Ambulatory surgical centers face multiple risks that could interrupt and devastate the business. The traditional method of protecting against these risks is insurance coverage, but coverage for these rare but catastrophic events is extremely expensive.
During Becker's 28th Annual Meeting: The Business & Operation of ASCs, in a session sponsored by Madison Insurance Group, Mark Sims, president of global business development discussed issues with conventional insurance and summarized the benefits of private insurance for ASCs.
Three key takeaways were:
- ASCs face a host of potentially catastrophic enterprise risks. Enterprise risks are risks that could result in business interruption. They have a low probability of occurring, but when they do occur, can devastate a business. Examples include a pandemic, a cyberattack, a supply chain interruption, loss of a key contract, loss of key talent, changes in laws or regulations and a host of other events that could interrupt and/or destroy a business.
- Common ways that businesses mitigate these risks are inadequate. Because insurance coverage for business interruption is extremely expensive, many businesses elect not to purchase insurance and instead rely on "hope and prayers." For businesses choosing this option, "If you do not have insurance to satisfy those losses, you've got to take it out of company cash flow. And when something catastrophic happens, there's typically not enough money in cash flow to satisfy that risk," Mr. Sims said.
For those businesses that pay the high premiums of commercial insurers, there are also challenges. That's because to maximize profits, these insurers impose "major exclusions in most commercial policies," Mr. Sims said. Exclusions are clauses in policies designed to allow the insurer to not pay claims. Mr. Sims shared an example of a business that experienced a ransomware attack, then filed a claim. The insurer responded by saying, "Oh, sorry, we don't cover ransomware." This is a typical response to exclusions.
It is also important to realize that when insurers collect premiums and don't pay claims, they make profit. They then invest that profit for the benefit of their shareholders. - Madison Insurance Group has a private insurance offering, which is a creative alternative to traditional insurance with significant benefits to businesses like ASCs. Madison Insurance Group has developed private insurance, where businesses can purchase business interruption policies from an insurance company called Madison International, which is a licensed, regulated insurance company. Mr. Sims explained that business owners are "transferring the risk of these low-probability, high-severity, business interruption policies to a licensed insurance company, just as if they were buying any insurance."
Madison International is a front-end carrier. It transfers the premium risks down to a reinsurance company called Madison Re, a licensed, regulated reinsurance company. With this arrangement, any underwriting profit investment income gets returned to the business owner, instead of being profit for a commercial insurance company. The structure includes funds withheld in risk reserves and a segregated asset plan. There is also a bond purchase program.
Beyond the specific details of this arrangement, what matters most is that a business owner with private insurance receives the same level of protection as when purchasing a commercial policy but also realizes the investment returns that are generated.
Part of what makes this arrangement possible is that Madison is based in Puerto Rico. "Puerto Rico has their own insurance laws," Mr. Sims said, adding, "Probably the most significant benefit about Puerto Rico is they have their own tax laws. The Internal Revenue Services does not have taxing authority in Puerto Rico." The combination of favorable insurance and tax laws enables Madison to offer private insurance that provides businesses like ASCs with the protection they need, while turning insurance from a cost into an investment with a good ROI.
"What we're doing is taking the insurance expense of coverage and creating a profit center," Mr. Sims said. By purchasing a private insurance company policy through Madison, ASCs can better mitigate their business disruption risks while realizing a positive and possibly significant return on their investment.