www.businessinsurance.com    Rodd  Zolkos     June 20, 2011

As staffs increase, hospitals expected to use captives more

Hospitals will look to add physicians to meet the added demand of the 32 million previously uninsured U.S. residents affected by the health care reform law, experts say.

Pressure on hospital and health care systems to add physicians as a result of the federal health care reform law will prompt dramatic growth in the use of alternative risk transfer vehicles to address medical professional liability risks, many experts say.The pressure on hospitals to add physicians to their staffs is expected to be twofold. Hospitals will be looking to meet the added demand of the 32 million previously uninsured U.S. residents expected to obtain coverage through the program. In addition, health care facilities, looking to benefit from new outcome-based reimbursement policies in the law, are expected to bring previously independent physicians on board as employees, increasing their liability exposures in the process.

“A hospital already has in its captives whoever its employed physicians are,” said Michael Maglaras, president of consultant Michael Maglaras & Co. in Ashford, Conn. “What we’ll see is growth in one aspect of hospital captives and that is the physician risk they take on.”

“The old bifurcation of the hospital having its own insurance through the captive and “Dr. Maglaras’ buying his coverage through an insurer…that paradigm is going to shift,” said Mr. Maglaras.

Captives likely to grow

Michelle Hoppes, president of the Chicago-based American Society for Healthcare Risk Management, said most large health care systems “already do have captives set up for this type of risk and absolutely do plan to utilize them to address this additional risk.”

Health care facilities that don’t have captives certainly will consider whether an alternative risk transfer approach offers advantages over the traditional market as they look to address the exposure they’ll add by bringing those physicians on staff, said Ms. Hoppes, who is senior vp and national director of health care risk management and patient safety at Sedgwick Claims Management Services Inc. in Troy, Mich.

“That’s absolutely the discussion that’s happening now,” Ms. Hoppes said.

As the impact of health care reform takes hold, what’s now “a quiet sleepy side of our business”—single-parent hospital captives—will become “a hotbed” of activity, Mr. Maglaras said.

“I just left a captive board meeting in Bermuda where one of the issues on the table was the recruitment of 200 new physicians in the next couple of years,” he said, underscoring what he said will be a “paradigm shift” for an exposure group that historically has been self-employed and insured in the traditional market that will move toward being hospital employees insured by their employers.

In addition to captives, experts say they expect more use of risk retention groups to cover the exposure.

Adding to the impact on hospitals and their captives is that the change will come against a backdrop of an already competitive environment for health care professionals.

“There are a lot of things that we deal with, the first being that we already don’t have enough health care providers,” said Vivian Miller, Chicago-based senior risk management specialist at ASHRM. “To get health care providers to come on board in that community…nine times out of 10 the only way we’re going to be able to keep them is to cover their insurance cost.”

That can apply to physicians employed by the hospital or self-employed physicians whose insurance the hospital agrees to subsidize through its own coverage to get them to affiliate with the hospital, Ms. Miller said.

The hospital can provide that coverage through traditional markets or a captive, though “captives are becoming much more popular for a variety of reasons,” Ms. Miller said.

While there are the initial costs of funding a captive, Ms. Miller said that, because claims typically don’t mature for several years, the captive can be less expensive than traditional insurance in the early years. And, she noted, a hospital likely will see its premiums increase as a result of claims when using traditional insurance.

Saving money

“A lot of times, that captive—if you’re not spending that money because it takes a couple of years for those claims to mature—you can make money on the deal because of your investments,” Ms. Miller said. “So there’s a significant advantage. There’s also a significant advantage to having a higher retention.”

A key consideration is that doctors already in practice typically come with a tail of exposures, Mr. Maglaras said. “Someone is going to have to acquire that liability,” he said.

“One option is for the hospital to say, “We want to have you, but you’ve got to buy tail insurance,’” he said. However, that might become an area of competition among hospitals vying for the same physicians, with some offering to take on that tail exposure in its captive.

Particularly in hot health care markets, “these captives as a result will get big. More exposure, more liability, more need for service providers. Perhaps higher reinsurance limits,” Mr. Maglaras said. “Service providers will be extremely busy.”

The change will affect captive assets, capital and surplus, domicile decisions, service needs, reinsurance, net retentions, and the infrastructure the hospitals need to provide risk management education to physicians who previously received that training from traditional insurers, according to Mr. Maglaras.

“Captive budgets will increase as a result because there is a larger base of people that need their services,” he said.

Ms. Miller agreed that hospitals will need to provide various risk management training services to physicians joining their staffs, but said that if they address those risks through a captive, typically the third-party administrator employed by the captive can provide that education in conjunction with the hospital’s safety officer and risk management staff.

She also noted that, as in other industries, by taking more control over their risk in captives, hospitals also can improve their loss experience.

That’s been the experience with existing hospital captives, said David F. Provost, deputy commissioner in the Captive Insurance Division of the Vermont Department of Banking, Insurance, Securities and Health Care Administration. Those captives “have been a steady line of business for us,” he said. “And it’s really been very successful for the hospitals, too. The ones that have done this have seen improvements in patient safety and patient results because of what they’ve done.”

Ultimately, there will be “enormous growth of captives because of health care reform,” Mr. Maglaras predicted. “It’s happening now.”

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