Healthcare Captives - Past, Present & Future presentation files

Report
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
3
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
4
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
•
•
•
•
•
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
5
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?



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?)

Systematic risk (EMR 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)
8
PRESENT – Hard Market Cycle Generally
Required 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


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


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


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)
10
Medical Malpractice Ultimate Loss Est. by
Coverage Year/Valuation Date
Source: SNL
*Prior Years do not include data up to 2012
11
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

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

Diversity of coverage (system at $100M, affiliated/owned entity at $1M); new
geographic areas

Increasing D&O/antitrust risk?
13
LOOKING TOWARD THE FUTURE: DELIVERY
OF SERVICE


Physician “Employment”/Alignment

Prior Acts Coverage for physicians

Limits provided

Responsibility for “rogue” physicians

Taxable / tax-exempt risk

Risk management experience with physicians

Does 1 + 1 = 2 when physician risk shifts to hospital program?

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?
14
LOOKING TOWARD THE FUTURE:
POPULATION HEALTH

Population Health


Will the old managed care risks emerge again? Allegations:
▬
Provider has financial incentive NOT to provide care
▬
All members of the team are responsible
▬
ACO or similar organization liable for its policies and
credentialing
How will captives participate in financial risk?
▬
How will state and domicile regulators respond?
▬
Will commercial markets partner with captives?
▬
What tools are needed to assist in the understanding and
management of this risk?
15
LOOKING TOWARD THE FUTURE:
EMERGING RISKS


While professional liability currently remains the primary focus of
healthcare captives, other exposures will take on increased significance:

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

Governmental fines and penalties: EMR allows for increased use of
data in discovering and documenting issues, outliers

D&O/E&O: for services provided to others too?
For professional liability:

Use of national standards/outcome data to set new standards of
practice

Branding: responsibility for the acts of nonowned/controlled entities

Telemedicine
16
What Will All of This Mean for Captives?
•
•
The industry isn’t status quo and the captive can’t be either
M&A Activity:
•
•
•
Governance:
•
•
•
How to understand and incentivize risk reduction in population health?
Structure:
•
•
•
If risk is changing, who should be involved with the captive?
Consider agendas, reports and board education; how should the focus change?
Risk Reduction:
•
•
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
17
Don’t Forget the Mission
Captive Mission Statement (in 10 words or less)

Minimize risk

Minimize cost of risk

Support parent business (mission)
18
When Considering Coverage for Evolving
Risks

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
19
The Best News

Captives are part of the fabric of risk in healthcare organizations

Captives are not “alternative” any longer

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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