Captive insurance, while commonly used in industries outside of healthcare to manage risk in-house, is an opportunity for ASCs to insure their center while capitalizing on associated economic benefits.
As a self-funded or in-house type of risk management, captive insurance shields company leaders from high-intensity but low-frequency liabilities resulting in higher premiums than they purchased commercial insurance to cover. For ASCs, such risks could include earthquakes or cyber terrorism, among others. Instead of paying premiums for coverage to commercial insurers, business owners pay premiums to their in-house captive. Pre-defined risks are underwritten with the help of an outsourced actuarial team, and any reserves remaining in the captive are shielded from creditors and available for investment.
Captive insurance is not a new or unlawful form of risk management, Larry Anders, chairman and CEO at Dallas-based Summit Alliance Companies, said at the Becker's ASC 23rd Annual Meeting: The Business and Operations of ASCs. Rather, captive insurance is a strategy used by more than 90 percent of every Fortune 500 company and one ASCs should consider.
Here are three reasons why it is advantageous for ASCs to use captive insurance.
1. Captive insurance covers risk ASC owners may not think about. High-impact low-probability risks such as earthquakes are not common issues ASC leaders mull over. However, captive insurance allows an ASC to set aside funds in case unlikely risks surface.
Mr. Anders said one risk — cyber terrorism — is becoming more common. "As medical professionals, you're guarding very confidential information. If that information were to fall into the wrong hands, it could be disastrous not only for the patient but disastrous for you financially," he said.
2. There are tax incentives available under a captive insurance structure. While some ASC owners may wonder why they should be motivated to implement an in-house insurance captive, Kenneth Kotch, principal at Dallas-based tax services firm Ryan, said captive insurance should be seen as a gift from Congress to convert ordinary income to a qualified dividend.
Owning a self-funded captive insurance company could allow an ASC to receive tax benefits outlined in 831 (b) or small property and casualty captive IRS tax code. The code allows captive insurance companies to receive up to $1.2 million in tax free premiums per year.
While regulation requires the insurance captive to be in tact for a year and operate under federal insurance regulations, at the end of the year premiums put into the captive turn into surplus. If a company chooses to end the captive, business owners convert what would have otherwise been taxable income into surplus and take a tax deduction for it.
Mr. Kotch added that Congress is essentially giving businesses an incentive for "setting aside a rainy day fund that in the event there is a high-severity low-frequency event like HIV exposure among medical employees or litigation defense," companies are prepared.
3. Captive insurance is most efficient when supplementing commercial insurance. Mr. Kotch said captive insurance is effective when a company keeps its commercial insurance and uses the captive to augment or supplement commercial insurance.
"The captive is never designed to create more exposure," Mr. Kotch said.
In addition, Mr. Kotch said that while there is no regulatory minimum amount needed to establish a captive, the most cost effective amount begins at $250,000 or $300,000 paid each year in premium.
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