The Patient Protection and Affordable Care Act is changing the landscape of risk for doctors and hospitals, said John Lochner, a director at Towers Watson and leader of the captive initiative at the firm.
As companies prepare to implement the Affordable Care Act, Lochner described several trends that he sees potentially impacting the captive industry. He spoke with Best's News Service at the recent Vermont Captive Insurance Association conference in Burlington, Vt.
Q: There's a lot of interest in the Affordable Care Act. How is that going to impact the health care provider community?
A: Well, we're currently seeing two major trends in the health care provider community. First is the accelerating trend of physicians seeking employment by hospitals. We're seeing first-time physicians opting in favor of the employment model, going to become hospital employees in lieu of forming their own practices or joining small practices.
We're also seeing those existing physicians that are part of practices seeking to become part of hospitals or health care systems and going about that by selling their practices.
Separately, the other major trend that we're seeing is consolidation within the health care provider field really in two areas. First off, on the hospital and health care system side, we're seeing significant merger and acquisition activity ranging from a hospital, a health care system, acquiring a hospital or two at a time ranging to the other side of the spectrum where major health care systems are joining forces with and merging with other large health care systems creating megasystems.
And then, back to the physician practice side, we're seeing those physician practices that still seek some level of independence from hospitals electing to band together and create larger physician groups.
Q: How is that impacting the captive industry?
A: Well, as a result of these two major trends, we're really seeing rather exciting times in captive circles today. Many issues that would be or current captive owners are facing...On the physician employment side, what we're seeing there is that, first and foremost, the major issue that's facing a lot of physicians that are seeking employment, especially existing physicians, is, "What are you going to do with my prior acts or tail liability exposure?"
Those organizations that have captives are in a unique position where they can use that funding vehicle, should they choose to, to actually offer a solution and allow the individual physician to, in effect, buy out their tail exposure there.
We're also seeing hospitals, as they grow their ranks, having to deal with possibly different reinsurance program structures given the increase in hospital-based exposure. Favorably, we are seeing that bringing more physicians into the fold and being able to put them under a common risk management framework...We're seeing positive efforts in that regard with the expectation that losses will improve.
And then, for those hospitals that have formed captives or are thinking of forming captive...Maybe to separately seek to insure non-employed physicians. We're having those clients reconsider that. Does it make sense, given the trend towards employing physicians? Does it make sense to pursue a captive or if we domiciled it, say, offshore because of the third-party business, does that domicile remain appropriate?
Back on the health care provider consolidation front, what we're seeing there is that health care systems are bringing in, buying some, say, community hospitals that, perhaps for them, this is the first go around at self insurance or participation in captives so there's some education regarding that.
Separately, at the megasystem level, we're finding that some of our clients find themselves with two or more captives so they're asking themselves the questions, "Do we need two or more captives? Which domicile do we want to be in?"
Perhaps having to separately reconcile philosophical funding and reserving differences. Some take the more traditional approach of high capital, relatively stable premium levels. Others go the opposite way of low capital, retrospectively rated. So really trying to reconcile how's the go-forward organization going to handle those exposures.
And then, lastly, back to the physician's practice side. Again, for those that are seeking some level of independence but getting bigger, they are now finding themselves to be worthy size-wise in terms of considering a captive and are forming those to help lower their long-term cost of risk, as well as being a recruitment tool to attract new physicians and help them deal with their tail exposure.
Q: What are you seeing in terms of the medical stop-loss captives coming out as a result of the Affordable Care Act?
A: We're seeing things from two different perspectives. Hospitals are in a unique position where they're approaching it both from the buyer and the would-be seller perspective. As the buyer, really an employer with their own employee base, they have decisions to make in terms of how they go about offering health insurance to their associates and, as a result, some are considering as part of a self-insurance program for health insurance...That they are considering should they go out to the commercial market to buy stop-loss protection or no, should they instead keep the risk in house but use their captive separately?
This is probably a growing trend from the seller vantage point. Already today some hospitals, health care systems, have within their system a health plan. We expect to see that trend to actually increase as a result of ACA. We expect more to consider offering health plans and with that, then, they...As they look at their employer insurance, the third parties to whom they'll offer health insurance. We expect them to go through some of that same thought process in terms of, "As a health plan, do we lay that risk off to the commercial market? Or no, should we instead put that into our captive?"
And so again, from a seller and buyer perspective, a lot of different, interesting opportunities there.