in private practices, and with more providers employed, there is a higher risk for employment practices liability claims.

Captive Solutions for the Healthcare Industry

Hospital systems, private practice groups, nursing homes and other healthcare organizations are in need of a custom insurance solution to finance risks and allow them to continue to meet the health needs of the American public.

For decades, captives have been used to assist healthcare groups mitigate financial risks. Since the 1970s, healthcare providers have turned to captives to address unexpected liability claims, large increases in the cost of commercial insurance, and even to serve as a potential source of capturing underwriting profit.

A captive is an insurance company created specifically to serve the needs of a like-minded group of insureds. Captives can provide greater control, predictable pricing, and tailored coverage options. In fact, healthcare captives now constitute 14% of worldwide captives, writing in excess of $3 billion in premium annually.

How Does a Captive Work?

Captives are licensed, regulated companies established in a domicile with captive friendly legislation. They are legal entities separate from the businesses who own them. Instead of relying entirely on the commercial insurance market for premiums and coverage options, captives provide coverages specific to the owners’ needs, ensuring unique or prohibitively expensive risks are adequately covered.

Within the healthcare industry, captives are used to cover:

• Directors & officers
• Executive risk
• Errors & omissions
• Professional liability
• General liability
• Workers’ compensation
• Difference in limits/conditions (DIL/DIC)
• Medical Stop Loss
• EPL

Many healthcare organizations are incorporating medical malpractice coverage into their captive, helping to shield the owners from the volatile market and filling any holes or gaps. A captive can serve as a valuable supplemental policy for a robust insurance program to protect healthcare systems, hospitals, physicians’ groups and nursing homes. Through a captive, owners can get wholesale rates for better premiums versus buying retail.

Benefits of a Captive

In a traditional insurance relationship, owners pay premiums as an expense for a set period. When using a captive, the money paid toward the captive is an investment. Though classified as a business expense for tax purposes, the investment becomes the reserves of the captive, used for paying claims. If the amount of claims is less than expected and reserves are prudently invested, the captive owners can benefit from any underwriting profit and investment income, or even scale back future years’ contributions to premium.

Getting Started

Captive establishment and administration require specialized expertise from a team of captive insurance and healthcare industry experts, together with actuarial, tax and legal professionals. The Hylant captive team has extensive experience with helping healthcare organizations and other entities develop customized, effective, affordable captive programs.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.

Anne Marie Towle Global Captive Solutions Leader