Healthcare Captives Dealing with the "New Normal" in Healthcare

1. Healthcare Captives Dealing with the "New Normal" in Healthcare William M. Cassetta IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

2. 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.

3. Healthcare Captives – The New Normal In the “new normal”, institutional health care will focus on “population health management”.

4. Healthcare Captives – The New Normal Healthcare captives were formed primarily to help manage medical professional liability risk.

5. Healthcare Captives – The New Normal In the “new normal”, captives will be challenged to help manage financial risk that extends far beyond medical professional liability.

6. Healthcare Captives – The New Normal • 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”?

7. HEALTHCARE CAPTIVES – THE NEW NORMAL • 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

8. HEALTHCARE CAPTIVES – THE NEW NORMAL • 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?

9. HEALTHCARE CAPTIVES – THE NEW NORMAL • 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

10. HEALTHCARE CAPTIVES – THE NEW NORMAL • 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

11. HEALTHCARE CAPTIVES – THE NEW NORMAL • 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

12. HEALTHCARE CAPTIVES – THE NEW NORMAL IT WON’T BE EASY, BUT IT WILL BE INTERESTING!

14. Healthcare Captives –Dealing with the “New Normal” in Healthcare Tom Hermes Director - Towers Watson IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

15. 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

16. 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

17. 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

18. 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

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

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

21. 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

22. 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

23. 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

24. 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

25. 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

26. Healthcare Captives –Dealing with the “New Normal” in Healthcare Shulamith Klein, Chief Risk Officer Emory University – Emory Healthcare IMAC 2013 Pre-Forum Tutorial Grand Cayman December 3, 2013

27. 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

28. 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

29. Conservative in purpose,broad in scope excess reinsurance (commercial) $3mm/$3mm buffer layer (captive) $3mm/claim (captive) • 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

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

31. 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

32. 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

33. New normal #1“clinically integrated network” New World Old World • 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

34. New normal #2“prior acts coverage” New World Old World • 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)

35. New normal #3“collaborative physician insurer relationships” New World Old World • 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

36. An enlightened liability program excess reinsurance (commercial) $3mm/$3mm buffer layer (captive) $3mm/claim (captive) • 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

37. 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

38. A team working together… INSURANCE BROKER INSURANCE BROKER EMORY HEALTHCARE LEGAL COUNSEL ACTUARY LEGAL COUNSEL ACTUARY INVESTMENT MANAGER COMMERCIAL INSURER INVESTMENT MANAGER COMMERCIAL INSURER FUND CUSTODIAN FUND CUSTODIAN AUDITOR FUND CUSTODIAN AUDITOR CAPTIVE MANAGER CAPTIVE MANAGER