Healthcare Captive Insurance: Claims Opening the Door to the Future

Take a look at the photograph below.

This is a photo of an institutional door handle. The handle is made of copper. You grab the bottom of the latch and pull it up, and the door to a hospital patient's room opens. Connecting this handle, captive insurance companies underwriting medical professional liability insurance, and what happens to you or me when we spend a night in a hospital bed is what this article is about.

Background

There are two reasons why commercial insurance companies exist. The first reason, in a general sense, is to protect assets. The second reason is to pay claims.

What is true for commercial insurance companies is also true for captive insurance companies. Captives are also asset protection mechanisms, and they also exist as exceptional vehicles for the management, reserving, compromising, and payment of claims.

At captive insurance industry meetings, not enough useful and practical information is discussed and debated on the subject of claims management and how captives are instrumental in helping insureds connect the dots between the causality of loss and the improvement of a business model. There are some obvious reasons for this. The whole subject of the adjustment of claims has limited sex appeal for most captive professionals. However, when we speak of medical professional liability captives, and we marry that idea to the important issues arising under accountable care, the way in which claims are paid, the way in which we learn from claims with merit, and the social media and reputational impact of claims are all important reasons why, in this lingering and what may be a "forever" soft market, captives still prosper.

Debunking Some Myths

Captives underwriting medical professional and general liability for acute care facilities, individual physician practices, managed care organizations, and other providers of healthcare services have a long history of the management and adjustment of claims.

In many states, given individual jurisdictional concerns and the claims history of the parent organization, captives regularly investigate, reserve, defend, and adjust claims of significant size for medical professional, general, and umbrella liability. My firm has no clients who are novices in this regard.

In many acute care facilities, it's not uncommon to find medical professional liability limits totaling $50 million or more, where the first $3 million to $5 million is retained as net in a captive on a per claim basis, with a multiple of four times that amount on an aggregate basis. This means that complex and sophisticated claims management processes are in place and have been for decades. There is no lack of experience in the captive market in this regard.

Some less enlightened commercial markets, led by mutuals and others devoted primarily to the insuring of what is, alas, a shrinking physician personal asset protection market, still hold the view that captive insureds are not the best gatekeepers of the claims management and defense process. All the evidence is to the contrary.

In fact, the Lloyd's market, representing long-standing syndicate and London company players with significant multidecade US healthcare liability captive experience, subscribe to the view that the best insured (or reinsured) is the self-administered-claim insured. I have been to many meetings in London over the last 30 years, and while the London market is supportive of many sound strategies to manage captive risk, the leading underwriters in the hospital and physician medical professional liability marketplace are unanimous in their view that a well-conceived and well-established internal captive claims management process yields the best results with regard to net retained losses, and in turn keeps them out of harm's way with regard to excess claims.

The idea that risk management staff in the acute care setting or in a large super-group physician practice setting cannot be trained to manage an internalized claims process is an idea that has come and gone. Whether through internal resources or through a combination of those resources and externalized assistance, such as unbundled third-party administration intervention, self-insureds and their captives are adjusting and paying losses successfully every day of the week. What's more important is that captive owners are vigorously defending and winning on claims filed without merit, as all the data clearly shows, including the paid claim data available as public information in Connecticut, Ohio, and elsewhere, where captive insurers dominate the market.

Defining the Process

The careful management, reserving, and adjustment of losses under a captive insurance company architecture is at the heart of any self-insurance program. How a captive handles a claim involving, for example, as frequent an allegation as infection due to a retained foreign object—how counsel is chosen, when counsel is assigned, what the loss run looks like, how reinsurers are placed on notice of a potential loss involving them—is the most important function of a captive. This function is far more important than is generally believed, and not enough attention is given to both the process and the outcome at captive board meetings.

With regard to claim reserving and adjustment, and speaking specifically of captives writing medical professional liability insurance, the process has become much more complex and demanding, but ultimately more rewarding, thanks to what we generally refer to as "Accountable Care."

Simply put, providers of health care are not going to be paid in the future for their mistakes. We are moving inexorably in this direction; and, in fact, with respect to the largest single payer system in the history of the United States, otherwise known as Medicare, we are already there.

So what are the basic elements of a good internalized healthcare provider-owned captive claims management process? 

1. A way to get information into the hands of the right people: All healthcare systems and many larger physician practices now use sophisticated electronic incident and claim reporting systems supported by a handful of software vendors well known to the industry. Many of these claims management systems have rolled out only in the past 5 years or so. Getting an incident report into the hands of a hospital or physician practice risk manager, so that it can be triaged, assessed, and acted upon, is a smoother process than it was a decade ago, and this process has been robustly supported by the healthcare liability captive budgets of captives domiciled in Vermont, Grand Cayman, Bermuda, and elsewhere. The biggest concern here is speed of information and data transfer. The second but equally important concern is the protection of personal health information at a time and in an age when a patient's private health record is of increasing value on the black market. It's not uncommon for an acute care system risk management staff to triage 2,000 electronic incident reports in a month, and for that work to result in only 15 or so potentially compensable events, that in the following quarter show up on a captive's balance sheet.
2. A reserving policy that makes sense and is consistently applied: This means clearly defining what an "incident" is, what a "potentially compensable event" is, and, finally, what a "claim" is, all consistent with captive policy language and excess or reinsurance program terms and conditions. The reserving process is, by definition, dynamic. Claims are a function of the people who caused them and the people on the receiving end. They are defined by human nature. Therefore, they evolve over their natural life, are subject to change, subject to variability, and subject to surprise. Claim reserves must be assessed on a regular basis, not stair-stepped, and where subjective views are tempered by a hard look at judgment value, including economic and noneconomic loss potential, jurisdictional implications, and the credibility of all witnesses and participants. Defense counsel must be intimately involved in determining the fact scenario and helping a captive's owners gauge the percentage of success or failure. 
3. Managing litigation: Some in the commercial insurance market still support the view that it is only commercial insurers that have the experience and credentials necessary to manage a process involving complex litigation. The results, visible on many captive balance sheets, speak differently to this point, as captive surplus has grown exponentially since St. Paul Insurance Company exited the medical professional liability insurance market in 2001. When the St. Paul packed up its bags precipitously and exited the market, healthcare providers with captives had to scramble. They had to add surplus to captive balance sheets. They had to put in place disciplined claims management protocols. They were optionless, and they have never forgotten the way in which the commercial market abandoned them. The good news is that a number of enlightened commercial insurers have come around to the idea that they can partner with healthcare providers and their captives. There is strength to be derived from both sides of this equation. Self-insureds, and in particular captive owners, are now very skilled at setting the framework under which matters are litigated, skilled at monitoring defense counsel costs and strategy, and skilled at assisting in the scheduling of staff interviews and depositions, and, in general, in guiding the process of the kind of litigation that happens when people's lives are affected by unintended outcomes. 

The Effects of Accountable Care

Lastly, and perhaps most importantly of all, healthcare liability captives now lead efforts, in a very direct sense, at improving the quality of your care and mine. In short, we have entered the era of the socially responsible captive.

Because healthcare liability captives have multidecade experience in the handling and assessment of medical professional liability claims, these captives' healthcare provider parents are now moving quickly and eagerly into the analysis of how the claims paid and the lessons learned can be translated into increased patient safety and better reimbursement by payers under the revolution mandated by the Affordable Care Act.

It is here where the proverbial rubber hits the road. It is in fact the reason that, in what has been the longest soft professional liability insurance market in history, healthcare liability captives continue to grow and expand their underwriting profiles; simply put, when you get in the habit of learning from the losses you've had, you never go back. And by this, I mean that you never go back to the commercial insurance market, where the adjustment of the loss under a "duty to defend" contract is taken out of your hands and, therefore, out of your sight.

Medical professional liability captives contain the seeds of what will now grow into a more visible focus on patient safety. But there's more. For a claim that used to be an isolated event is now recognized as not being that at all. Every claim impacting a captive insurance company writing healthcare liability takes on the aspects of an octopus. The graphic below shows what now happens in the real world when an adverse event results in a claim with merit made against a healthcare provider.

That claim now ripples not only through the organization itself and its captive but strikes at the very heart of the institution's public face. Claims with merit regularly (and unfortunately) are discussed and debated on Twitter and Facebook. What happened, when it happened, and why it happened affect the recruitment of employed and community physicians, the morale of nursing staff, Internet grading, reimbursement from payers, and of course, finally, reputation. There is no greater concern in the competitive healthcare market than what people think and say about you. And, of course, at a time when everyone is buying everybody else, negative publicity related to claim activity may decide whether or not you are a good or not so good acquisition risk.

So Now Back to the Door Handle …

More than a decade ago, at the board meeting of a captive owned by a major healthcare institution employing thousands of physicians, the captive's directors, many representing the community served by the captive's parent, went into a rebellion.

They received a report about an increase in the parent organization's nosocomial infection rate. A nosocomial infection is an infection you get while you are a patient—you didn't walk in with it. When you get a bad one, your health is frequently compromised, and sometimes your life is lost.

The board demanded action. They authorized $500,000 to fund a study involving the analysis of more than a decade's history of claims paid by this captive to patients and family members who had been harmed by hospital-acquired infections. A year later, that report was released, and some of us in the industry saw it. It tackled the subject of these kinds of claims in a candid and revealing way.

As a result of this study, the captive's parent instituted a broad-based effort at reducing its infection rates, including using new technologies to zap bugs with ultraviolet light, as well as more simple ideas, such as improvements in raising awareness among healthcare professionals about the importance of washing their hands.

Buried down inside the depths of the report was a recommendation that at first went unnoticed. That recommendation suggested that when the parent organization built its next new hospital facility, every door handle should be made of copper. Why? Because the study revealed what science had long known: copper has antimicrobial properties. The bugs that sicken you or me and that remain on a door handle to a patient's room die faster on a copper handle than on a handle made of some other material.

Walk into a private patient room in any hospital built in the last couple of years. Check the handle. A captive made all the difference.

I began and I end with a fundamental idea: in a continuing soft market, where medical professional liability insurance capacity abounds, and some, particularly in the commercial market, question why more captives aren't folding their tents, the captive claim process becomes a way in which the door is opened to success under Accountable Care.