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Alternative risk financing is not just for the biggest players in healthcare anymore. Long used by large health systems, this type of self-insurance is becoming more attractive to smaller institutions as well.
Healthcare providers are all looking for ways to become more proficient in their operations, so more and more C-suite executives are looking at the option of self-insuring, says Eileen F. Conlon, managing director for the insurance broker Beecher Carlson in Miami.
"It behooves the risk manager to be familiar with this type of risk financing, how it works and, why you might consider it, because it is something that is going to be on the radar screens of their senior management," Conlon says.
Alternative risk financing is a mechanism that allows cost savings because you carve out some of the costs incurred when dealing with an insurance company, Conlon explains. With a typical insurance policy, the healthcare provider pays a premium to the insurer, who in turn pays on some claims. With self-insurance, the hospital sets up its own insurance company, known as a captive or a risk retention group, and sets aside the money it would have paid in premiums but avoids the administrative costs associated with a commercial insurer. Premiums paid to the captive are invested for the benefit of the healthcare provider rather than sitting in an insurance company’s bank account.
"Money not paid out by the captive is retained by the healthcare provider, so if you have a particularly good year with minimal claims losses, that can contribute substantially to the bottom line," Conlon says. "Even if it is only a small sum, that adds up over time, and the interest grows. Hospitals that have had a captive in place for 30 years or even more are seeing very significant amounts of money that can be reallocated to other uses."
Forming a captive will require hiring accounting professionals, attorneys, a reinsurance broker, and a captive manager. The provider is not completely on its own when it comes to managing and paying claims, however. Most healthcare providers have re-insurance that will kick in after a claim reaches a specified threshold, such as $1 million in costs, or after all claim expenditures total $10 million for the year.
The option has been mostly used by large health systems and hospitals, but Conlon says that situation is changing as leaders realize the potential benefits. After years of paying for insurance and analyzing claims, healthcare providers might realize that they could achieve the same results while saving themselves some money.
"We’re seeing it more now in smaller systems, and smaller practices like physician groups are looking to do this," Conlon says. "The typical guideline is that if you’re spending more than a million dollars a year in premiums, a captive is something you should be looking at."
Another important consideration is how well you manage claims. The captive you, essentially handles all claims management unless the reinsurance kicks in, so you have to be confident that you can do that task. Also consider your risk management and patient safety records. Are you doing outstanding work in those areas, and do you not expect many claims? Or is there a lot of room for improvement?
Some providers are drawn to self-insuring because they think their good records in claims and loss management are not being recognized by commercial insurers, notes Geoffrey Etherington, JD, partner in the New York City office of Edwards Wildman, which specializes in insurance. Particularly for smaller clients, insurers might refuse to tailor coverage and premiums for good performers, he explains. The hospital is lumped in with other providers who might have much worse records, which results in a higher premium.
In addition, self-insuring might allow the healthcare provider to obtain insurance that is not available to it on the open market, Etherington says. "For example, a facility that provides long-term care for children may feel like they have some child abuse exposure and need coverage for that," he explains. "That might be hard to find, or they might not be able to find it at the coverage amounts they want."
Self-insuring usually leads to better claims management because you’re doing it yourself, Conlon says. Senior managers also are more interested and responsive to risk management when they know that the hospital will be paying the claims directly rather than letting an outside insurance company take the hit. That involvement can help risk managers improve safety, she says. (See the story on p. 78 for more on the risk manager’s role with a captive.)
Etherington cautions that any provider considering a captive should work closely with accountants from early in the consideration process and all the way through forming the captive.
"Sometimes people assume that a captive program will allow them to fully deduct the premiums they pay to the captive, but that’s actually a very complicated question and has to be analyzed carefully," he says. "You don’t want to get to the end of the year with your tax returns or financial statements and find that your attorneys or accountants are not willing to sign off on the structure."