Self-insurance: What practices need to know

Pete Reilly: ©HUB International

In an era of high inflation, medical practices are seeing their overhead costs rise while reimbursement rates continue to decline. As physicians look for places to cut costs, insurance often becomes an obvious target. But what to do about it? Going without insurance is not wise, and there’s not always much price difference among insurers, depending on the type of coverage.

Self-insurance may be a possibility. By acting as your own insurance company, a practice can save money with minimal additional risk. But this type of undertaking is not for every practice and requires careful planning and execution.

Medical Economics spoke with Pete Reilly of HUB International to learn more about self-insurance.

(This transcript has been edited for length and clarity.)

Medical Economics: What is self-insurance and why would a medical practice want to use it?

Pete Reilly: Self-insurance is exactly what it sounds like: when an entity -- and in this case a physician or physician practice -- decides to essentially act as their own insurance company, or at least take on some degree of risk they would normally transfer to an insurance company. It is a financial decision as much as it is an actual risk-transfer decision. The main reason to do it is generally, when you have good losses, from a practice for any one of a number of coverages, you don't want to simply trade dollars with your insurance company. You can take a degree of self-retention or risk transfer to yourself in order to save money on the premium, because there's a reasonable suspicion you will not hit that threshold. You can essentially take the savings into your operational budget as opposed to simply paying a larger insurance premium.

Medical Economics: There are so many different types of insurance -- car insurance, property insurance malpractice insurance -- what exactly are you self-insuring?

Reilly: That will depend exactly on which coverage you buy. In the case of malpractice insurance, or medical professional liability, you are essentially saying as a practitioner, that in the event of a loss, you will pay up to a certain amount out of your own pocket. It may be as low as $5,000, $25,000, or into the millions depending on the size of the institution. Think of it as a deductible on steroids potentially, just as you would with your home or your auto insurance. But self-insurance can apply for your property, or your medical professional, cyber insurance to a certain degree, all the way through to employment practices. Almost any type of commercial or business insurance can have a self-insurance component to it. But even the types of self-insurance can vary wildly, and sometimes are not always in the best interest of an insured even though they think it may sound like it at first.

Medical Economics: What kind of savings are we looking at if you self-insure?

Reilly: Well, that is a direct correlation between how much self-insurance you will take, meaning how much you will pay out of your own pocket first and foremost, versus how much limit you're buying. As a general rule of thumb, and in this marketplace, as we sit starting the second quarter of 2024, for any self-insurance retention below $25,000, on most lines of coverage, isn't going to realize much in the way of premium savings, maybe a couple of percentage points. Once you begin to get north of say $100,000 or $250,000, now you're looking at premium savings over the course of an annual policy ranging anywhere from 10 to as high as 40%. That will depend on a number of factors: your loss history, what you do, where you do it -- but in certain instances can be meaningful in terms of the cash flow improvement. The downside is when you have to pay a claim, it's your money first.

Medical Economics: Do you need some sort of secondary insurance in the event of a catastrophic loss?

Reilly: You certainly should have. And when you say secondary insurance, generally the term you will hear in the commercial insurance market is excess or umbrella insurance. But if you think of a particular line of coverage, and again, let's talk medical professional liability, if you think you are exposed to a catastrophic loss, you might want to buy excess limits of liability, which will sit over and above your primary insurance, any self-insurance you may have, your primary insurance policy. There is a robust and healthy excess liability market, which you are talking of attachment points north of a million dollars each and the premiums for those start as low as $10,000 per million and go no place but up. It's something that should be examined carefully because you can over insure yourself. But again, that's a discussion that can be relatively easily determined through a discussion that should be had with your broker in order to determine if it's really necessary. But it is available, and it should be explored on an annual basis.

Medical Economics: Who are the best candidates for self-insurance?

Reilly: First and foremost, it's driven by your losses. If you have a very good loss history, and not just ones where you've paid out a claim, but instances where you have not been sued, or you don't have any claims against you, for a period of really at a minimum five years, but ideally 10 or more, there is no reason not to explore some component of self-insurance. Also, the larger the institution, and depending on the venues where you may practice, and add to that, that specialty in which you practice, the larger the premium dollars, the better the opportunity where you could benefit from self-insurance. For medical professional liability, but this can kind of apply across the board, anything less than $25,000, even $50,000, there's not going to be much immediate material savings. But if you get north of that, some self-insurance component is a worthwhile consideration.

Medical Economics: What are the steps to setting up a self-insurance program?

Reilly: It’s unlike a traditional renewal cycle, where sort of 90 days ahead of time you share information with your carrier, and hopefully anywhere from 15 to 30 days before the expiration, you have a new quote or quotes to consider. If you're going to go down the path of self-insurance, you need to add 30 to 60 days going back from the date of renewal. The first start is really twofold: your losses and your financial position. Because if you have good losses, that doesn't mean you won't have one in the coming years, you will then need some sort of financial stability, in order to pay that aspect of self-insurance that your medical practice or institution may be required to pay. So those are the first few things. And that should be taken into consideration not only by your insurance broker, legal counsel should be involved to make sure you're not running afoul of any regulations are contracts. I would start with an accountant to make sure you have a cash flow position based on your income over the course of a year. That's really the first step. After that, assuming things work, your broker, your insurance carrier, or anyone one of a number of folks can help model for you what that should look like. And this is all before you even go to the insurance marketplace. That's why you need to build in an extra 30 to 60 days. But it is not a quick nor should it be considered an easy decision. I can make the numbers work out if I really want to, but it needs to be a dialogue for you as the provider to decide, yes, I am comfortable taking this on. That is also true if you want to do it with your homeowners or with your property insurance -- anything where if and when the bill comes due for an insurance claim, you're the first payer. And so that process really does need to start probably six months before the renewal and start with your losses your financial consideration. Self-insurance is not something to be considered or just taken lightly; you're not taking a deductible from $500 to $1,000. This is your intent to get into the risk-bearing risk-transfer business even if it's only for yourself.

Medical Economics: Is this something that's regulated through the state like other insurance programs might be? Or what kind of regulations are we looking at here?

Reilly: Most commercial insurance is regulated by state. So whatever jurisdiction where your medical license for practice may exist, that's the regulations you need to consider. If you're just taking a self-insurance stake, say taking a $250,000 self-insurance on a medical professional liability policy, that doesn't require approval, except maybe by contract with a payor, or with a hospital where you have privileges. If you're going to go down the road of some sort of captive insurance company, be it a sell captive, single cell captive, those are heavily regulated, depending on the jurisdiction where you set them up. The ones everybody likes to talk about are Bermuda or the Cayman Islands or something like that, but there's so much growth within the US at the moment. That can be done in Vermont, South Carolina, Delaware, Utah, Arizona, those are the rules and regulations. And that's where the state will have to sign off on something like that. If you go down that road, the answer to this question is one that I could fill with several pages. If you're truly getting into a captive, it is highly regulated, but if you're just self-insuring, it’s not nearly as much.

Medical Economics: Once created, can a self-insurance program be terminated? Can you just go back to the regular insurance market? And why might you want to end a program that has started?

Reilly: Too often, I don't think that question is considered at the outset. Yes, you can end a self-insurance program whenever you want and go back to first dollar coverage in almost every instance that I can think of. However, that does not end the liabilities that were incurred during that period of self-insurance. So, you may be required by an insurance company to have collateral available to them should you not be able to pay those prior losses and the incurred-but-not-reported instances that may take place. And in the case of captives or some sort of alternative risk financial structure, those are more difficult to unwind over time. The jurisdiction where you set up that type of self-insurance vehicle, they will not let you shut it down until they are convinced all the liabilities have been paid. The reason people often don't think about it is everybody likes the idea of all the cash flow savings upfront. But sometimes things go wrong. And the need then to unwind old liabilities is often outside of the control of the practitioner or even the claims people who are helping resolve matters. So those can take years. There are a handful of vehicles to try to close them down more quickly. It most certainly can be done, and in some instances, it's very simple. But for far more cases, it does take several years to do so just because medical professional claims and many others are a long tail type of exposure.

Medical Economics: There are a lot of complicated issues with self-insurance and this doesn't sound like something you can watch a YouTube video to teach yourself how to do it. This sounds like you're going to probably need some professional guidance to get through this process.

Reilly: Yes, it is something that requires guidance, particularly as you go into something like captives or cell captives or anything like that. At a minimum, any self-insurance of any kind should be discussed with legal and accounting, because this is a financial transaction, and you are getting into the insurance business, essentially. And you want to be sure you understand the financial implications. Insurance companies and insurance brokers and other intermediaries can be valuable to help give you the counsel and advice of what the process looks like, what the pitfalls may be. But I would strongly, strongly recommend that this is not something you decide to flip the switch and just say, oh, I want to be self-insured now, or even take a large retention. It should be modelled, evaluated, and you can do some stress testing on your ideas before you implement it. Because once you get on that path, the plaintiffs bar does not particularly care where the money comes from, they just know they're going to come look for their money.

Medical Economics: What else do medical practices need to know about self-insurance?

Reilly: Self-insurance is a very good tool in the midst of an environment where there are currently lots of headwinds from social inflation. Insurance companies, while their results have been better as of late, are still dealing with some long-tail issues, especially in the medical professional liability community. If this is something that you want to do, research should be done. And it needs to be done over time. There are other service providers you will suddenly need to engage. You will need potentially a captive manager, a third-party claims administrator, you will need to have third-party accountant who can make sure the state insurance rules are followed. The process should not be undertaken lightly. And even if you haven't had claims for four or five years, and you may think I'm a great candidate for this, you should speak to a professional. There are a number of captive managers and captive advisors who can help you understand that space much more clearly.

It is a wonderful tool. Many do not go there for the fear of it's complicated, but it is worth exploring. The only other caveat I would list here is if you're thinking of ultimately selling to a private equity firm or some other buyer down the road, be it even just joining a much larger practice, self-insurance sometimes becomes a challenge as to how you will deal with that issue. Because while you can buy tail insurance, that gets to be very much an actuarial modeling exercise. So don't forget, if you go down this path, having an exit strategy is as important as having an insurance strategy.

Medical Economics: Is there a way to sort of dip your toe in the water with something simpler? Like is property insurance simpler than malpractice insurance? Is there a way to see if this is right for you in a simpler manner?

Reilly: I think the simplest way would be to take ever increasing deductibles. If you're a first-dollar buyer, go to a $5,000 deductible or $10,000 or $25,000. If that causes you consternation or discomfort, you don't want to go self-insured. Property is a good way to start by using that for deductibles because policies for property are done on a year-to-year basis. There aren't the same tails. And you can do that with any one of a number of policies -- cyber liability, workers compensation. I wouldn't do it so much with auto, as that's a whole different discussion. But you mentioned a property and that’s is a good one. I think the easiest or the most direct answer to your question is raise your deductible a couple of times and see how you feel when you have to write a check. And if that's really of discomfort to you or causing you to stay up at night, then you probably don't want to explore self-insurance at all.