Insuring employed physicians: Captive opportunity or not

Read our article in the Cayman Financial Review Magazine, eversion 

The more things change, the more they stay the same. This phrase has been used to describe a number of situations over the years. The current environment in the US healthcare industry regarding the relationship between healthcare systems, hospitals and their physicians is certainly one of them. 

The buzz in the industry these days is all about hospitals employing more physicians, and looking at ways to align themselves more with their physicians. This article will take a look at why this is happening and what the implications are for captives.

The study of the history of physicians and hospitals helps to understand how and why the industry got to where it is today. Without going too far back, the period from 1960 to 1990 saw the number of medical schools in the US increase from 88 to 126, fuelled by an increase in federal aid.

The number of graduates from these schools went from less than 7,500 to over 15,000, mostly in specialty and sub-specialty groups. Prior to this time, there was limited specialisation in the medical field. This supply of physicians forced them to look at ways to increase their revenue. It encouraged them to form physician groups and to look at services typically performed by hospitals. This put stress on hospital revenues.

Ten to twelve years ago, healthcare expenditures were estimated at 14 per cent of US GDP. This attracted the attention of Wall Street, who began to acquire hospitals. Those healthcare providers that had been the major players in the industry, non-profit hospitals and independent physicians, began to merge together for defensive reasons. This was the most recent effort by physicians and hospitals to work together.

However, it quickly became apparent that the merged systems provided more leverage with managed care organisations, allowing the non-profits to be more competitive than the Wall Street entities. As revenues returned to the hospitals, they divested themselves of unprofitable physician groups. 

Nonetheless, physicians continue to play a significant role in a hospital’s revenue. They refer patients for admission and testing. The reputation of certain specialists working at particular hospitals is an important factor in attracting patients to a particular hospital. So the relationship between a hospital and a physician is a vital one.

Fast forward to recent times  
In the last several years, hospitals are aggressively looking to employ physicians and physician groups again. According to the Medical Group Management Association, practices owned by physicians have dropped from its peak in 2003 of 72 per cent to 48 per cent in 2008, while practices owned by hospitals doubled from 26 per cent to 50 per cent during the same period.

What has changed? Firstly, there is increased competition again in the healthcare sector, causing all entities to look for ways to increase their revenues.

There is also the spectre of reduced Medicare/Medicaid reimbursement which would further stress hospital revenue. The implications of healthcare reform and the unknown impact of accountable care organisations (ACO’s) are looming out there. Finally, a relatively new factor on the landscape is the physician’s quality of life concerns.

Physicians appear to be more willing to trade some of their independence, with the “on-call at all hours” requirement it brings, to becoming employees and working in a more secure “9 to 5” environment.

So, it is clear the employed physician environment has changed. And this time, it may work as the change is being supported by physicians, or at least they are not fighting it! Physicians are evolving into real leaders in the hospital world, as they wrestle with and embrace the new dynamics of the industry.

What does this mean for insuring employed physicians?
Traditionally, employed physicians have been insured more as independent physicians, than as employees. A hospital’s typical employee, ie a nurse, is covered by the hospital’s professional liability coverage. The nurse does not pay a premium or get involved in any coverage decisions.

This has not been the case traditionally for employed physicians. Even in cases where the employing entity (ie hospital) pays the premium, the physician may be participating in choice of insurer and choice of defence counsel in the event of a claim.

But there are benefits to bringing employed physicians into a hospital’s self-insured arrangement, which we will generically call a captive.

A hospital has the risk either way. It is paying the premium for the physician coverage and its excess professional liability coverage likely responds to any claim in excess of the physician coverage. Keeping the exposure self-insured can also assist with control of underwriting and claims handling.

Insuring employed physicians in a hospital’s captive puts a physician’s interests in line with the hospitals in claims issues. In the event of a claim, this can eliminate the issue of “finger-pointing” where the physician claims it was the hospital’s fault and the hospital points at the physician.

It can also allow for joint defence, saving the costs of both parties using different defence counsel; industry estimates indicate that cost savings from joint defence can be as high as 15 per cent.

Another key reason why hospitals are looking at insuring their employed physicians is to improve alignment between the physicians’ behaviour and the hospital’s patient safety goals and objectives. Premium or underwriting credits are frequently given by physician insurance companies to encourage certain education and certain patient safety initiatives.

When a hospital and its captive have more control over the underwriting process, they have a significant opportunity to directly align the hospital’s specific goals and initiatives with the underwriting credits, and encourage physician behaviour more exactly along the hospital’s desired path.

A number of hospitals and systems have concluded that the benefits of utilising a captive to provide coverage to their employed physicians outweigh the disadvantages. However, no article would be complete without putting the reader on notice of the challenges involved with it.

It is important to understand the model that a hospital uses to compensate its employed physicians. Does the model assign costs to a physician, as in a “virtual physician practice” model? The nature of the model determines how impacted the facility and the physician are by any change in premium costs.

Will underwriting guidelines be more or less strict than employment guidelines? How will the insurance programme, now that it is essentially the same entity as the hospital, handle physicians with unacceptable incident or claims history?

Conflicts of interest in claims litigation can arise, particularly when differences exist between clinic and acute medicine. The physician may want to defend a claim while the hospital/captive wants to settle the matter.

As hospitals bring in more and more employed physicians, there is concern over the question of “tail” coverage, which provides coverage for incidents that occurred prior to the physician’s employment. Frequently, the cost of tail coverage would be a significant burden to the physician if they were to leave their current insurer.

The payment of any tail premium, however, is a complicated issue. There are potential tax and insurement issues that should be thoroughly discussed with the hospital’s tax advisors and general counsel.

Bringing employed physicians into a captive is something that every healthcare captive should at least be studying. It can provide benefit to the hospital and to the physicians, both qualitatively through alignment of goals and objectives, as well as quantitatively through reduced costs of risk.

Healthcare continues to evolve in the US and healthcare providers, including hospitals and physicians, continue to adapt to the changing landscape. For the astute captive owner, these changes will present opportunities to use their captive to create value for their hospitals and systems. It could be insuring employed physicians today or underwriting an ACO tomorrow.

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Peter Jones

Peter has over 20 years experience in both consulting and managing captive insurance companies. He is a Canadian chartered accountant as well an associate in Risk Management. Captive Management Initiatives, Ltd is a Cayman based company providing captive consulting and captive management services to the US healthcare industry.
BIO: Peter Jones

Peter Jones
Managing Director
Captive Management Initiatives, Ltd.
PO Box 10073
Grand Cayman KY1-1001
Cayman Islands

T. +1 (345) 943 2645
E: [email protected]

Captive Management Initiatives

Captive Management Initiatives, Ltd., (CMI) is an independent, boutique captive management and consulting firm. CMI was created by one of the largest health care systems in the United States to address the specific captive needs of the health care industry. CMI provides a winning combination of superior day-today management services and strategic consulting services.

CMI is independent of any broker or agent affiliations. CMI’s mission is to serve for-profit and not-for-profit health care organizations, including faith-based providers. Its ownership structure enables CMI to focus on serving clients in a cost-efficient manner 

Grand Pavilion
APO PO BOX 10073
Grand Cayman KY1-1001
Cayman Islands

T. +1 (345) 943 2645
E: [email protected]