Table of Contents 

 

The ART market and ACA implementation

 

 

 

 

 

 

 

 

 

 

Increasing size of health care institutions will have an impact on agents

By Michael J. Moody, MBA, ARM


t's no secret that the Affordable Care Act (ACA) will have a profound effect on the entire health care insurance industry. Due to its newness as well as some of the resistance to ACA, it is difficult to tell just how widespread these changes will be. However, John Lochner, CPCU, ARM, director at Towers Watson and lead of the firm's captive initiative, indicates that in all likelihood, the Act will also have a significant effect on the alternative risk transfer (ART) market, particularly captives. For many years, the health care provider industry has been the largest market sector to take advantage of captives. Both health care institutions and doctor groups have accounted for the largest segment of both the onshore and offshore captive market and, more recently, the risk retention group (RRG) landscape. Lochner sees these as exciting times for health care provider-owned captives due to the many changes being influenced by ACA.

"Agents and brokers are less and less likely to be dealing with the individual physicians, but, instead with the business manager of a large physician group or a hospital risk manager or finance executive."

—John Lochner, CPCU, ARM Director Towers Watson

 

Change is coming

The first major change, Lochner indicates, is the increase in merger and acquisition activity. "This is a trend that has been building over the past few years." Whether it is health care institutions buying each other, buying single hospitals, buying physician groups which will then become employees of the hospital, or even having newly graduated doctors become employees of the hospitals, the bottom line according to Lochner is that "there will be more exposure units in health care provider-owned captives. I would expect health care captives to grow in size despite the consolidation that is occurring in the health care provider community." All of this consolidation will leave the organizations examining the best way to finance their risks. Most, Lochner believes, will retain the use of the captive, but he says that is the easy part.

One of the logical outcomes of consolidation is that the hospital or health care system is bound to find itself with two or more captives, so the real question, says Lochner, becomes, "What do we do with the other captives?" Or more to the point, "Do we really need all of these captives?" This logically leads to other important questions, such as whether to domicile the captive offshore, which has a long history of captive involvement, or house it onshore.

Which alternative will be the "most appropriate for a given captive owner is dependent on a number of factors, including whether the domicile's view is consistent with how the captive owner likes to fund and reserve and is it consistent with the kind of business that they're writing." With all the consolidation that is currently going on and what is likely to occur in the short term, he says, "we expect some winding down of certain captives as they get rolled into others."

He states, "The issue of multi-domicile is a complex one." However, "with regard to new formations, it's possible that it could lead to more staying onshore—that is, being formed in the U.S., rather than being formed offshore." However, he cautions, "I'm not sure it will cause those that are already offshore necessarily to look to moving onshore unless there are other overriding factors." Frequently, in the past, he notes, health care systems would typically domicile captives focused on writing voluntary attending physicians (i.e., non-employee doctors) offshore. However, now that so many of these doctors have become full-time employees, does this still hold true? Lochner points out that a key concern with writing voluntary attending physicians is the tax-related issues, and while Towers does not provide tax advice, that had historically suggested an offshore domicile might be more appropriate.

Lochner points out that consolidation is not a new trend. "It has been going on for the last couple of years; it's probably just picking up a little bit more steam," without a significant reduction in captive growth. As noted previously, he thinks that the end result will be a net growth in the captive arena. There are several reasons for this growth, but most important is that there will be more exposure growth. For example, small groups that may not have been candidates for captives previously, that are themselves hiring more employed physicians and/or joining together to form larger groups, may see advantages to a captive formation.

An additional benefit to the consolidations, especially as regards the accelerating trend of employing physicians, is that they should allow for a closer working relationship within the various departments and between physicians and hospital staff that make up the risk management effort. Lochner says that it certainly makes it easier to bring all elements together and work under the same common risk management platform on the same team. "So number one, it would ideally minimize the chance of adverse incidents occurring." Second, since everyone is working under the same risk management platform, a more coordinated approach to care should emerge. "Further, should an incident occur, having everyone on the same team should provide for a more coordinated response and joint defense opportunities, eliminate finger pointing at each other, and lead to a lower cost outcome."

Additionally, he believes that many health care providers will consider using their captives for a wider variety of risks. Historically, he says, "Many health care provider-owned captives have been used mostly to provide medical professional liability coverage." However, he notes, captives could provide coverage for additional areas such as medical stop-loss coverage or other potentially large risks that will result from the implementation of ACA. One example that he points to is cyber liability. He notes that due in large part to ACA, everyone is "pushing forward to implement electronic health records as required by ACA." Lochner believes that the potential risks involved with cyber liability could fit into a captive. Other similar risks could also be combined within the captive, thus "providing a net growth for captives as a whole."

Role of the agent and broker

According to Lochner, there are plenty of implications for the agent/broker community from all of this consolidation activity. Captive insurers may be one of the first to see the effects, and he says, "There are going to be winners and losers, in terms of who can keep their clients." Further, he notes, "It will be most essential to not only know your client, but to know who your future client is going to be as well." This winner/loser situation extends to working with health care-related risks that in the past were too small to consider a captive. "You need to be mindful of that fact and try to be proactive and anticipatory," Lochner asserts.

He reminds agents and brokers that the insurance buyers who are going along with these consolidation moves may find themselves in a changing role as those organizations look to get bigger. "Agents and brokers are less and less likely to be dealing with the individual physicians, but instead with the business manager of a large physician group or a hospital risk manager or finance executive." Thus it is important to have as broad a relationship with the organization as possible and be developing relationships with other organizations (e.g., the would-be acquirer). Further, given the current situation of an "upward trend in the formation of captives, you will need to remember that if you are not talking to your client about captives or alternative risk, your competition is."

It is possible for agents and brokers to lose clients during this consolidation period due to some matters that are simply out of their control. However, being proactive and strategic in their approach to current clients can only help. Change is occurring throughout the health care industry. As always, these types of changes can spell opportunity for some agents and brokers.

   

 

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