Alternatives to standard medical liability insurance companies
Five years ago in Virginia, orthopaedic surgeons and other high-risk specialists were in the midst of a medical liability insurance crisis. The Virginia legislature had raised the medical liability insurance cap from $1 million/$3 million to $2 million/$6 million. One major malpractice insurer was in bankruptcy and another had withdrawn from the state. The remaining insurers offered policies with annual increases of 20 percent to 30 percent.
The seven physicians in our group practice had a combined total of 75 years of claim-free care. But because we provided orthopaedic care for a major professional team, four out of the six insurers in the state would not cover us. We were paying $65,000 in annual premiums and looking at increases that would bring our premiums to more than $100,000 annually.
Given the state’s unfavorable climate for medical liability insurance for high-risk specialists, we clearly needed to make a significant change. We chose to establish a “captive” insurance company, and recently converted to a risk retention group (RRG). It’s a model that has worked for us, and may work for you as well.
Options in the medical liability market
The medical liability market is a mix of traditional insurers, provider-owned groups, and alternative risk transfer entities such as RRGs, reciprocal arrangements, purchasing groups, and captive insurance companies.
Most physicians who use traditional insurers send their medical liability premiums to the equivalent of a black hole. They mail the premiums off, but have little idea of what the insurance company is doing with the funds. Although the company may have a building, a claims staff, a toll-free number, and an overall balance sheet, there is little transparency regarding how the premium payments are invested and spent. Nor do physicians receive any explanation for the additional charges to cover physician assistants and other practice extenders, a professional corporation, or liability after retirement.
Conversely, physicians who use an RRG or establish a captive insurer have both a great deal of knowledge and control. Each of these two models enables the physician group to retain control of underwriting guidelines, rates, coverage, claims, and market (the size of the group). In both cases, the physician group controls participation, realizing that a few physicians may be responsible for a significant proportion of claims.
Risk retention groups
The federal government created the concept of RRGs under the Product Liability Risk Retention Act in 1981. The concept was amplified and clarified in 1986 with adoption of the Liability Risk Retention Act, which allowed risk retention groups to be established for all types of liability insurance, including medical liability insurance.
RRGs do not have to be licensed in every state in which they offer coverage. The owners and the insureds are the same people. This model enables the owners/insureds to control rates, coverage, defense costs, and risk management. Overhead is minimal; most of the premium is spent on reserves and reinsurance.
Captive insurance companies
Captive insurance companies are incorporated to insure the risks of their owners. Unlike an RRG, a captive company can operate only in the jurisdiction in which it is licensed and is subject to the licensing restrictions of that jurisdiction (state).
Few states (notably Nevada, South Carolina, Delaware, and Vermont) have traditionally been receptive to captive formation. The Cayman Islands, however, have always been receptive, with attractive regulatory structures, low regulatory costs, a high degree of expertise, and favorable tax structures. Recently, several states have reduced their regulatory costs to encourage offshore captives to relocate onshore.
RRGs and captive insurance companies have the following four advantages:
- Costs—Typically RRGs and captives operate with minimal overhead—no employees or buildings.
- Flexibility—The RRG or captive determines where and how premiums are spent and deposited. If reserves are sufficiently large, premiums can be reduced or eliminated. Additional flexibility in determining who is insured and what procedures are covered is also available.
- Claims management—Insurance company claims departments are not typically “user-friendly.” They operate slowly with minimal flexibility. With a captive insurance company, however, the insured works directly with an attorney to determine the most appropriate course in the event of a claim.
- Claims experience benefits—Captive companies usually retain a portion of the overall risk and reinsure the remainder. This ratio is determined by the owners, who also determine premium costs, the cost of tail coverage, and whether funds will be returned after retirement.
In the next article, I’ll share our successful story of establishing our own captive insurance company.
Thomas B. Fleeter, MD, of Town Center Orthopedic Associates in Reston, Va., is a member of the AAOS Medical Liability Committee. He can be reached at firstname.lastname@example.org