Captive Opportunities for Healthcare Organizations

Transcription

1 Captive Opportunities for Healthcare Organizations White Paper Aligning Strategy To Manage Risk

2 TABLE OF CONTENTS ABOUT SPRING... 2 INTRODUCTION... 3 OPPORTUNITIES FOR HEALTHCARE CAPTIVES... 3 ACCOUNTABLE CARE ORGANIZATIONS (ACOS) AND CAPTIVES... 3 EMPLOYEE BENEFITS AND CAPTIVES... 4 INTEGRATING EMPLOYEE BENEFITS PROGRAMS... 5 STRUCTURED SETTLEMENTS... 5 CHARITABLE LIFE DONATIONS... 5 TAX ISSUES... 5 APPENDIX... 6 CASE STUDY 1: FUNDING EMPLOYEE BENEFITS IN A CAPTIVE... 6 CASE STUDY 2: ENHANCING A HEALTHCARE CAPTIVE... 7 CASE STUDY 3: FINANCIAL BENEFITS OF USING A CAPTIVE Copyright Spring 2011

3 ABOUT SPRING Spring is an insurance and financial services firm with expertise in a wide range of insurance and risk management disciplines. Captive insurance strategies for employee benefits and property & casualty risks comprise our core competencies, enhanced by best-in-class employee benefits brokerage and wealth management expertise. We partner with clients across the globe to identify and resolve unique challenges that they encounter on a daily basis. Spring s employee benefits and captive insurance experience and expertise are exemplified by the fact that we have consulted with roughly 50% of the Prohibited Transaction Exemptions (PTE) granted by the U.S. Department of Labor (DOL) to allow organizations to reinsure their employee benefits in their captives. In 2000, Spring s partners were instrumental in gaining DOL approval for the first pure captive transaction for funding employee benefits. As a result, Columbia Energy (now NiSource) was granted approval to place their group disability insurance program into their captive. Since then, Spring has received DOL approval for a number of other firms including, but not limited to, AGL Resources, Banner Health, Memorial Sloan-Kettering Cancer Center, Subaru and United Technologies Corporation for funding various health and welfare employee benefit programs in a captive. CONTACT INFORMATION Spring Consulting Group LLC, 84 State Street, Suite 500, Boston, MA Phone: (617) ; Fax: (617) John Cassell, Senior Partner, Employee Benefits John.Cassell@springgroup.com Phone: ; ext 103 Teri Weber, Partner, Employee Benefits Teri.Weber@springgroup.com Phone: ; ext 113 Michael Clark, Consultant, Employee Benefits Michael.Clark@springgroup.com Phone: ; ext Copyright Spring 2011

4 INTRODUCTION The healthcare industry is under more economic and social pressure now than it has experienced in the last couple decade. The issues it faces are enormous, from unfavorable demographic trends and a fractured global economy to a stasis in health reform, as well as the internet fuelling increased consumer health expectations. In this environment, healthcare organizations, as a baseline, must understand and manage their changing risk structure and operate with extraordinary efficiency to survive. In addition, healthcare purchasers demand transparent performance data and benchmarking, leaving the competitively weak clearly identified. This white paper describes a number of financial measures you can consider to stay ahead in employee satisfaction and risk management. Future editions will describe other tools to keep you ahead of the game. OPPORTUNITIES FOR HEALTHCARE CAPTIVES ACCOUNTABLE CARE ORGANIZATIONS (ACOS) AND CAPTIVES The Patient Protection and Affordable Care Act (PPACA) has given rise to a new framework, the Accountable Care Organization (ACO), for containing the costs of Medicare plans. ACOs will deliver top quality healthcare within a per-capita cost limit for the Medicare population to align Medicare payments with provider costs through a partnership of employers, providers, and health insurers. The focus is on risk, quality, and safety management, and providing a full continuum of primary, inpatient, and acute care services for registered patients, moving from a sickness to a health model. This will move care to a value based versus volume based purchasing model. Section 3022 of PPACA establishes a Medicare Shared Savings Programs (SSP) by January 1, 2012 to work with ACOs to: Promote accountability for patient population Encourage investment in infrastructure Increase quality and efficiency of service delivery through redesigned care processes Coordinate services under Medicare part A and B Reward ACOs if their overall costs per registered patient are less than average Medicare beneficiary in the geographic area in a given year (ACOs must meet 33 quality performance standards in four domains to receive payments or shared savings) ACOs will allow providers of services to work together to manage and coordinate care for previous Medicare fee-for-service beneficiaries. There are many benefits to this including potentially creating 3 Copyright Spring 2011

5 more efficient healthcare delivery, reduced utilization and costs, and better quality of care for patients. Cost reductions for Medicare plans will be possible through: Better communication among providers and patients Less duplication of efforts More preventative services An integrated set of resources to replace the current fragmented set of resources focused on caring for the sick Linking Medicare payments directly to efficiency of provider As a result of creating an ACO, healthcare organizations will be met with several challenges: Accountability for quality and cost of beneficiaries care Capacity for no fewer than 5,000 Medicare beneficiaries Concern over revenue reduction and shift of risk to providers (get back what was given up) Increased financial medical risk associated with population could create adverse selection Potentially increased medical malpractice risk Possible increase in unrelated business income tax (UBIT) to be considered when structuring the ACO Many healthcare organizations are looking to establish and bear risk as Accountable Care Organizations (ACOs) that function as insurers, captives or risk retention groups (RRGs). This would allow providers to share in cost savings generated by ACO s per-capita costs limit assuming per-capita costs do not exceed the cap. If a captive is used, it would also be responsible for the equitable distribution of savings to the ACO s captive parent (the providers), and would also help manage the financial risk created by ACOs. A captive structure can also provide controls to reduce medical error and support a single focus. EMPLOYEE BENEFITS AND CAPTIVES For most companies, employee benefit programs represent a significant financial investment. As every human resources director knows, the costs of employee benefits, health insurance in particular, have dramatically increased over the last decade. Employee benefit costs can comprise as much as 40% of a company s total payroll. As a result, many employers have been looking for alternative funding solutions for their employee benefit programs, specifically, life, disability, retiree medical and pension programs. Captives can provide effective, longterm solutions to the rising cost of funding the variety of employee benefits, including pension and retiree medical obligations. Funding employee benefits in captives helps to control and potentially reduce the year to year increase in healthcare premiums. Additionally, funding employee benefits in a captive can qualify as third-party 4 Copyright Spring 2011

6 business and if the parent is taxable, it can deduct property & casualty premiums that are traditionally paid to the captive. Depending on line of coverage and the organization s program experience, savings typically range between 5% - 30% per line of business. There are several other advantages to funding employee benefits in a captive, including recapture of trapped assets, increased control, improved risk management, enhancement of a previously established captive, and the potential opportunity for the organization to recapture underwriting income and to eliminate commissions. INTEGRATING EMPLOYEE BENEFITS PROGRAMS Several organizations have aligned employee benefit programs with other insurance risks to create a streamlined and integrated process, which helps them achieve cost savings, provides a positive impact on workforce health and productivity, as well as increases employees engagement on a daily basis. Providing Return to Work (RTW) programs, allows organizations to reduce costs on employee benefit programs while maintaining a healthy working environment. STRUCTURED SETTLEMENTS While working with a structure settlement carrier(s) and utilizing the organization s captive insurance company, a solution has been developed that will save the parent company money while reducing dependence on traditional coverage. By partnering with insurance companies, organizations can obtain captive fronting for structured settlements resulting from various litigation settlements to get a 1% - 4% reduced rate. Organizations can continue to update their structured settlements in order to obtain the lowest net present value cost, lowest frictional costs, and lowest implied interest charge. CHARITABLE LIFE DONATIONS Charitable healthcare organizations often receive gifts of life insurance which do not provide an immediate benefit to the institution and only pay upon the death of the donor, which can be decades later. However, if these policies are written through a captive insurer, this could allow the healthcare organization to make use of money prior to death of the insured. Additionally, organizations looking to use other life insurance structures in their captive can develop other alternative funding arrangements for group life, key man insurance and deferred compensation SERPs. TAX ISSUES One major example of the different considerations that healthcare organizations need to be aware of is whether or not the entity is for-profit vs. non-profit tax issues. Healthcare organizations that have captives are faced with different tax issues than most for-profit captives. Non-profit entities that own captives need to be concerned that unrelated business income tax when aggregated with the parent company needs to be under 10% of the total income. 5 Copyright Spring 2011

7 APPENDIX CASE STUDY 1: FUNDING EMPLOYEE BENEFITS IN A CAPTIVE A healthcare organization with 10,000 employees wanted to implement captive funding for some of their employee benefits without too much change or impact on their current processes. Challenges The organization wanted to expand the use of their Vermont captive to fund long-term disability and group life/ad&d coverage to reduce the overall costs of risk and enhance the cash flows to the parent company. Additional objectives included improving operational performance of their benefits programs through integration of coverage from both a funding and process perspective, as well as building up captive assets for a better return on investment. The client wanted to use its existing carriers in order to minimize any impact on human resources. Moreover, the client considered the impact on existing carrier relationships, renewal dates, and employee processes. They have also acknowledged that their human resources department had a number of program initiatives underway. Process Spring conducted a feasibility study to determine if the objectives could be met. Working closely with human resources and risk management, Spring helped structure the program and obtain DOL and captive domicile approval. We were able to implement the new structure with existing carriers within a six month time frame, thus minimizing any disruptions to existing relationships. Spring s Solutions After determining that funding long-term disability and group life coverage in a captive would meet their objectives, Spring transitioned the existing carriers from fully insured to fronted contracts, and confirmed that the claims and operational process for human resources and employees did not change. Additionally, we negotiated program savings that would eventually be passed on to employees, leading to a savings in the HR budget, while creating comprehensive financial reports to better manage the program. Results The savings as compared to the fully insured arrangements were over $7 million in the first year. The organization was able to maintain the same operational and claims processes for human resources and employees, but with improved information flow resulting from the new reporting formats. 6 Copyright Spring 2011

8 CASE STUDY 2: ENHANCING A HEALTHCARE CAPTIVE A non-profit multi-state health system with 35,000 employees, wanted to conduct a feasibility study to determine if captive funding could: Generate savings on employee benefit costs Improve operational performance Increase cash flow Maintain current level of coverage and see benefit enhancements where appropriate Improve employee participation Process Spring assessed basic life, supplemental life (including spouse and dependent child coverage) and longterm disability, and identified fully insured basic life and supplemental life as potential candidates for captive funding (estimated $1.0 million in savings). Long-term disability was eliminated as a candidate due to current funding and the non-profit status of the company. Spring s Solutions Spring proposed using a fronting company arrangement to reinsure benefits in the captive. We helped the company select a fronting insurance company recognized for outstanding plan implementation and administration. It was recommended to go out to bid to find a new plan provider as the current carrier was not a fit and it would be ideal to have all benefits under one carrier. Spring then worked with the company to establish a captive branch (on-shore required for employee benefits) and file with the DOL for tentative and then final approval. Results The first-year projected savings were $500,000. Life insurance claim payments timing improved from 1 month to 3-5 days, there was a significant decrease in bureaucracy, and the company was able to be more responsive to clients requests. Additionally, employee participation increased by 8.5%. Benefit enhancements included: Doubled life coverage for spouses and children Enhanced accelerated health benefit Added beneficiary counseling, legal services (including will preparation) and travel assistance for emergency medical needs 7 Copyright Spring 2011

9 CASE STUDY 3: FINANCIAL BENEFITS OF USING A CAPTIVE A group of 25 Massachusetts employers with approximately 9,000 total employees was spending $110 million per annum on health insurance. Spring conducted research to determine the best way to save the group money on their health insurance. Spring s research determined that funding their employee benefits in a captive would yield significant savings. Spring is currently working with the group to decide whether or not to fund their health insurance through a captive. By funding their health insurance through a captive, the group would save over $6 million in 2011, and their 5 year net present value savings would be over $30 million. Additional potential savings include better health management, reduced reinsurance costs, and further savings on administration. 8 Copyright Spring 2011