Transcript Healthcare Captives - Past, Present & Future presentation files

Healthcare Captives
–
Past, Present, and
Future
December 2, 2014
Tom Hermes: Towers Watson
Julie Robertson: Honigman Miller Schwartz
and Cohn LLP
INTRODUCTION
• The U.S. healthcare industry was an early adopter of
captives and continues to be one of the largest industry
segments that use captives. Why?
• Market demands: coverage at times unavailable, unaffordable;
hospitals forced to take high retentions
• Desire to control the defense of claims, including having joint
defense when nonemployed physicians were co-defendants
• Favorable reimbursement treatment in the past
• Now the industry is in a dramatic state of flux
• We’ll address the evolution of captives, and the current
state of the healthcare industry and its likely impact on
existing captives and captive formations
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PAST - THE HEALTHCARE INDUSTRY
• Hospitals were the drivers
• Mostly nonprofit, community based
• Had the “big bucks”
• Physicians were not employed by hospitals
• Physicians generally practiced solo or in small groups
• “Doctor’s Orders”; not a team approach to delivery
of care
• Most claims arose from incidents occurring in the
hospital
• Paper records; little outcomes data
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PAST – EARLY CAPTIVE FORMATIONS
• Late 70’s – Mid 80’s
• Primarily hard market driven- availability/affordability
• Individual hospitals or large unrelated groups
• Primarily HPL and HGL coverages
• Mid 80’s – Mid 2000’s
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Still hard market driven-particularly doctors
Non-employed physician-availability/affordability
Also strategic as larger systems forming – need insurance vehicle
Significant growth in Dr. captives (RRGs) as Dr. mutuals struggle
Regional competition for independent doctors
• Mid 2000’s – Present
• Captive consolidation mirrors healthcare industry consolidation
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PRESENT - THE HEALTHCARE INDUSTRY
• The ship is turning
• Affordable Care Act
▬ Resulting in significant increase in insured population
▬ Focus on population health management; goal is to
improve health and keep population out of the acute care
setting
• Significant increase in hospital employment of
physicians
• Technological advances outpacing ability to manage
and use data
• Increasing merger and acquisition activity
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PRESENT – UNCERTAINTY AFFECTS
HEALTHCARE CAPTIVE PROGRAMS

Worldwide economic instability continues


Real and manufactured crises continue
Affordable Care Act
▬ Potential changes to historical risks are not represented in current data
▬ Changes generate new potential causes of loss requiring coverage – no data

Will professional liability still be the primary captive coverage?
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Cyber liability, EMR flaws, billing errors, fraud, restraint of trade
Managed care, stop loss, pandemic issues (WC and liability), provider risk
Insurance cycle turning??

Could affect availability/affordability
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PRESENT – The Medical Professional
Liability Cycle

Is the Medical Professional Liability (MPL) insurance cycle turning??

Last MPL cycle turned positive in 2002 (13 years ago) – change is due

Tort reform erosion continues

Major healthcare restructuring creating potential new liability issues

Never events (absolute liability?)
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Systematic risk (EMR System flaws)

Government scrutiny/reporting requirements (Section III) (stents)
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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)
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PRESENT – Hard Market Cycle Generally
Required a “Perfect Storm”


Substantial increases in frequency and/or severity of claims
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Early cycles were frequency driven

Most recent cycle was large loss severity driven
Significant decline in investment return affects leverage

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Excess market capacity limited (market demands high attachments/prices)
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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

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Cash flow underwriting allows loss ratios excess of 100%
Often driven by late reserve development on large cases
2007 Example
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PRESENT – Hard Market Cycle Generally
Required 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

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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
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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)
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Medical Malpractice Ultimate Loss Est. by
Coverage Year/Valuation Date
Source: SNL
*Prior Years do not include data up to 2012
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Medical Malpractice Ultimate Loss Est. by
Coverage Year/Valuation Date (continued)
Source: SNL
*Prior Years do not include data up to 2013
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LOOKING TOWARD THE FUTURE

Mergers/Acquisitions/Affiliations/Partnerships/JOA’s/Management
Agreements/Purchasing Arrangements

Other healthcare systems/hospitals

New types of providers in the system, including health plans

Combining coverage for taxable/non-taxable/governmental entities
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Mergers result in multiple captives requiring consolidation

New acquisition currently participates in a group captive with multi-year
withdrawing commitments
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Deals negotiated without risk management involvement or review

Diversity of coverage (system at $100M, affiliated/owned entity at $1M); new
geographic areas

Increasing D&O/antitrust risk?
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LOOKING TOWARD THE FUTURE: DELIVERY
OF SERVICE

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Physician “Employment”/Alignment

Prior Acts Coverage for physicians
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Limits provided
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Responsibility for “rogue” physicians
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Taxable / tax-exempt risk
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Risk management experience with physicians
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Does 1 + 1 = 2 when physician risk shifts to hospital program?
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Do physicians want/need more involvement with captives?
Team approach to delivery of services

As the roles of midlevel providers increase, will their liability?
▬
How will the market respond?
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LOOKING TOWARD THE FUTURE:
POPULATION HEALTH

Population Health
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Will the old managed care risks emerge again? Allegations:
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Provider has financial incentive NOT to provide care
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All members of the team are responsible
▬
ACO or similar organization liable for its policies and
credentialing
How will captives participate in financial risk?
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How will state and domicile regulators respond?
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Will commercial markets partner with captives?
▬
What tools are needed to assist in the understanding and
management of this risk?
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LOOKING TOWARD THE FUTURE:
EMERGING RISKS
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While professional liability currently remains the primary focus of
healthcare captives, other exposures will take on increased significance:
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Cyber / technology liability: privacy and security of health and
financial information, social media, providing technology services for
others, likelihood of batch claims resulting from system error
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Governmental fines and penalties: EMR allows for increased use of
data in discovering and documenting issues, outliers
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D&O/E&O: for services provided to others too?
For professional liability:
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Use of national standards/outcome data to set new standards of
practice
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Branding: responsibility for the acts of nonowned/controlled entities

Telemedicine
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What Will All of This Mean for Captives?
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The industry isn’t status quo and the captive can’t be either
M&A Activity:
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Governance:
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How to understand and incentivize risk reduction in population health?
Structure:
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If risk is changing, who should be involved with the captive?
Consider agendas, reports and board education; how should the focus change?
Risk Reduction:
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Is the captive following the lead of the parent in the integration strategy?
Bumps in the road in the transitional process
Does the captive need to be restructured to accommodate taxable/tax-exempt risk, third party
risk? To segregate risk?
Are multiple captives advantageous?
Regulation
•
Watch for developments in regulation of financial risk, stop loss products, etc., and the impact
on the captive
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Don’t Forget the Mission
Captive Mission Statement (in 10 words or less)
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Minimize risk
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Minimize cost of risk
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Support parent business (mission)
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When Considering Coverage for Evolving
Risks

Don’t risk a lot to save a little
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Retain risk that is controllable and predictable
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Transfer risk that is volatile or unpredictable
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Retain “owned” risk and transfer “non-owned” risk
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The Best News

Captives are part of the fabric of risk in healthcare organizations
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Captives are not “alternative” any longer
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New models/structures provide significant flexibility

More guidance on tax issues than in prior years
Captives have proved to be adaptable in the past and will in the
future
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