HEALTHCARE CAPTIVES DEALING WITH THE "NEW NORMAL" IN HEALTHCARE William M. Cassetta IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

HEALTHCARE CAPTIVES

DEALING WITH THE "NEW NORMAL" IN HEALTHCARE

William M. Cassetta

IMAC 2013Pre-Forum TutorialGrand CaymanDecember 3, 2013

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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.

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

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

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

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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”?

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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

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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?

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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

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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

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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

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

WWW.HONIGMAN.COM

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

Tom HermesDirector - Towers Watson

IMAC 2013Pre-Forum Tutorial

Grand CaymanDecember 3, 2013

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

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

towerswatson.com

© 2013 Towers Watson. All rights reserved.

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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)

towerswatson.com


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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

towerswatson.com


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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)

towerswatson.com


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

towerswatson.com


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

towerswatson.com


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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

towerswatson.com


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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)

towerswatson.com


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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

towerswatson.com


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Don’t Forget the Mission

Captive Mission Statement (in 10 words of less)

Minimize risk

Minimize cost of risk

Support parent business (mission)

towerswatson.com


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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

towerswatson.com


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Healthcare Captives –Dealing with the “New Normal” in

Healthcare

Shulamith Klein, Chief Risk OfficerEmory University – Emory Healthcare

IMAC 2013Pre-Forum Tutorial

Grand CaymanDecember 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

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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

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Conservative in purpose,broad in scope

excessreinsurance

(commercial)

$3mm/$3mmbuffer layer

(captive)

$3mm/claim (captive)

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• 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

The perfect storm

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

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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

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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

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New normal #1“clinically integrated network”

• employed and community physicians with Emory privileges

• limited clinical performance data

• hybrid use electronic med record and paper

• 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

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Old World New World

New normal #2“prior acts coverage”

• pre-employment tail purchased through prior carrier

• captive provides 1st dollar coverage upon hiring

• community hires: pre-employment retro date rolls into MagMutual primary policy

• MagMutual provides 1st dollar coverage for 2 years

• excess through captive • post-2 years, tail options for

pre-employment includes captive (except for ob’s)

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Old World New World

New normal #3“collaborative physician insurer

relationships”

• MagMutual largest insurer Georgia private physicians

• covers majority non-Emory codefendants

• finger-pointing between co-defendants

• primary insurer for Emory community hires

• clinical site visits• valuable risk mgt resource• residents participate in

Patient Safety Program• open dialogue regarding

litigation strategy

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Old World New World

An enlightened liability program

excessreinsurance

(commercial)

$3mm/$3mmbuffer layer

(captive)

$3mm/claim (captive)

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• 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

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

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A team working together…

EMORY HEALTHCARE

INSURANCEBROKER

FUND CUSTODIAN

CAPTIVEMANAGER

AUDITOR

ACTUARY

COMMERCIALINSURER

INVESTMENTMANAGER

LEGALCOUNSEL

INSURANCEBROKER

CAPTIVEMANAGER

AUDITOR

ACTUARY

COMMERCIALINSURER

INVESTMENTMANAGER

LEGALCOUNSEL

FUND CUSTODIAN

FUND CUSTODIAN

Documents

HEALTHCARE CAPTIVES DEALING WITH THE "NEW NORMAL" IN HEALTHCARE William M. Cassetta IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013