HEALTHCARE CAPTIVES

DEALING WITH THE "NEW NORMAL" IN HEALTHCARE William M. Cassetta

IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

HEALTHCARE CAPTIVES – THE NEW NORMAL

Historically, the institutional healthcare system has been designed to heal and cure patients, with a focus on services in the acute care setting.

2

HEALTHCARE CAPTIVES – THE NEW NORMAL

In the “new normal”, institutional health care will focus on “population health management”.

3

HEALTHCARE CAPTIVES – THE NEW NORMAL

Healthcare captives were formed primarily to help manage medical professional liability risk.

4

HEALTHCARE CAPTIVES – THE NEW NORMAL

In the “new normal”, captives will be challenged to help manage financial risk that extends far beyond medical professional liability.

5

HEALTHCARE CAPTIVES – THE NEW NORMAL     Don’t risk a lot to save a little.

Retain risk that is controllable and predictable.

Transfer risk that is volatile or unpredictable.

Retain “owned” risk and transfer “non-owned” risk

Will these continue to be the precepts of alternative risk financing in the “new normal”?

6

HEALTHCARE CAPTIVES – THE NEW NORMAL  Employing physicians in large numbers • Perfect Storm – health systems want to provide full range of services; physicians fear payment changes if they remain in private practice • Is it really “employment”?

   Integration into corporate culture of parent?

Willingness to adapt to working for someone else?

Compensation models often resemble private practice ‒ So, newly “employed” physicians have demands that cannot be ignored

7

HEALTHCARE CAPTIVES – THE NEW NORMAL  Tail Coverage • Commercial market prices tail coverage unrealistically • Cost of tail coverage is often a critical factor in the employment negotiation • Physicians might have potential personal benefits if they remain insured by their commercial carriers

What about providing tail coverage through our captive?

8

HEALTHCARE CAPTIVES – THE NEW NORMAL  Distinguish ability to provide tail coverage from advisability of providing tail coverage • Limited opportunity for coordinated defense • Was physician’s prior practice in an unfamiliar/adverse venue?

• Does the medical specialty have an especially long tail?

• Was the physician insured under a policy with a “claims asserted” trigger?

• Does the sponsoring organization wish to assume risk for practice outside the sponsor’s facilities?

• What if the physician quits/is terminated?

• Premium tax/potential income tax issues

9

HEALTHCARE CAPTIVES – THE NEW NORMAL  • Potential New Best Friend – Physician Insurance Companies?

New willingness by physician carriers to entertain collaborative arrangements with health systems   Concerns about shrinking non-employed physician market Recognition that “preferred provider” status with predominant health system may produce greater market share   Apparent willingness to consider nearly any proposed program structure ‒ ‒ ‒ 100% risk transfer Quota shares Assumption of prior acts liability only ‒ Access to underwriting services Reluctance due to historical animosity between hospitals and physicians’ carriers

10

HEALTHCARE CAPTIVES – THE NEW NORMAL  • • • • • • • • • • • New Exposures/Threats Class action claims ‒ Will current opportunity to limit retained risk be available in the future as excess carriers reconsider “batch” coverage provisions?

Negligent credentialing claims New “agency” theories in clinically integrated networks and ACOs Claims alleging failure to provide care based on economic incentives Antitrust claims for excluding/terminating providers from CIN/ACO Privacy breaches ‒ Who “owns” the electronic medical record that can be accessed by multiple unrelated providers?

eMedicine Quality Improvement fatigue Increasing role of non-physician providers Aggressive tax enforcement The insurance market cycle

11

HEALTHCARE CAPTIVES – THE NEW NORMAL

IT WON’T BE EASY, BUT IT WILL BE INTERESTING!

12

WWW.HONIGMAN.COM

Healthcare Captives – Dealing with the “New Normal” in Healthcare

Tom Hermes Director - Towers Watson IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013 14

Uncertainty Effects Healthcare Captive Programs

 Worldwide economic instability continues  Real and manufacturing crises continue  Insurance cycle turning??

 Could affect availability and affordability  Affordable Care Act (AKA Obama Care)  Major restructuring of healthcare industry – – Potential changes to historical risks are not represented in current data Changes generate new potential causes of loss requiring coverage – no data 15 © 2013 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. towerswatson.com

The Medical Professional Liability Cycle



Is the Medical Professional Liability (MPL) insurance cycle turning

  Property, workers compensation, and commercial auto markets firming Last MPL cycle turned positive in 2002 (12 years ago) – change is due  Tort reform erosion continues  Major healthcare restructuring creating potential new liability issues  Never events (absolute liability?)  Systematic risk (E.D. System flaws)  Government scrutiny/reporting requirements (Section III) (stents)  Increased public awareness of outcomes (higher expectations)  Some evidence that large claim severity is increasing (while frequency flat)  Increased frequency of class action/batch cases (cardiac stents) 16 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Hard Market Cycle Generally Requires a “Perfect Storm”

 Substantial increases in frequency and/or severity of claims  Early cycles were frequency driven  Most recent cycle was large loss severity driven  Significant decline in investment return affects leverage  Cash flow underwriting allows loss ratios excess of 100%  Excess market capacity limited (market demands high attachments/prices)  Historically insureds buy down (per claim/agg. limits) during soft market ultimately resulting in significant working layer losses for excess market  Adverse loss development on prior years loss reserves  Often driven by late reserve development on large cases

HOWEVER

17 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Hard Market Cycle Generally Requires a “Perfect Storm” (continued)

 While there is some evidence of increased severity of large claims, overall trend indications remain moderate ( ≤ 5%)  Investment returns remain low but relatively stable  Commercial underwriting is more stable – significant excess capacity  As systems have formed, insureds have taken larger retentions with no aggregates – excess markets are not in the working layer  Low investment income requires better underwriting  Actuarial data improved substantially  Claims reporting, settlement and payment patterns accelerated  Increased healthcare risk management/safety focus has lowered trends  Loss reserve development on prior years is still favorable (graphs) 18 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Medical Malpractice Ultimate Loss Est. by Coverage Year/Valuation Date

towerswatson.com

19 © 2013 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Medical Malpractice Ultimate Loss Est. by Coverage Year/Valuation Date (continued)

towerswatson.com

20 © 2013 Towers Watson. All rights reserved.

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

The New Normal Healthcare captives under Affordable Care Act

Primary Challenges

 Physician “Employment”/Alignment  Mergers/Acquisitions/Affiliations/Partnerships/JOA’s/Management Agreements/Purchasing Agreements  Other healthcare systems/hospitals  Other healthcare entities  Supply chain 21 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

The New Normal (continued)

 Current Issues  Combining coverage for taxable/non taxable/Governmental entities  Mergers result in multiple captives requiring consolidation  New acquisition currently participates in a group captive with multi-year withdrawing commitments  Deals negotiated without risk management involvement or review  Branding/agency theories – don’t own or control it but legally responsible  Managed care exposures/credentialing risk  Diversity of coverage (system at $100M, affiliated/owned entity at $1M) 22 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

The New Normal (continued)

 “New” exposures/threats  While professional liability remains the primary focus of healthcare captives, other exposures will take on increased significance – Cyber liability – Managed care liability (provider/insured) – Medical stop loss (employee/provider?) – E&O/D&O/EPL – Governmental Errors & Omissions 23 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Don’t Forget the Mission Captive Mission Statement (in 10 words of less)

 Minimize risk  Minimize cost of risk  Support parent business (mission) 24 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Bill’s Precepts Still Important When Considering Coverage

 Don’t risk a lot to save a little  Retain risk that is controllable and predictable  Transfer risk that is volatile or unpredictable  Retain “owned” risk and transfer “non-owned” risk 25 towerswatson.com

Proprietary and Confidential. For Towers Watson and Towers Watson client use only. © 2013 Towers Watson. All rights reserved.

Healthcare Captives – Dealing with the “New Normal” in Healthcare

Shulamith Klein, Chief Risk Officer Emory University – Emory Healthcare IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

Facts & Figures

• Academic health system (Atlanta, GA) • Clinical arm of Emory University • 6 hospitals (tertiary, geriatric, orthopaedic) • Multi-specialty, primary care outpatient clinics • Nursing & rehab • Clinical & research affiliates 27

Facts & Figures

• $2.4 billion net revenue • $72 million charity care • 15,000 staff employees • 1,300 employed physicians • 1,900 hospital beds • 61,700 inpatient hospital admissions • 3.8 million outpatient service visits 28

Conservative in purpose, broad in scope

excess reinsurance (commercial) $3mm/$3mm buffer layer (captive) $3mm/claim (captive) • • • • • • • • • • medical professional & general liability staff & employed physicians course & scope of employment no prior acts coverage full program limits for all insureds ____________ batch coverage clarity around clinical trials volunteer activity punitive damages patient’s personal property 29

The perfect storm

• • • • • • • Weak economy Workforce shortages Baby boomers retiring Rising healthcare costs Market consolidation Health care reform Stress on AMC tripartite mission 30

The end of the ball for all Cinderellas

• • • Transition from fee-for-service to accountable care Payment models based on clinical outcomes, service, and safety Less revenue per patient 31

Emory Healthcare strategy

• • • Demonstrate VALUE by providing highest quality care cost-effectively RE-INVEST in select capital projects and tripartite AMC mission GROW STRATEGICALLY by participating in market consolidation 32

New normal #1 “clinically integrated network

” • • • Old World employed and community physicians with Emory privileges limited clinical performance data hybrid use electronic med record and paper • • • • • New World employed, community, and independent physicians founded on clinical quality, efficiency, & collaboration quality data tracked for all participants shared savings based on quality metrics universal use of electronic med record 33

• •

New normal #2 “prior acts coverage”

Old World pre-employment tail purchased through prior carrier captive provides 1st dollar coverage upon hiring • • • • New World community hires: pre employment retro date rolls into MagMutual primary policy MagMutual provides 1 st coverage for 2 years dollar excess through captive post-2 years, tail options for pre-employment includes captive (except for ob’s) 34

New normal #3 “collaborative physician insurer relationships”

• • • Old World MagMutual largest insurer Georgia private physicians covers majority non-Emory codefendants finger-pointing between co defendants New World • • • • • primary insurer for Emory community hires clinical site visits valuable risk mgt resource residents participate in Patient Safety Program open dialogue regarding litigation strategy 35

An enlightened liability program

excess reinsurance (commercial) $3mm/$3mm buffer layer (captive) $3mm/claim (captive) • • • • • prior acts coverage for pre employment exposures increased risk of vicarious liability for independent participants in network captive excess of MagMutual for community hires filling gaps between captive & MagMutual (“DIC”) collaboration with non-Emory co defendant 36

Developing areas potential exposure

• • • • • Management liability errors and omissions Clinical trials (other than bodily injury) Healthcare regulatory liability Third party legal advice Miscellaneous errors and omissions 37

A team working together…

38