Own Your Insurance Company to Protect Your Income from RAC Audits, ICD-10, and the Affordable Care Act

By John Henry Dreyfuss, MDalert.com staff.

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  • A captive insurance company can save taxes for a medical practice on up to $1.2 million of insurance premium per year
  • A captive insurance company can go well beyond filling the gaps in existing commercial insurance policies
  • Physicians can insure the loss of income from a reduction in reimbursements, loss of a key employee, or loss of a contract with a hospital.
  • Practices can also insure expenses associated with a Recovery Audit Contractor (RAC) audit or insurance fraud claim, or delayed reimbursements as a result of ICD-10.

Any sensible businessperson would you buy an insurance policy that protects future income against reduced reimbursements, increased compliance costs, and a wide range of underinsured or uninsured lawsuit threats?

This person would likely be further motivated to purchase such a policy if the premiums were tax-deductible, the invested funds remained under the control of the investor, and the reserves were fully-refundable no claim is made against the policy over the next 5 to 10 years.

As crazy as it sounds, high-income specialists can accomplish these goals by creating a captive insurance company (CIC). The purpose of this article is to give a brief overview of how this 50-year-old strategy is being adapted to meet the needs of today’s physician.

What is a Captive Insurance Company?

A captive insurance company is a company that is properly licensed to provide insurance coverage under the rules of a local insurance department.

For physicians, a CIC provides property and casualty insurance coverage to a medical practice, surgery center, medical products company, compounding pharmacy, laboratory, real-estate management company, or other business, that a physician or physician practice may own.

In many cases, CICs supplement existing commercial insurance policies by covering deductibles, co-payments, and policy exclusions. In other instances, CICs provide surplus lines coverage similar to what one might find in a Lloyds of London-type insurance syndicate. In other industries, for decades companies have used captives to insure against legislative risks and the costs of compliance. Now, physicians and hospitals are following suit.

The Best Way Physicians Can Use Captives

Given the current state of healthcare, physicians can go well beyond filling the gaps in existing commercial insurance policies. Physicians can insure the loss of income from a reduction in reimbursements, loss of a key employee, loss of a contract with a hospital, expenses associated with a Recovery Audit Contractor (RAC) audit or insurance fraud claim, delayed reimbursements as a result of ICD-10, and other reasons. (See our ICD-9 to ICD-10 converter here.)

Captives could also add coverage for liabilities excluded by traditional general liability policies, such as wrongful termination, harassment, or even Americans with Disabilities Act violations. Given that these awards can be in excess of $1 million, this could be a valuable coverage.

Turn Threats into Opportunities

There has never been more uncertainty about physicians’ future incomes than there is today. Captive insurance companies can help physicians manage financial risks, reduce taxable income by significant amounts, and build a creditor-protected reserves account to provide finances to manage future changes.

Learn from Business Owners, not Other Physicians

The biggest mistake most physicians make is that they focus in their practices by wanting to see more and more patients, not on their practices as businesses that need to be built for profitability and sale.

The ways to make more money are not to see more patients but to run a more efficient practice that better controls costs, better exploits profitability centers, and takes advantage of captive insurance companies.

Is a Captives Worth the Cost to You?

Many businesses are enamored by the potential to save taxes on up to $1.2 million of insurance premium per year.

However, not every business can justify such sizable premiums. Only after a property casualty risk assessment can you truly know what risks are underinsured or uninsured and which ones are ideal for your future captive. If the assessment identifies at least $500,000 of annual premiums for a captive, then it is worth consideration. This is because the fees to create a customized insurance mechanism are not insignificant. You need legal, tax, actuarial, and insurance experience. You also want those experts to take the time to integrate the captive into both your business structure and your personal financial goals.

The costs are also a factor. Creation fees range from $60,000 to $100,000 for customized captive insurance companies. After year one, you can expect $40,000-$75,000 in corporate taxes, professional fees, licensing and risk management. Lastly, you have to consider the initial capitalization required to secure your license. Most states require $250,000 of initial capitalization, but a few are lower and more flexible. The accommodations state insurance departments are making to attract new business are always changing.

For questions about practice-related finance, Ask Mike, and pose a question to Michael Berry, ChFC. Mr. Berry is the lead financial advisor for MDalert.com. You can reach him at mberry@msf-advisors.com.

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