7 benefits for ASCs of forming a healthcare captive insurance company

Captive insurance is an exciting new concept in the healthcare industry.

Essentially a type of self-insurance, business owner's form privately owned captive insurance companies to protect themselves from the risks associated with business ownership. Rather than pay insurance premiums for a policy to third-party insurers, premiums are paid to the captive. Pre-defined risks are underwritten with the assistance of a third-party actuarial team. Any reserves realized from unpaid claims remain an asset of the captive, protected from creditors of the business and available for investment or disbursement to the captive owners.

Captive insurance companies, while common in other industries, are frequently overlooked in healthcare and the ASC industry as a strategic initiative. A primary reason: The benefits are often not clearly explained. When business owners gain a better understanding of captive insurance companies, the economic advantages of establishing a captive program become readily apparent.

Here are seven of the benefits associated with forming a healthcare captive insurance company.

1. Ownership and control. Captive insurance companies are completely controlled by their owners. This includes all stock, investments and bank accounts. Owners can regularly assess and adjust risk by deciding which to retain with the captive and which to transfer to reinsurance markets.

Control over losses also improves by providing owners with the resources to categorize, measure and manage these costs while maintaining accurate financial projections.

2. Asset protection. Business owners are often litigation targets. By forming a captive insurance company, owners are protected against risk from creditors, business debts, attorneys and litigation. Furthermore, only owners of the captive are able to file an insurance claim.

3. Insurance coverage flexibility. Captive insurance companies can obtain insurance coverage for operating risks not routinely covered by traditional insurance policies. Owners can tailor policies to only insure risks they are willing to accept and obtain access to the reinsurance markets that may have a greater ability and willingness to handle such risks.

By liberating businesses from the fluctuating market cycles of commercial insurance companies, captive insurance companies provide better availability, stability and affordability on a wide range of commercial coverage options.

4. Reduced insurance costs. Savings from insurance cost reductions and profits routinely earned by third-party insurers are controlled by the captive. Captive insurance companies have the flexibility to adapt to changes in the pricing structure of the commercial insurance market and changes in the company's business, risk tolerance, cash flow, etc.

Direct access to reinsurance provides benefits such as increased potential capacity, lower pricing, coverage benefits and reduced exclusions, and allows the captive to limit its economic exposure.

5. Favorable tax treatment. 831(b) of the Internal Revenue Service code permits captive insurance companies to receive a certain amount of annual insurance premiums completely income tax free. Tax savings start immediately and allow for flexible participation. Annual insurance premiums paid to the captive are fully deductible by the payer as "ordinary and reasonable business expenses," pursuant to Internal Revenue Code section 162(a). The business owner decides when, how much and for how long the existing businesses will pay premiums to the captive.

There are no restrictions regarding the amount of time a captive insurance company is in operation.

6. Improved cash flow. With a captive insurance company, the business can retain insurance premium dollars and profits within the business enterprise. This increases investment income on its unpaid loss reserves, capital and surplus.

Control over losses also improves by providing owners with the resources to categorize, measure and manage these costs while maintaining accurate financial projections.

7. Wealth accumulation and preservation. Profits from premiums paid are retained by the captive for reinvestment or disbursement.

Jeff Blankinship is co-founder of Surgical Captive, a new firm focused on developing and administering turnkey captive insurance companies for ambulatory surgery centers, surgical hospitals, and other healthcare organizations. Surgical Captive provides solutions that allow its clients to protect their assets, save money, enhance cash flow, and benefit from customized insurance policies through the establishment of captive insurance companies. Learn more at www.surgicalcaptive.com.

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