Amid the barrage of hospital-billing lawsuits filed by Richard Scruggs and affiliated law firms in recent months have come suggestions that hospitals are being less than forthright about their use of offshore captive insurance companies.
The little-known vehicles, usually set up in tax havens such as the Cayman Islands and Bermuda, have been targeted by Scruggs' associates as potential ways for hospitals to hide assets, avoid regulation or funnel money to hospital executives. Scruggs has questioned why a tax-exempt hospital would need to locate any of its businesses offshore. "They certainly don't need it as a tax haven," said Scruggs spokesman Robert Siegfried.
While the biggest incentive to locate offshore, indeed, is tax-related, places like the Caymans and Bermuda also were home to some of the accounting misdealings by corporations such as Enron Corp. and Tyco, raising questions about why hospitals might be operating there, too. It doesn't help these perceptions that hospital executives on offshore captive insurance company boards generally are required to meet once a year in whatever sunny, warm offshore haven they've selected as their insurance company's home.
Nevertheless, the negative publicity is un-likely to diminish hospitals' use of captive insurance companies. Hospital executives and industry insiders say captives offer a more predictable and generally lower premium payment, as well as the ability to create more incentives to improve healthcare by reducing claims.
A captive insurance company is not very different from a normal insurance company. The primary distinction is that it is owned by the institution or institutions seeking to be insured. For that reason, premiums are essentially paid back to the owner of the captive, with most of the day-to-day work of running the company getting outsourced.
Given the leg work that goes into setting up a captive insurance company and the benefits of running it, hospital executives have little incentive to stop using a captive as a result of the recent Scruggs-induced scrutiny. Officials for Baystate Health System in Springfield, Mass., are not backing off from using its roughly 15-year-old captive insurance company, based in the Cayman Islands, said Candace Quinn, spokeswoman for Baystate, which is one of 48 healthcare systems currently being sued by a Scruggs client.
"Our primary reason (for creating a captive) was to control the volatil-ity of premiums," Quinn said. "We've done that," to the tune of hundreds of thousands of dollars, she said. "It's a very prudent strategy," she said. In addition to insuring its general and professional liability, Baystate uses its captive for workers' compensation, long-term disability and directors' and officers' insurance, she said.
Phoebe Putney Health System, an Albany, Ga., defendant in a Scruggs suit, is standing behind its captive insurance company, despite being singled out in a Time magazine article as having $15 million in captive insurance money sitting in a Cayman Islands account.
"Captive insurance is a win-win situation," said Jackie Ryan, a spokeswoman for Phoebe Putney. "The cost savings for us have been huge," Ryan said. She disputed the amount quoted in the Time article, saying the hospital's holdings in its offshore captive are closer to $500,000 than $15 million.
Scruggs officials, though, say the discovery phase of their lawsuits might reveal other reasons for the existence of the offshore captive vehicles. Why would a not-for-profit hospital go offshore when there are U.S.-based alternatives, Siegfried said.
The major reason is related to taxes, said Tom Jones, a Chicago-based partner with the law firm McDermott Will & Emery who helps companies create captives. If a hospital is insuring itself alone through its captive, then there's no reason to go offshore, Jones said. But when a captive insurance company insures anything or anyone outside of itself-such as a for-profit physicians' group-there are taxes that would result if the business were located within the U.S., he said.
The first-time use of an offshore captive for insuring hospitals is attributed to Harvard University, which created a healthcare captive insurance company in the late 1970s. Since then, more than 200 healthcare organizations have domiciled a captive insurance company in the Cayman Islands, the most popular offshore haven for hospitals, according to a captive insurance accounting specialist operating out of the Cayman Islands.
"These entities have been around for many, many years," said Michael Jones, vice president of legal affairs and compliance for Cape Cod Healthcare, a hospital system based in Hyannis, Mass. Cape Cod, which has not been named in a Scruggs lawsuit, went live with its Cayman Islands captive insurer in June.
In addition to questioning why a tax haven is needed when there are domestic alternatives, Scruggs spokesman Siegfried said no one can be certain how captive insurance companies owned by not-for-profit hospitals are using the money held offshore, which can amount to hundreds of million of dollars. Perhaps employees are getting additional compensation through the vehicles, he suggested.
Baystate officials maintain nothing untoward is going on with its captive, Quinn said.
Moreover, executives working in the industry say captive insurance companies offer a smart way to help cut costs and reduce errors. Attorney Jones estimated the total cost of running an offshore captive insurance company-including annual meetings held there-to be about 5% to 10% of the insurance premium. A primary reason Cape Cod established its captive insurance company, said Cape Cod's Jones, was "We have stronger control."