Alternative Risk Financing Mechanisms: The Financial Benefits Are Good For Senior Care, But Are Not the End of the Story

March 3, 2009

The most common form of risk financing in the senior care/long term care arena is commonly referred to as your “insurance policy.” Typically, we “finance” the chance that we may suffer a loss secondary to an accidental injury by paying for an insurance policy. Alternative risk financing mechanisms can offer a number of different types of insurance mechanisms that provide the same (and many times better) “coverage” as the typical insurance policy. They also allow you to realize some investment ownership of that mechanism. Because the incentives of “ownership” and “good risk management practices” are perfectly aligned, well-managed alternative risk finance mechanisms can return the fruits of successful risk management straight to your bottom line. In short, a successfully owned and managed alternative risk financing mechanism can take “insurance” from the cost side of your balance sheet to the asset side. They also have other benefits.

Alternative risk mechanisms come in all shapes and sizes and are infinitely customizable to various situations. They can be single parent (owned and operated by one entity, with or without multiple locations) or they can be group owned (again, with or without multiple locations). They can be risk retention groups, capitalized risk pools, premium refund programs or various forms of captive insurance entities. There is no one size fits all answer, and many times a program can be grown in steps that decrease the need for large, up-front financial investment. They also can be on or offshore to optimize the owner(s) tax picture. Certain variables will lead to the type of mechanism that is right for your facility; like what is the type and amount of risk to be financed and managed. You must remember that risk is real and it occurs daily, no matter how much you plan to avoid risk, it is there. The key to a successful program, however, is how you plan for it and what you do after it does occur. That is, a critical function of every well-managed, successful alternative mechanism is: 1) proactive risk management and 2) active claims handling. The adoption and disciplined pursuit of best practices drawn from experienced programs helps to avoid risk. Aggressive, smart claims management brings efficient and effective resolution to claims that do occur. Both skill sets are necessary for a successful program.

Softer markets (and the current economic crisis which brings about the fear of uncertainty) have caused a slow down in the launch of new alternative entities over the last 18 months. At least part of that, of course, was predictable, because alternative risk financing mechanisms are the darlings of hard markets. As insurance markets softened up and renewals dropped in price, the premium cost savings incentives in forming alternative mechanisms appeared to disappear. Harder markets, however, are on the horizon. With a hardening market, we expect a renewed interest in alternative mechanisms because premium differentials will be obvious once again.

There are other things, however, you should consider. Regardless of the state of the insurance market, there are benefits in the alternative market that are always present. Remember, a mandatory part of any alternative mechanism is a proactive risk management program and an aggressive claims handling program. These components typically do not increase the cost of any alternative program; the same dollars spent on current insurance premiums are just spent more effectively. The result? Improved risk management and loss prevention that lead to an enhanced community reputation for safety and security–a better star rating, if you will. An existing, well managed program also adjusts to market fluctuations, resulting in stable, known insurance costs year to year. Another advantage, the owners control what type of events are covered and what is not. The most important benefit that can occur regardless of what the insurance market is doing, though, is the financial reward for good loss experience that is returned to your bottom line.

There are many ways that an alternative risk financing mechanism can lower the cost of insurance for a long-term care facility. If you would like additional information, please feel free to contact our Senior Care team, part of our Health Care industry group.