Physician Captive Advantage

 

 

The advent of forming a physician-owned medical liability captive brought about fear, apprehension, and anxiety unlike many business opportunities MaternOhio Management Services (MOMS) had seen before.  It also brought the excitement of change.  The physician leadership who started Oasis Mutual Assurance, SPC (Oasis), was fully aware that the captive was an insurance company that was insuring exclusively their medical liability.  They were also aware of what  the meaning of “off-shore” meant, and that a business in the Cayman Islands was not a dangerous or deviant thing.  They were perceptive to the fact that they were assuming complete risk on the performance of the captive and there was a possibility, however remote, that the captive could fail with their personal name and money at stake. 

 

Physician captives were not new.  Previous “hard” markets had perpetuated various forms of self-insurance as a result of the rising cost of insurance being more expensive to buy than to make.  Each decade since the 1970’s has seen the creation of medical liability captives as a result of price changes and market availability of commercial insurance.  Many of these physician founders have lead the way for modern efforts by establishing mature management of captives, legal advice, banking, and other professions that in the formative days were quite ad hoc, but in today’s captive environment, the processes are virtually formulaic.

 

Anecdotally we owe the formation of captives in Grand Cayman to the physicians at Harvard Medical School.  In the 1970’s, as a result of the rising costs of medical liability, the physicians at this program traveled to Bermuda to determine if they could simply insure the malpractice risk of the physician group and nothing more (hence the term, captive).  Although captives for other insurance risks, such as property, had been around for some time, the thought of a physician malpractice captive in Bermuda was a bit much for this island’s taste back then and the doctors retreated to a brand-new venue, Grand Cayman.  The rest is history and subsequently this has become healthcare’s biggest captive domicile.

 

At the birth of Oasis, the physicians of MOMS had been in business together as a management company since 1997.  They had successfully created a co-operative for independent OB/Gyn specialists that included billing, management, information technology, and purchasing for over 150 doctors throughout Ohio.   As a risk-purchasing organization, MaternOhio was able to organize, administer, and improve the buying of medical liability coverage for most of its doctors.  The organization provided a viable retail product at a significant discount to its members and also created the preliminary criteria for quality, clinical algorithms, and physician participation in the risk transfer process.

 

The hardening market of 2001-2005 allowed MaternOhio to view captive formation as a viable alternative.  The organization was fortunate enough to have affiliations with brokers, attorneys, and consultants who had extensive experience in captive formation.  There were also a number of less tangible, but highly crucial, elements that directed the formation of Oasis.  The presence of strong physician leadership was the catalyst.  This presence of active doctors, complimented with five years of collaborative buying of medical liability coverage, allowed something, that is highly speculative to most physicians, to occur systematically and with a disciplined business process.  The captive was formed in May, 2003.

 

The captive was created in Grand Cayman as a result of both direction (and bias) from consultants and the realization that other healthcare structures had been long-entrenched in this domicile.  There was comfort in the thought that major hospital systems, large physician organizations, and successful publicly-traded companies had established a bona fide business presence as part of their risk management process.  However, there were not that many “physician management companies” to cross reference.  Having the a number of healthcare organizations in this business venue, many of them over thirty years, provided some degree of comfort in that this was not some variation of the book The Firm and that doing business in this location required all an American program would require if not more.

 

Oasis had every reason to fail.  It was created from a loose cooperative and not a highly-structured organization with advanced management.  It was small.  The initial participation in the captive was only 46 physicians which accounted for less than $3 Million in annual premium at the time.  These traits were further confounded by the Obstetrics and Gynecology specialty, one of the most highly sued groups of specialists in a state where there were high incidents of litigation regardless of specialty.  Needless to say, it was an actuarial nightmare.  These external variables were butting up against internal data that reflected a highly successful, from a medical liability standpoint, group of physicians.  Their combined loss ratio from 1992-2001 was less than 60% in a market that was averaging 105-120%.  However, as most parties who are experienced in risk transfer and actuaries know external market data prevails for many years over individual performance.  Initially, Oasis struggled to fully subscribe reinsurance.

 

The distinction that the captive looked to make was the introduction of a risk management process and quality control methods that provided better loss projections than the presence of increasingly larger numbers of insureds.  With only 46 physicians in its initial phase, it was imperative that the physicians not only continue to maintain their inherent clinical quality, but that they establish a number of risk-mitigation tools to further enhance the outcome of the frequency and severity of claims.  Oasis looked at different arenas where either communication or clinical pathways were compromised and set up pragmatic standards to improve projected losses Oasis required (and continues to require) its insureds to follow a number of requirements as a condition of coverage:

  • Provide patients with advocacy information
  • Introduction of a mediation agreement for all patients
  • Completion of an incident reporting form based on specific events in the specialty of OB/Gyn
  • Adherence to ACOG guidelines with regional enhancements
  • Engage physician insureds with “on-call” attorney and risk manager
  • Assure the continuation of strong physician governance that embraces:
    • Claims Management
    • Quality Assurance and Clinical Controls
    • Finance, Funding, and Investment
    • Captive Governance and Domicile Compliance

 

As a result of these programs and the subsequent high level of compliance, the current combined loss ratio for the organization is below 25%.  There are a number of additional variables that impact results that are not as definable.  The fact that the physicians are sharing risk at the core level and that it involves both clinical oversight and fiscal well-being, the phenomenon of the Hawthorne Effect (Initial improvement in a process caused by the obtrusive observation of that process) and the “Skin in the Game” rationale invokes a higher level of physician participation in governance of the captive.

 

As Oasis enters its fourth year, there are a number of perspectives and ideas that have begun to prevail.  Today, it has an oversubscription of reinsurance and continues to provide a return for its investors.  Globally, any viable physician organization needs to enter into discussions of risk management and risk transfer using the captive as the vehicle.  It offers security and control at the visceral level.  The message to physician participants is clear; the captive is being formed for the sole purpose of securing medical liability coverage in the event of a malpractice claim.  However, as the entity matures, it is critical that Oasis offer more than just an over-funded receptacle of fear.  The captive leadership needs to ask fundamental questions of how Oasis can provide the following:

1.                  A method to continually improve the risk management and clinical care process.  Does it make sense, for example, for the captive to assist its participants to make investments in electronic medical records (EMR) in order to create greater continuity within the risk bearing organization?

2.                  A mechanism for MaternOhio, a leader and developer for Pay for Quality programs in OB/Gyn, to correlate the results of managed care quality with medical liability quality

3.                  A structure, much like the co-operative, that can be achieved at the segregated portfolio level, where separate independent organizations can share successful infrastructure, costs, and risk management tools

4.                  A program that embraces high-quality physicians within their specialty to continually improve upon risk management and then assess  the real value of risk transfer

5.                  The captive as a recruiting tool for physicians who seek independence from the employment model of healthcare

6.                  A continuing means to educate it’s members with the newest clinical literature, patient care algorithms, drug interactions, and other necessary criteria that is often abandon after residency

 

Oasis has had the advantage of putting itself in a position of forward thinking by staying true to the basic premise of why a captive was formed. Security, stability, and good governance; from those roots, bigger things can perpetuate themselves.

 

Michael E. D’Eramo, MHA, FACMPE

CEO MaternOhio Management, Inc.

mderamo@maternohio.com

November, 2006