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A Medical Practice Risk Management Strategy
By Guy P. Jones CFP®
Successful practices face multiple risks in their daily operations including loss of a medical license or professional certification, legal defense reimbursement, medical/Medicare collections risk, HIPAA violations, and reputational risk. Small- to medium-sized practices can benefit from risk-management tools that can help them handle such risks more effectively and reduce their overall insurance costs. To that end, the practice may want to consider the establishment of a Captive Insurance Company (CIC) to protect themselves from risks not typically covered by traditional insurance companies.
Captive Insurance Planning
Captive insurance planning is a strategy for physicians to manage risk through the purchase of a property-casualty insurance policy. Premiums paid by the practice to a properly structured CIC should be tax-deductible to the practice under section 162(a) of the IRS code just like their workers’ compensation or malpractice coverage.
When the practice forms a CIC, it receives premium income tax-free up to $1,200,000 per year, per captive. Profits that come out of the CIC come out as a distribution from a C-corp. as qualifying dividends or long-term capital gains, which are currently 15%. Furthermore, the CIC may retain surplus from underwriting profits within reserve accounts, free from income tax. Profits that accumulate within the CIC can be used as a tax-deductible sinking fund in order to save money on malpractice premiums by shifting to a high deductible policy and/or insuring that deductible through the CIC.
No Rules – Just Right
There are no hard-and-fast rules regarding the minimum amount of gross revenue from a practice or the minimum amount of insurance premiums paid by a practice before considering the establishment of a CIC.
Planning Opportunities
The establishment of a CIC creates immense planning opportunities for physicians because of the flexible ownership of the CIC. The CIC is set up as a C-Corp and someone or some entity owns the shares of the C-Corp While it’s important to keep in mind the primary business purpose of the CIC is for risk management, some potential planning opportunities include the following:
- Wealth Accumulation/Surplus Retirement Income: Physicians own the CIC outside the practice for surplus dollars in retirement.
- Asset Protection Planning: Most physicians have the CIC owned inside an asset protection trust to potentially shield pre-tax dollars and assets from judgment creditors or litigation.
- Estate Planning/Wealth Transfer: Physicians who don’t need access to this money may be interested in having the CIC owned outside of their estate to also bypass gift and estate taxes with each premium payment.
- Practice-Owner Benefits: By the CIC not being an employee benefit plan, it is not subject to the non-discrimination rules of ERISA, and therefore only benefits the owners of the practice.
- Non-Mandatory Participation for Practice Doctors: Doctors at smaller levels can join together to create a CIC for economies of scale.
Enter the Experts
Physicians would be encouraged to discuss the various CIC planning strategies with their tax, estate planning, and other legal professionals to ensure that the most appropriate structure is utilized to fit their unique planning objectives. As part of our services to the practice, we would be happy to meet with the practice management and advisors to answer any questions and start the process of the feasibility of a CIC for the practice. As reassurance, this is already IRS-tested, and we strictly adhere to each IRS Safe Harbor Revenue Ruling for a conservative model offering very predictable risk management and tax planning results.
Assessment
While this is not intended to be a thorough discussion of CICs, it is meant to initiate a conversation with practices or conduct due diligence with their key advisors as to the many potential benefits of establishing a Captive Insurance Company.
About the Author
Mr. Guy P. Jones is a Certified Financial Planner in Houston, TX who has specialized in serving the financial planning needs of medical professionals and their families since 1990. He can be reached at 832.677.1692, email: guypjones@guypjones.com, or by visiting his website: www.guypjones.com
Conclusion
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Filed under: Insurance Matters, Professional Liability, Risk Management | Tagged: Captive Insurance Company, Guy P. Jones CFP, IRS Safe Harbor Revenue Ruling, medical malpractice, professional medical liability |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
2013 Second Quarter Commercial Medical Loss Ratio for Selected National Health Plans
Aetna 79.1%
Centene 88.8%
CIGNA 78.7%
HealthNet 84.9%
Humana* 82.5%
Molina 86.2%
WellPoint 79.2%
United Health Group 80.7%
Source: Various company press releases as compiled by MCOL: Aetna, Centene, CIGNA, Health Net, Humana, Molina, WellPoint, United Health Group
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Tips for looking Medical Professional Liability Coverage
The following are buying tips for healthcare professionals who are shopping for medical professional liability insurance coverage:
• Shop well in advance of your renewal or expiration date. Your agent should have all of the necessary information to the insurer at least six to eight weeks before your coverage expires. See the attached checklist for the types of information your agent will need.
• If you do not know an agent who can place your coverage, the Bureau of Insurance has a list of agencies that are licensed and appointed with at least one of the insurers on the Bureau’s list of “Insurers Writing New Business for Physicians and Surgeons.”
• Contact one or two agents and be sure to ask each agent which insurer will be contacted for a quote. Ask the agent if an application will also be submitted to a surplus lines broker. If so, ask for the name of the surplus lines broker and ask which surplus lines insurers will be contacted. Provide this information to the other agent to avoid multiple applications being submitted to one insurer from different agents. If the application is being submitted to a surplus lines broker, be sure to ask the agent for information on the coverage provided and specifically request information on exclusions.
• If the agent recommends coverage through an unlicensed company (such as a surplus lines insurer or a risk retention group), be aware that, in the case of insolvency, the insured will not have coverage through the [State] Property and Casualty Insurance Guaranty Association. However, if the healthcare professional has had several claims or an open claim, they may only be able to obtain coverage through a company not licensed in their state.
• Ask the agent for information on the financial rating of the company and if the surplus lines insurer has its own guaranty fund. Also, if shopping, the medical professional should feel free to check with the Insurance Bureau of their respective state to see if the company and agent are licensed or authorized to do business.
• The agent should fully understand the healthcare professional’s business. If incorporated, ask the agent what coverage is needed to protect the corporation as well as any individual doctors.
• Ask the agent about the availability of “tail coverage” or if the new insurer will provide coverage for “prior acts.” If coverage is offered with two insurers, ask the agent what each insurer charges for “tail coverage.” This information may help in deciding which insurer has the most competitive price.
• Complete the application for coverage in its entirety. Don’t omit any information and be sure to provide as much detail as possible, especially about prior claims. Many insurance companies want 10 years of information. They may also request information about any risk management practices and procedures.
• Discuss deductible options with your agent. These may help lower your premium.
• Find out if the insurance company offers any risk management or loss prevention programs. Such programs may lower the premium and help reduce exposure to losses.
Note: This section is adapted from the State of Virginia, State Corporation Commission, Bureau of Insurance.
Dr. David Edward Marcinko MBA
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