The Potential of Captive Medical Liability Insurance Carriers and Damage Caps for Medical...

Electronic copy available at: http://ssrn.com/abstract=2121449

Robert H. McKinney School of Law Legal Studies Research Paper No. 2012 - 22

The Potential of Captive Medical Liability Insurance Carriers and Damage Caps for Medical Malpractice Reform

Eleanor D. Kinney

Electronic copy available at: http://ssrn.com/abstract=2121449Electronic copy available at: http://ssrn.com/abstract=2121449

KINNEY FINAL (DO NOT DELETE) 3/31/2012 11:29 AM

489

The Potential of Captive Medical Liability Insurance Carriers and Damage Caps for

Real Malpractice Reform

ELEANOR D. KINNEY

ABSTRACT

Medical malpractice continues to be a contentious health policy issue particularly from the perspective of physicians and patients. The medical malpractice insurance market as a whole has changed considerably since the mid-1970s, with widely fluctuating premium prices and crises in the availability and affordability of medical malpractice insurance. More recently, hospitals and physicians have increasingly chosen to self-insure through a variety of vehicles including captive insurance companies.

This Article suggests that two existing strategies can be intentionally designed and coordinated to facilitate the fair and expeditious resolution of medical malpractice claims. Specifically, captive insurance companies operating in states with damage caps can work more effectively with healthcare providers to resolve identified malpractice claims, and they can identify and compensate medical injury where claims are not pressed. This knowledge establishes space for the providers and the captive insurers to settle claims expeditiously and fairly. The space also enables the providers and the captive insurers to go further and express apologies to patients who have been injured in the care process. However, the National Practitioner Data Bank under the Health Care Quality Improvement Act of 1986 poses challenges for physicians in participating in captives. This article explores how captives can be structured and barriers addressed to mitigate the problems for physicians and to improve the management of medical error for all stakeholders.

*J.D., Duke University School of Law, 1973; MPH, University of North Carolina School

of Public Health, 1979; Hall Render Professor of Law Emerita, Hall Center for Law and

Health, Indiana University Robert H. McKinney School of Law. I would like to thank Mark

Harbin and Miriam Murphy for their contributions to this Article.

Electronic copy available at: http://ssrn.com/abstract=2121449Electronic copy available at: http://ssrn.com/abstract=2121449


490 New England Law Review v. 46 | 489

INTRODUCTION

edical malpractice continues to be a contentious health policy issue particularly from the perspective of physicians and other healthcare providers.1 For patients, physicians, and other

healthcare providers, medical injury and liability are difficult problems. Physicians and their associations devote more time and energy advocating for the reform of medical liability systems than almost any other health policy issue.2 They argue that physicians practice defensive medicine to reduce their exposure to medical malpractice claims and that this phenomenon is a great contributor to escalating healthcare costs.3 Some evidence suggests that the claims about the problem of medical malpractice and the impact of defensive medicine on medical costs are overblown.4 Nevertheless, the issue of medical malpractice clearly animates the medical profession, as well as patients, and warrants action by policymakers.

The medical malpractice insurance market as a whole has changed considerably since the mid-1970s and years following, with widely fluctuating premium prices and crises in the availability and affordability of medical malpractice insurance.5 States enacted laws to slow the increase in medical malpractice premium rates through reducing the frequency and severity of claims.6 Physicians formed mutual, nonprofit insurance

1 See William M. Sage & Rogan Kersh, Introduction to MEDICAL MALPRACTICE AND THE U.S.

HEALTHCARE SYSTEM 1 (William M. Sage & Rogan Kersh eds., 2006); FRANK A. SLOAN &

LINDSEY M. CHEPKE, MEDICAL MALPRACTICE 1-2 (2008); Kenneth E. Thorpe, The Medical

Malpractice ‘Crisis’: Recent Trends and the Impact of State Tort Reforms, HEALTH AFF., W4-20 (Jan.

21, 2004), http://content.healthaffairs.org/content/early/2004/01/21/hlthaff.w4.20.full.pdf+html. 2 See Current Topics in Advocacy, AM. MED. ASS’N, http://www.ama-assn.org/ama/pub/

advocacy/current-topics-advocacy.page (last visited Mar. 30, 2012). 3 See Daniel P. Kessler & Mark B. McClellan, Do Doctors Practice Defensive Medicine? 111 Q.J.

ECON. 353, 354 (1996); Daniel P. Kessler & Mark B. McClellan, How Liability Law Affects Medical

Productivity, 21 J. HEALTH ECON. 931, 935 (2002); Daniel P. Kessler & Mark B. McClellan, The

Effects of Malpractice Pressure and Liability Reforms on Physicians’ Perceptions of Medical Care, 60

LAW & CONTEMP. PROBS. 81, 82-83 (1997). 4 See Patricia M. Danzon, Liability for Medical Malpractice, in 1 HANDBOOK OF HEALTH

ECONOMICS 1339, 1368-69 (Anthony J. Culyer & Joseph P. Newhouse eds., 2000); see also

OFFICE OF TECH. ASSESSMENT, U.S. CONG., OTA-H-602, DEFENSIVE MEDICINE AND MEDICAL

MALPRACTICE 2 (1994), available at http://www.fas.org/ota/reports/9405.pdf; TOM BAKER, THE

MEDICAL MALPRACTICE MYTH 3 (2005); Henry J. Aaron & Paul B. Ginsburg, Is Health Spending

Excessive? If So, What Can We Do About It?, 28 HEALTH AFF. 1260, 1270 (2009). 5 Eleanor D. Kinney, Malpractice Reform in the 1990s: Past Disappointments, Future Success?,

20 J. HEALTH POL. POL’Y & L. 99, 101-02 (1995) (stating tort reform likely made medical

malpractice insurance more widely available but not necessarily less expensive). 6 Id. at 101; see Randall R. Bovbjerg, Legislation on Medical Malpractice: Further Developments

and a Preliminary Report Card, 22 U.C. DAVIS L. REV. 499, 501-03, 522-23, 525 (1989) (providing

M


2012 Potent i a l o f Capt iv es and Damage Caps 491

companies to lower premiums and exercise greater control over the management of malpractice claims.7 These companies did not do well.8 More recently, as this article describes, hospitals and physicians have increasingly chosen to self-insure through a variety of vehicles including creating captive insurance companies. The insurance market for healthcare institutions and professionals is posed to transform still with the implementation of the new health reform legislation enacted in 2010.9

This Article suggests that two existing strategies already in place in many state, and among many providers can be intentionally designed and coordinated to facilitate the fair and expeditious resolution of medical malpractice claims. Specifically, captive insurance companies operating in states with caps on damages can work more effectively with healthcare providers to resolve identified malpractice claims and also to identify and compensate medical injury where claims are not pressed. This phenomenon is because the damage cap informs insurers and providers of the full extent of their liability. This knowledge establishes space for providers and the captive insurers to settle claims expeditiously and fairly. The space also enables providers and the captive insurers to go further and express apologies to patients who have been injured in the care process. This Article explores how this phenomenon can be implemented and realized. This Article also explores how captives can be structured and barriers addressed to mitigate the problems for physicians and to improve the management of medical error for all stakeholders.

I. Background

This section reviews past efforts of malpractice reform as well as the rise and evolution of the patient-safety movement. These developments are important precursors to the reforms suggested in this article.

A. Medical Liability

There is much debate over the “existence, nature and scope” of the “malpractice problem,” with little consensus about the problem or its

examples of reforms aimed at reducing the number of lawsuits and the potential recovery size

as a legislative reaction to the steep increase in insurance premiums). 7 See Nicole Williams Koviak, An Insurance Perspective on the Medical Malpractice Crisis:

Introduction, 13 ANNALS HEALTH L. 607, 610-11 (2004); Transcribed Speech of Mr. Robert

Mulcahey, 13 ANNALS HEALTH L. 617, 621 (2004) [hereinafter Mulcahey]. 8 Koviak, supra note 7, at 610-11; Mulcahey, supra note 7, at 621. 9 See generally Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119

(2010), amended by Healthcare and Education Reconciliation Act of 2010, Pub. L. No. 111-152,

124 Stat. 1029 (2010) [hereinafter ACA].



resolution.10 Most importantly, there is not a one-to-one ratio in the incidence of medical malpractice and lawsuits. The Harvard Malpractice Study found that “45% of claims present no malpractice,”11 and the older California Malpractice Study reported 57% false positives,”12 with the more recent Utah-Colorado Study having similar rates.13 Also, there is some evidence that some groups—for example, recipients of Medicare and Medicaid—sustain medical injury that is less likely to result in malpractice claims.14 In addition, the poor and the elderly are less likely to sue than younger, more affluent individuals.15 These data suggest that the current tort system does not address all medical injuries. From a social and jurisprudential perspective, this inconsistency is problematic and unjust.

Another important phenomenon with medical injury is that providers often fail to disclose and/or apologize for medical errors. This phenomenon influences claiming behavior. Studies have shown that patients find themselves in an adversarial position when seeking accountability from providers in the event of a poor outcome and would have responded positively to an explanation or an apology. One study showed that twenty-four percent of the surveyed patients sued because “physicians had failed to be completely honest with them about what happened, allowed them to believe things that were not true, or intentionally misled them.”16 Empirical

10 William M. Sage, The Forgotten Third: Liability Insurance and the Medical Malpractice Crisis,

23 HEALTH AFF. 10, 13-16 (2004) (arguing that “the insurance component of the medical

malpractice system has not kept pace” with other factors in the system). 11 Patient Safety and Medical Liability Reform Demonstration Projects, DEP’T OF HEALTH &

HUMAN SERVS., http://grants.nih.gov/grants/guide/pa-files/PAR-11-025.html (last visited Mar.

30, 2012); see PAUL C. WEILER ET AL., A MEASURE OF MALPRACTICE: MEDICAL INJURY,

MALPRACTICE LITIGATION, AND PATIENT COMPENSATION 71 (1993); A. Russell Localio et al.,

Relation Between Malpractice Claims and Adverse Events Due to Negligence: Results of the Harvard

Medical Practice Study III, 325 NEW ENG. J. MED. 245, 250 (1991). 12 See Don Harper Mills, Medical Insurance Feasibility Study, 128 WEST J. MED. 360, 364

(1978). 13 See David M. Studdert et al., Negligent Care and Malpractice Claiming Behavior in Utah and

Colorado, 38 MED. CARE 250, 253 (2000). 14 See U.S. GENERAL ACCOUNTING OFFICE, GAO/HRD-93-126, MEDICAL MALPRACTICE:

MEDICARE/MEDICAID BENEFICIARIES ACCOUNT FOR A RELATIVELY SMALL PERCENTAGE OF

MALPRACTICES LOSSES (1993) (finding Medicaid patients file claims at a lower rate than other

groups, based on population). 15 Helen R. Burstin et al., Do the Poor Sue More? A Case-Control Study of Malpractice Claims

and Socioeconomic Status, 270 JAMA 1697, 1700 (1993); see also Mark Sager et al., Do the Elderly

Sue Physicians?, 150 ARCHIVE INTERNAL MED. 1091, 1091 (1990) (reviewing Wisconsin

malpractice cases to determine the frequency of elderly patients’ lawsuits). 16 Gerald B. Hickson et al., Factors that Prompted Families to File Medical Malpractice Claims

Following Perinatal Injuries, 267 JAMA 1359, 1361 (1992); see also Carol B. Liebman & Chris

Stern Hyman, A Mediation Skills Model to Manage Disclosure of Errors and Adverse Events to



evidence developed by Gerald B. Hickson and colleagues suggests that patient complaints have a predictive quality—the more dissatisfied the patient, the more likely a malpractice claim will result.17 Additionally, James W. Pichert, studying feedback from patients, identified individual units within an institution that could be considered high risk.18

B. Damage Caps

Historically and predominantly, medical liability reform has consisted of state legislation to reduce the frequency and severity of recovery for malpractice claims.19 Damage caps are the major strategy to reduce severity and bring predictability to the medical liability insurance market. Damage caps and reduced statutes of limitations have been shown to reduce severity and frequency, respectively.20 Damage caps in medical malpractice cases have been effective in controlling the cost of malpractice insurance.21 Damage caps have also been criticized as hurting malpractice claimants to the benefit of providers and liability insurers.22

C. The Patient Safety Movement

The Patient Safety Movement, inspired by the Institute of Medicine’s (“IoM”) report, To Err Is Human, has precipitated a “sea change” in the way healthcare providers and policy makers perceive the problem of medical injury.23 This IoM report made several important findings and observations that have contributed to this sea change: (1) an estimated 44,000 to 98,000 people die each year in hospitals from medical injury; and (2) systems failures, rather than poor performance by individual practitioners, cause at

Patients, 23 HEALTH AFF. 22, 24 (2004) (listing factors that lead to the decision to sue, including

physician dishonesty). 17 See Gerald B. Hickson et al., Patient Complaints and Malpractice Risk, 287 JAMA 2951, 2955

(2002). 18 See James W. Pichert et al., Identifying Medical Center Units with Disproportionate Shares of

Patient Complaints, 25 JOINT COMM’N J. QUALITY IMPROVEMENT 288, 292, 298 (1999). 19 Kinney, supra note 5, at 101. 20 Patricia M. Danzon, The Frequency and Severity of Medical Malpractice Claims: New

Evidence, 49 LAW & CONTEMP. PROBS. 57, 71, 73-74 (1986); Frank A. Sloan et al., Effects of Tort

Reforms on the Value of Closed Medical Malpractice Claims: A Microanalysis, 14 J. HEALTH POL.

POL’Y & L. 663, 665, 678 (1989). 21 Leonard J. Nelson, III et al., Damage Caps in Medical Malpractice Cases, 85 MILBANK Q. 259,

269 (2007). 22 Eleanor D. Kinney, An Empirical and Critical Look at the Current Medical Liability Crisis,

FRONTIERS HEALTH SERVS. MGMT., Fall 2003, at 31, 34. 23 Ross D. Silverman, Patient Safety and Patients’ Rights, VIRTUAL MENTOR (June 2004)

http://virtualmentor.ama-assn.org/2004/06/pfor2-0406.html.



least half of patient injuries.24 The IoM report concluded that “eliminating or minimizing unintended risks and hazards associated with the structure and process of care, improvements in patient safety could decrease medical liability claims.”25 The IoM recommended that providers create a culture of safety in institutions by: (1) focusing on reducing errors in systems providing care; (2) borrowing from quality science in the engineering industries; and (3) moving away from emphasizing placement of blame on individual physicians and other providers.26

Additionally, the Patient Safety and Quality Improvement Act of 2005 authorized creation of Patient Safety Organizations (“PSOs”) at the state level to improve quality and safety through the collection and analysis of data on patient events.27 PSOs offer “a secure environment where clinicians and healthcare organizations can collect, aggregate, and analyze data, thereby improving quality by identifying and reducing the risks and hazards associated with patient care.”28

An important development in the Patient Safety Movement has been the identification of so-called “never events,” which are incidents that, according to some authorities, should never occur in the provision of good quality medical care.29 In 2002, the National Quality Forum (“NQF”) published its report, Serious Reportable Events in Healthcare, which identified twenty-seven adverse events occurring in hospitals “that are serious, largely preventable, and of concern to both the public and healthcare providers.”30 According to NQF, the report’s objective is to establish “consensus among consumers, providers, purchasers, researchers, and other healthcare stakeholders about those preventable adverse events that should never occur and to define them in a way that, should they occur, it would be clear what had to be reported.”31

24 INST. OF MED., TO ERR IS HUMAN: BUILDING A SAFER HEALTH SYSTEM 26, 30 (Linda T.

Kohn et al. eds., 2000). 25 Patient Safety and Medical Liability Reform Demonstration Projects, supra note 11. 26 See INST. OF MED., supra note 24, at 49, 71; see also Lucian L. Leape, Error in Medicine, 272

JAMA 1851, 1852 (1994). 27 See Patient Safety and Quality Improvement Act of 2005, Pub. L. No. 109-41, 119 Stat. 424

(codified as amended at 42 U.S.C. §§ 299(b)-21 to 299(b)-26 (2006)). 28 Patient Safety Organizations, AGENCY FOR HEALTHCARE RES. & QUALITY, http://pso.ahrq.

gov/psos/overview.htm (last visited Mar. 30, 2012). 29 Nancy Berlinger, Medical Error, in FROM BIRTH TO DEATH AND BENCH TO CLINIC: THE

HASTINGS CENTER BIOETHICS BRIEFING BOOK FOR JOURNALISTS, POLICYMAKERS, AND

CAMPAIGNS 97, 97 (Mary Crowley ed., 2008) (describing “never events” as a major

development in patient care). 30 Kenneth W. Kizer, Foreword to THE NAT’L QUALITY F., SERIOUS REPORTABLE EVENTS IN

HEALTHCARE: A CONSENSUS REPORT (2002), available at www.ahrq.gov/qual/nqfpract.pdf. 31 Patient Safety: Serious Reportable Events in Healthcare, NAT’L QUALITY F.,



The Centers for Medicare and Medicaid Services (“CMS”) have also taken steps to limit payment for so-called “never events” including “hospital-acquired conditions.” Specifically, section 5001(c) of the Deficit Reduction Act of 2005 requires the Secretary to identify conditions that: (a) “are high cost or high volume, or both . . . .”; (b) “results in the assignment of a case to a diagnosis-related group that has a higher payment when . . . present as a secondary diagnosis”; and (c) “could reasonably have been prevented through the application of evidence-based guidelines.”32 In August 2007, CMS adopted a final rule identifying eight “never events” for which, beginning October 1, 2008, Medicare would not provide additional payment to hospitals unless the events were present on admission.33 The ACA expanded reimbursement restrictions for “never events” to the Medicaid program.34 In June 2011, CMS promulgated a final rule to implement this ACA provision.35

D. Captive Insurance Companies

In recent years, both institutional and professional healthcare providers have moved away from commercial insurance carriers toward alternative insurance vehicles to provide malpractice liability coverage.36 Captive insurance is a self-funded insurance mechanism that is primarily controlled by its owners and whose owners are typically the principal insureds.37 The Captive Insurance Companies Association defines captive insurers as follows:

http://www.qualityforum.org/projects/hacs_and_sres.aspx (last visited Mar. 30, 2012). 32 Deficit Reduction Act of 2005, Pub. L. No. 109-171, § 5001(c)(1)(iv)(I)-(III), 120 Stat. 30

(codified as amended at 42 U.S.C. § 1395ww(d)(4)(A)(iv)(I)-(III) (2006)); accord CTRS. FOR

MEDICARE & MEDICAID SERVS., DEP’T OF HEALTH & HUMAN SERVS., HOSPITAL-ACQUIRED

CONDITIONS (HAC) IN ACUTE INPATIENT PROSPECTIVE PAYMENT SYSTEM (IPPS) HOSPITALS (Oct.

2011), available at https://www.cms.gov/HospitalAcqCond/downloads/HACFactsheet.pdf. 33 Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008

Rates, 72 Fed. Reg. 47,130, 47,217 (Aug. 22, 2007) (codified at 42 C.F.R. §§ 411-13, 489); see also

MEDICARE NATIONAL COVERAGE DETERMINATIONS MANUAL, Ch. 1, Part 2, §§ 140.6-140.8,

https://www.cms.gov/manuals/downloads/ncd103c1_Part2.pdf (last visited Mar. 21, 2012). 34 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 2702, 124 Stat. 319

(2010) (codified as amended at 42 U.S.C. § 136b-1). 35 Payment Adjustment for Provider-Preventable Conditions Including Healthcare-

Acquired Conditions, 76 Fed. Reg. 32, 816 (June 6, 2011) (to be codified at 42 C.F.R. Pts. 434,

438, & 447). 36 See generally JAY D. ADKISSON, ADKISSON’S CAPTIVE INSURANCE COMPANIES (2006); R.

WESLEY SIERK, III, TAKEN CAPTIVE (2008.. 37 TOWERS WATSON, CAPTIVES 101: MANAGING COST AND RISK 2, available at

http://www.towerswatson.com/assets/pdf/2435/TW_Captives_101.pdf; see also ROBERT H.

JERRY, II, NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION § 1.09 (2011); Arthur G.

Koritzinsky, The Captive Concept, in INSURANCE COVERAGE 2009, at 698, 691 (2009).



Captive Insurance Company - A risk-financing method or form of self-insurance involving the establishment of a subsidiary corporation or association organized to write insurance. Captive insurance companies are formed to serve the insurance needs of the parent organization and to escape uncertainties of commercial insurance availability and cost. The insureds have a direct involvement and influence over the company’s major operations, including underwriting, claims, management policy, and investments.38

Captive insurers, as they are known today, originated in the 1960s and were primarily domiciled in Bermuda with its loose insurance regulation.39 The laws in Bermuda facilitated easy incorporation of captive insurance companies and light regulation and continue to do so today. In the 1950s, only about 100 captive companies, domiciled in Bermuda, existed; by 1982, over 1000 captives existed with the majority incorporated in Bermuda.40 The global consulting firm Towers Watson estimates that there are now some 5400 captive insurance companies worldwide with 885 incorporated in Bermuda.41 However, more and more state insurance regulatory schemes recognize captives and license them accordingly. Figure 1 lists the U.S. jurisdictions that currently license captive insurers:

38 Captives Glossary, CAPTIVE INS. COS. ASS’N, http://www.cicaworld.com/Resources/

CaptivesGlossary.aspx (last visited Mar. 30, 2012). 39 TOWERS WATSON, supra note 37, at 2. 40 Id. 41 Id.



There are two primary forms of captives: single-parent captives and group captives.43 In a single-parent captive, also known as a pure captive, a parent company forms an insurance company to insure its own risks.44 In a group captive, multiple, non-related organizations form or participate in an insurance company to insure risks common to the group.45 Other classifications of captives include an association captive, a “rent-a-captive,” a sponsored or “protected cell” captive, and a risk retention group (“RRG”).46

Captives are of interest to all industries because they allow corporate control over the captive; reduce premiums that do not reflect profits for commercial insurers or expenses related to any other non-associated risk; and, for for-profit corporations, permit tax deductions for premiums paid to the captive. Initially, industries’ use of captives generally was inhibited by the tax treatment of premiums paid to the captive. In 1978, the U.S. Tax Court ruled that a taxpayer corporation’s agreement with an insurance company, to the extent it reinsured the taxpayer’s wholly owned subsidiary, was not “insurance” for tax purposes and that payments made

42 Complete Listing of All U.S. and Offshore Captive Insurance Domiciles: Best Domiciles for

Captive Insurance Companies, WEALTH MGMT. SOLUTIONS, LLC, http://www.wmsolutionsnow.

com/captive_insurance_domiciles.htm (last visited Mar. 30, 2012). 43 See TOWERS WATSON, supra note 37, at 2. 44 Michael R. Mead, Captive Structures, IRMI.COM (Apr. 2002), http://www.irmi.com/expert

/articles/2002/mead04.aspx. 45 Id. 46 TOWERS WATSON, supra note 37, at 2.

Figure 142 U.S. Jurisdictions Authorizing Captive Insurers

Alabama Arizona Arkansas Colorado Delaware District of Columbia Florida Georgia Hawaii Illinois Kansas Kentucky Maine

Montana Nevada New York Puerto Rico Rhode Island South Carolina South Dakota Tennessee U.S. Virgin Islands Utah Vermont Virginia West Virginia



were not deductible as business expenses.47 The Court of Appeals for the Ninth Circuit affirmed.48

In 1986, to clarify tax policy, Congress enacted the Liability Risk Retention Act of 1986 to recognize captives and other arrangements as RRGs for tax purposes.49 An RRG must be domiciled in a U.S. state that regulates it as a captive insurance company.50 The RRG may then operate nationwide, provided it registers with each state in which it is to operate.51 Of note, the U.S. Government Accountability Office has raised concerns about the effectiveness of state regulation of captives.52

In recent years, healthcare providers have increasingly used captive insurance companies for their medical liability coverage.53 Over the past several years, an increasing number of individual hospitals and consortia of hospitals and physicians have begun to self-insure in a variety of ways. In 2003, the American Hospital Association estimated that forty percent of its member hospitals were self-insured.54 A more recent industry survey conducted by AON Risk Solutions and the American Society for Healthcare Risk Management “found that 73 percent of systems surveyed will self-insure the combined hospital-physician malpractice risk.”55

47 Carnation Co. v. Comm’r, 71 T.C. 400, 415 (1978), aff’d, 640 F.2d 1010 (9th Cir. 1981). 48 Carnation Co. v. Comm’r of Internal Revenue, 640 F.2d 1010, 1013 (9th Cir. 1981); see 3

COUCH ON INSURANCE § 39:2 (3d ed. 2011). 49 Pub. L. No. 99-563, 100 Stat. 3170 (codified as amended at 15 U.S.C. § 3901(4) (2006)). 50 Id. § 3901(4)(c). 51 Id. § 3902(a). 52 See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-05-536, RISK RETENTION GROUPS:

COMMON REGULATORY STANDARDS AND GREATER MEMBER PROTECTIONS ARE NEEDED 65-66

(2005), available at http://www.gao.gov/new.items/d05536.pdf. 53 Mark E. Battersby, Create a Strategy to Protect Your Practice, 88 MED. ECON. 65, 66 (2011);

Koviak, supra note 7, at 609; David B. Mandell & Maureen Verduyn, Captive Insurance

Companies: Why You Should Consider Them Now More than Ever, 26 DERMATOLOGY TIMES 82, 82

(2005); Mulcahey, supra note 7, at 622; see Michael J. Moody, 25 Years of Stability in Medical

Malpractice, ROUGH NOTES, Feb. 2008, at 68, 68, available at http://www.captive.com/

captives/FuturoArticle/Rough%20Notes%20Article%202-08.pdf; Steve Taravella, Frustrated

Healthcare Systems Seek Alternatives to Traditional Insurance, MOD. HEALTHCARE, May 13, 1988,

at 30, 31-32. 54 U.S. GEN. ACCOUNTING OFFICE, GAO-03-702, MEDICAL MALPRACTICE INSURANCE:

MULTIPLE FACTORS HAVE CONTRIBUTED TO INCREASED PREMIUM RATES 39 (2003), available at

http://www.gao.gov/new.items/d03702.pdf. 55 Healthcare Industry Faces Unprecedented Change in Hospital Landscape, AON (Oct. 18, 2011),

http://aon.mediaroom.com/index.php?s=43&item=2414.

http://web2.westlaw.com/find/default.wl?tc=-1&docname=15USCAS3901&rp=%2ffind%2fdefault.wl&sv=Split&rs=WLW11.07&db=1000546&tf=-1&findtype=L&fn=_top&mt=208&vr=2.0&pbc=F5A51F2A&ordoc=0299581051



E. The Potential Contribution of Health Reform

The Affordable Care Act, enacted in 2010, has multiple provisions that encourage providers to integrate their quality improvement, patient safety, and care delivery activities, and thus could greatly benefit by the flexibility accorded by captive insurance companies managing liability.56 One of the most important provisions in this regard is the Shared Savings Program for Medicare fee-for-service providers.57 Under this program, a group of providers and suppliers of services (e.g., hospitals, physicians, and others involved in patient care) collaborate to care for Medicare beneficiaries who are not enrolled in Medicare Advantage plans in organizations called accountable care organizations (“ACOs”).58 ACOs must adhere to certain requirements and practices aimed at providing seamless, high quality care. In November 2011, CMS promulgated a final rule to implement the Shared Savings program and ACOs.59

II. Captive Insurance Coverage and Damage Caps

The patient safety movement has fundamentally changed the perspective through which providers view the management of error and injury. Rather than taking a completely defensive posture of blame and subsequent concealment in many instances, providers are looking at errors and injuries as system problems that need better internal management to ameliorate wrongs and improve future practice.60 Thus, the infrastructure is in place that allows providers to move toward remediating medical injury and deflecting malpractice claims in a more proactive, effective, and just manner.

56 See DAVID M. LINER & KATHLEEN E. ELY, HEALTHCARE REFORM: POTENTIAL

OPPORTUNITIES FOR CAPTIVES (2011), available at http://publications.milliman.com/publications/

healthreform/pdfs/potential-opportunities-for-captives.pdf; EDWARD M. WROBEL AND JEFFREY

LEVIN-SCHERZ, US HEALTHCARE REFORM (Dec. 2010), http://www.towerswatson.com/

assets/pdf/mailings/Towers-Watson-Captive-Review-Article.pdf. 57 See 42 U.S.C. § 1395jjj (2010). 58 See Accountable Care Organizations: Improving Care Coordination for People with Medicare,

HEALTHCARE.GOV, http://www.healthcare.gov/news/factsheets/2011/03/accountablecare03

312011a.html (last updated Nov. 16, 2011); Ctrs. for Medicare & Medicaid Servs., Overview:

Accountable Care Organizations, CMS.GOV, https://www.cms.gov/aco/ (last modified Feb. 7,

2012, 11:25 AM). 59 Medicare Program; Medicare Shared Savings Program: Accountable Care Organizations

Final Rule, 76 Fed. Reg. 67, 802 (Nov. 2, 2011) (to be codified at 42 C.F.R. pt. 25). 60 See NAT’L PATIENT SAFETY FOUND., RESEARCH PROGRAM: SUMMARY OF PROGRESS 2

(2010), available at http://www.npsf.org/wp-content/uploads/2011/10/2010_Research_-

Summary_of_Progress.pdf.



A. The Potential of Captives and Caps

While preferential to providers, damage caps provide an extraordinary opportunity for real medical liability reform that benefits patients first and foremost while mitigating the trauma of medical malpractice for physicians and providers. Specifically, captive malpractice insurers and state damage caps, working in conjunction, show great promise in closing the chasms in medical error identification, risk management, and medical injury compensation.

Specifically, captives can work better with providers to resolve identified malpractice claims. Moreover, they can better identify and compensate medical injury where claims are not pressed. The cap accords the captive and provider knowledge of the full extent of their liability and thereby establishes space for providers and the captive insurers to settle claims expeditiously and fairly. The space also enables providers and the captive insurers to go further and express apologies to patients who have been injured in the care process.61 Consequently, providers have more flexibility to manage medical injuries and/or claims more justly and make disclosures of errors, frank apologies, and remediation without fear of large jury verdicts that might include punitive damages.

Captives can assume this function because of the fact that the owners of the captives, insured providers, can essentially direct the decisions relating to underwriting, claims, and investments of the captive. Thus, captives can take steps to limit medical liability claims and protect the provider, as the provider is the only insured entity. Because they are acting in the provider’s interest without another incentive, such as serving shareholders or other insureds, they have greater flexibility to compensate patients for medical injury as part of a provider’s patient safety program.62

In this regard, captives can act in ways that conventional commercial liability insurers cannot. Conventional medical liability insurers are incentivized to contest medical liability claims in pursuit of profits or revenue. In their effort to control their liability, conventional liability insurers have little incentive to work with provider patient safety programs in compensating patients for medical injury.

61 See Richard C. Boothman et al., A Better Approach to Medical Malpractice Claims? The

University of Michigan Experience, 2 J. HEALTH & LIFE SCI. L. 125, 142, 144-45 (2009). 62 See Mary Chmielowiec & Brad Granger, Cost of Risk: Show Me the Money, US CAPTIVE,

Apr. 2011, at 26, 27-29, available at www.uscaptivemagazine.com/archive.asp (accessed by

following “2011 Issue” hyperlink) (explaining that using data and data analytics can predict

risks, allow captives to be proactive by monitoring their exposure, and create financially

sound captives).



B. Linking Quality Assurance, Safety Programs, and Risk Management with Medical Injury Remediation

Patient safety initiatives are very useful in addressing medical malpractice. With these initiatives, the circumstances are in place to link quality assurance, patient safety, and risk management with the complete remediation of medical injury. Of note, some important policymakers have called for linking patient safety and liability reform.63

The envisioned role of captive providers in the resolution of claims and injuries is a major factor in enabling this linkage. By crossing the historical chasm between risk management and remediation, many of the problems now caused by adjudicating medical injury claims in the tort system would be mitigated. Specifically, genuine medical injuries could be identified early and resolved expeditiously. Also, grievances that do not involve medical injury, but have caused concerns for patients, can be identified and resolved, thus lessening the likelihood that the patient will seek satisfaction through the tort system. In sum, early remediation can resolve incidents and claims more promptly, privately, and informally, thus reducing the high financial and emotional costs that attend traditional tort litigation.

C. Some Minor Caveats

There are some important considerations to take into account in structuring captive insurance companies for hospitals and other healthcare providers. As indicated above, the tax treatment of captives and premiums paid by a hospital or other healthcare organizations is complicated.64

Also, complex Medicare reimbursement issues are implicated in hospital ownership of captives. CMS, which administers the Medicare program, issued Section 2162.2.A.4 of The Provider Reimbursement Manual regarding the treatment of the cost of premiums paid to captive insurance companies for Medicare cost reimbursement.65 Specifically, Section 2162.2.A.4 limits cost reimbursement if the captive’s investments in

63 See, e.g., JOINT COMM’N ON ACCREDITATION OF HEALTHCARE ORGS., HEALTHCARE AT THE

CROSSROADS: STRATEGIES FOR IMPROVING THE MEDICAL LIABILITY SYSTEM AND PREVENTING

PATIENT INJURY 6, 10 (2005), available at http://www.jointcommission.org/assets/1/18/

Medical_Liability.pdf [hereinafter HEALTHCARE AT THE CROSSROADS]; Hillary Rodham Clinton

& Barack Obama, Making Patient Safety the Centerpiece of Medical Liability Reform, 354 NEW ENG.

J. MED. 2205, 2205 (2006), available at http://www.nejm.org/doi/pdf/10.1056/NEJMp068100. 64 See supra notes 43-47 and accompanying text; see also James A. Christopherson, The

Captive Medical Malpractice Insurance Company Alternative, 5 ANNALS HEALTH L. 121, 122, 125-

26 (1996); Karen Gantt, Federal Tax Treatment of Medical Malpractice Insurance Alternatives for

Nonprofits, 52 DRAKE L. REV. 495, 501, 503 (2004). 65 See Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491-92 (D.C. Cir. 2010).



equities exceed what state insurance regulators ordinarily require.66 The Circuit Court for the District of Columbia invalidated this rule in 2010, creating some uncertainty regarding this policy.67

There is also question about the degree to which Medicare fraud and abuse rules will permit institutional healthcare providers to assist affiliated physicians with the cost of medical malpractice insurance through captives. In 2004, the American Health Lawyers Association wrote a letter to officials with the Internal Revenue Service and the U.S. Department of Health and Human Services (“DHHS”) requesting details of the “permissible assistance that hospitals and other acute and long-term care providers may provide to physicians and other health professionals to lessen the effects of rising malpractice insurance premiums.”68 DHHS declined to offer a response to the letter given the restrictions of the Medicare fraud and abuse authorities.69

D. A Major Barrier

There is one important barrier that threatens the possibility of the integrative reforms suggested in this Article. A captive that insures a corporate entity may also be covering providing coverage for physicians and other professionals on a theory of vicarious liability.70 The captive as the physicians’ insurer will have specific obligations to defend the employee physicians. These obligations may be inconsistent with the captive’s desire to resolve claims expeditiously.71

Specifically, medical malpractice claims have serious consequences for individual physicians. One of the most serious consequences of a settled

66 See id.at 491-92. 67 See id. at 494, 496 (invalidating the rule on grounds that it had been improperly

promulgated); see also D.C. Circuit Reverses, Remands Judgment on Payment for Offshore Insurer

Coverage, 19 HEALTH L. REP. 1176, 1176 (2010). 68 Letter from Gerald M. Griffith, on Behalf of the Am. Health Lawyers Ass’n, to the U.S.

Dep’t of Health & Human Servs. and the Internal Revenue Serv. (Apr. 22, 2004), available at

http://www.healthlawyers.org/SiteCollectionDocuments/Content/ContentGroups/Press_Relea

ses/pi_MalpracticeLtr.pdf; see Attorneys Ask Agencies to Clarify Limits on Assisting with Coverage,

13 HEALTH L. REP. 677, 677 (2004). 69 With Little Help from Feds, Hospitals Explore Ways to Fix Staff Physicians’ Insurance Woes, 13

HEALTH L. REP. 1363, 1363 (2004). 70 See Leona Egeland Siadek, Vicarious Liability Spreads with Ostensible Partnerships, THE

DOCTORS CO.: THE DOCTOR’S ADVOC. (2007), http://www.thedoctors.com/KnowledgeCenter/

Publications/TheDoctorsAdvocate/CON_ID_000351 (discussing that doctors are often named

in lawsuits due to vicarious liability). 71 See HEALTHCARE AT THE CROSSROADS, supra note 63, at 5 (noting that a medical

malpractice lawsuit is lengthy and reduces the opportunity for quick resolution of unsafe

practices).



malpractice claim against a physician is the obligation under the Health Care Quality Improvement Act of 198672 to report settled claims to the National Practitioner Data Bank (“NPDB”) that the U.S. Department of Health and Human Services maintains.73 Such reports to the NPDB follow physicians throughout their careers and can limit employment and advancement opportunities.

Indeed, the NPDB stands in the way of the reforms proposed in this Article, as well as other forward-looking reforms, such as enterprise liability for healthcare organizations. Further, the NPDB is not consistent with the patient safety movement’s philosophy to focus less on blaming individuals and more on addressing systemic problems that contribute to medical injury. In closing, this Article calls for a reassessment of the NPDB’s value in today’s era of access to information on the Internet and the increased quality assurance and improvement methods of hospitals, physicians, and all other healthcare providers.

CONCLUSION

Patient safety initiatives provide much promise in addressing medical malpractice. Indeed, policymakers have called for linkages between patient safety promotion strategies and the resolution of medical liability claims and injuries. It makes great sense to link provider quality, patient safety, and risk management efforts with remediation of medical injuries, grievances, and medical malpractice claims. As providers become more integrated under healthcare reform, captives can facilitate and support integration initiatives. Captives and caps, working in the context of health reform, provide an opportunity to resolve medical injury claims and events internally and expeditiously. But such linkages should only be implemented if physicians can be adequately protected from settlement decisions that unfairly compromise their reputation. Reforming the National Practitioner Data Bank would be a good first step in this regard.

72 Healthcare Quality Improvement Act of 1986, Pub. L. No. 99-660, 100 Stat. 3784 (codified

as amended at 42 U.S.C. §§ 11101-11152 (2006)). 73 Id. §§ 11131-11137.

The Potential of Captive Medical Liability Insurance Carriers and Damage Caps for Medical...

Documents

Transcript of The Potential of Captive Medical Liability Insurance Carriers and Damage Caps for Medical...