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The Potential of Captive Medical Liability

Insurance Carriers and Damage Caps for
Real Malpractice Reform

ELEANOR D. KINNEY
ABSTRACT

Medical malpractice continues to be a contentious health policy issue

particularly from the perspective of physicians and patients. The medical
malpractice insurance market as a whole has changed considerably since
the mid-1970s, with widely fluctuating premium prices and crises in the
availability and affordability of medical malpractice insurance. More
recently, hospitals and physicians have increasingly chosen to self-insure
through a variety of vehicles including captive insurance companies.
This Article suggests that two existing strategies can be intentionally
designed and coordinated to facilitate the fair and expeditious resolution of
medical malpractice claims. Specifically, captive insurance companies
operating in states with damage caps can work more effectively with
healthcare providers to resolve identified malpractice claims, and they can
identify and compensate medical injury where claims are not pressed. This
knowledge establishes space for the providers and the captive insurers to
settle claims expeditiously and fairly. The space also enables the providers
and the captive insurers to go further and express apologies to patients
who have been injured in the care process. However, the National
Practitioner Data Bank under the Health Care Quality Improvement Act of
1986 poses challenges for physicians in participating in captives. This
article explores how captives can be structured and barriers addressed to
mitigate the problems for physicians and to improve the management of
medical error for all stakeholders.

*J.D., Duke University School of Law, 1973; MPH, University of North Carolina School
of Public Health, 1979; Hall Render Professor of Law Emerita, Hall Center for Law and
Health, Indiana University Robert H. McKinney School of Law. I would like to thank Mark
Harbin and Miriam Murphy for their contributions to this Article.

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INTRODUCTION

edical malpractice continues to be a contentious health policy

issue particularly from the perspective of physicians and other
healthcare providers.1 For patients, physicians, and other
healthcare providers, medical injury and liability are difficult problems.
Physicians and their associations devote more time and energy advocating
for the reform of medical liability systems than almost any other health
policy issue.2 They argue that physicians practice defensive medicine to
reduce their exposure to medical malpractice claims and that this
phenomenon is a great contributor to escalating healthcare costs.3 Some
evidence suggests that the claims about the problem of medical malpractice
and the impact of defensive medicine on medical costs are overblown.4
Nevertheless, the issue of medical malpractice clearly animates the medical
profession, as well as patients, and warrants action by policymakers.
The medical malpractice insurance market as a whole has changed
considerably since the mid-1970s and years following, with widely
fluctuating premium prices and crises in the availability and affordability
of medical malpractice insurance. 5 States enacted laws to slow the increase
in medical malpractice premium rates through reducing the frequency and
severity of claims.6 Physicians formed mutual, nonprofit insurance

1 See William M. Sage & Rogan Kersh, Introduction to MEDICAL MALPRACTICE AND THE U.S.
HEALTHCARE SYSTEM 1 (William M. Sage & Rogan Kersh eds., 2006); FRANK A. SLOAN &
LINDSEY M. CHEPKE, MEDICAL MALPRACTICE 1-2 (2008); Kenneth E. Thorpe, The Medical
Malpractice Crisis: Recent Trends and the Impact of State Tort Reforms, HEALTH AFF., W4-20 (Jan.
21, 2004), http://content.healthaffairs.org/content/early/2004/01/21/hlthaff.w4.20.full.pdf+html.
2 See Current Topics in Advocacy, AM. MED. ASSN, http://www.ama-assn.org/ama/pub/
advocacy/current-topics-advocacy.page (last visited Mar. 30, 2012).
3 See Daniel P. Kessler & Mark B. McClellan, Do Doctors Practice Defensive Medicine? 111 Q.J.
ECON. 353, 354 (1996); Daniel P. Kessler & Mark B. McClellan, How Liability Law Affects Medical
Productivity, 21 J. HEALTH ECON. 931, 935 (2002); Daniel P. Kessler & Mark B. McClellan, The
Effects of Malpractice Pressure and Liability Reforms on Physicians Perceptions of Medical Care, 60
LAW & CONTEMP. PROBS. 81, 82-83 (1997).
4 See Patricia M. Danzon, Liability for Medical Malpractice, in 1 HANDBOOK OF HEALTH
ECONOMICS 1339, 1368-69 (Anthony J. Culyer & Joseph P. Newhouse eds., 2000); see also
OFFICE OF TECH. ASSESSMENT, U.S. CONG., OTA-H-602, DEFENSIVE MEDICINE AND MEDICAL
MALPRACTICE 2 (1994), available at http://www.fas.org/ota/reports/9405.pdf; TOM BAKER, THE
MEDICAL MALPRACTICE MYTH 3 (2005); Henry J. Aaron & Paul B. Ginsburg, Is Health Spending
Excessive? If So, What Can We Do About It?, 28 HEALTH AFF. 1260, 1270 (2009).
5 Eleanor D. Kinney, Malpractice Reform in the 1990s: Past Disappointments, Future Success?,
20 J. HEALTH POL. POLY & L. 99, 101-02 (1995) (stating tort reform likely made medical
malpractice insurance more widely available but not necessarily less expensive).
6 Id. at 101; see Randall R. Bovbjerg, Legislation on Medical Malpractice: Further Developments
and a Preliminary Report Card, 22 U.C. DAVIS L. REV. 499, 501-03, 522-23, 525 (1989) (providing

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companies to lower premiums and exercise greater control over the

management of malpractice claims.7 These companies did not do well.8
More recently, as this article describes, hospitals and physicians have
increasingly chosen to self-insure through a variety of vehicles including
creating captive insurance companies. The insurance market for healthcare
institutions and professionals is posed to transform still with the
implementation of the new health reform legislation enacted in 2010.9
This Article suggests that two existing strategies already in place in
many state, and among many providers can be intentionally designed and
coordinated to facilitate the fair and expeditious resolution of medical
malpractice claims. Specifically, captive insurance companies operating in
states with caps on damages can work more effectively with healthcare
providers to resolve identified malpractice claims and also to identify and
compensate medical injury where claims are not pressed. This
phenomenon is because the damage cap informs insurers and providers of
the full extent of their liability. This knowledge establishes space for
providers and the captive insurers to settle claims expeditiously and fairly.
The space also enables providers and the captive insurers to go further and
express apologies to patients who have been injured in the care process.
This Article explores how this phenomenon can be implemented and
realized. This Article also explores how captives can be structured and
barriers addressed to mitigate the problems for physicians and to improve
the management of medical error for all stakeholders.
I.

Background

This section reviews past efforts of malpractice reform as well as the

rise and evolution of the patient-safety movement. These developments are
important precursors to the reforms suggested in this article.
A. Medical Liability
There is much debate over the existence, nature and scope of the
malpractice problem, with little consensus about the problem or its

examples of reforms aimed at reducing the number of lawsuits and the potential recovery size
as a legislative reaction to the steep increase in insurance premiums).
7 See Nicole Williams Koviak, An Insurance Perspective on the Medical Malpractice Crisis:
Introduction, 13 ANNALS HEALTH L. 607, 610-11 (2004); Transcribed Speech of Mr. Robert
Mulcahey, 13 ANNALS HEALTH L. 617, 621 (2004) [hereinafter Mulcahey].
8

Koviak, supra note 7, at 610-11; Mulcahey, supra note 7, at 621.

See generally Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119
(2010), amended by Healthcare and Education Reconciliation Act of 2010, Pub. L. No. 111-152,
124 Stat. 1029 (2010) [hereinafter ACA].
9

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resolution.10 Most importantly, there is not a one-to-one ratio in the

incidence of medical malpractice and lawsuits. The Harvard Malpractice
Study found that 45% of claims present no malpractice,11 and the older
California Malpractice Study reported 57% false positives,12 with the more
recent Utah-Colorado Study having similar rates. 13 Also, there is some
evidence that some groupsfor example, recipients of Medicare and
Medicaidsustain medical injury that is less likely to result in malpractice
claims.14 In addition, the poor and the elderly are less likely to sue than
younger, more affluent individuals.15 These data suggest that the current
tort system does not address all medical injuries. From a social and
jurisprudential perspective, this inconsistency is problematic and unjust.
Another important phenomenon with medical injury is that providers
often fail to disclose and/or apologize for medical errors. This phenomenon
influences claiming behavior. Studies have shown that patients find
themselves in an adversarial position when seeking accountability from
providers in the event of a poor outcome and would have responded
positively to an explanation or an apology. One study showed that twentyfour percent of the surveyed patients sued because physicians had failed
to be completely honest with them about what happened, allowed them to
believe things that were not true, or intentionally misled them.16 Empirical

10 William M. Sage, The Forgotten Third: Liability Insurance and the Medical Malpractice Crisis,
23 HEALTH AFF. 10, 13-16 (2004) (arguing that the insurance component of the medical
malpractice system has not kept pace with other factors in the system).
11 Patient Safety and Medical Liability Reform Demonstration Projects, DEPT OF HEALTH &
HUMAN SERVS., http://grants.nih.gov/grants/guide/pa-files/PAR-11-025.html (last visited Mar.
30, 2012); see PAUL C. WEILER ET AL., A MEASURE OF MALPRACTICE: MEDICAL INJURY,
MALPRACTICE LITIGATION, AND PATIENT COMPENSATION 71 (1993); A. Russell Localio et al.,
Relation Between Malpractice Claims and Adverse Events Due to Negligence: Results of the Harvard
Medical Practice Study III, 325 NEW ENG. J. MED. 245, 250 (1991).
12 See Don Harper Mills, Medical Insurance Feasibility Study, 128 WEST J. MED. 360, 364
(1978).
13 See David M. Studdert et al., Negligent Care and Malpractice Claiming Behavior in Utah and
Colorado, 38 MED. CARE 250, 253 (2000).
14 See U.S. GENERAL ACCOUNTING OFFICE, GAO/HRD-93-126, MEDICAL MALPRACTICE:
MEDICARE/MEDICAID BENEFICIARIES ACCOUNT FOR A RELATIVELY SMALL PERCENTAGE OF
MALPRACTICES LOSSES (1993) (finding Medicaid patients file claims at a lower rate than other
groups, based on population).
15 Helen R. Burstin et al., Do the Poor Sue More? A Case-Control Study of Malpractice Claims
and Socioeconomic Status, 270 JAMA 1697, 1700 (1993); see also Mark Sager et al., Do the Elderly
Sue Physicians?, 150 ARCHIVE INTERNAL MED. 1091, 1091 (1990) (reviewing Wisconsin
malpractice cases to determine the frequency of elderly patients lawsuits).
16

Gerald B. Hickson et al., Factors that Prompted Families to File Medical Malpractice Claims
Following Perinatal Injuries, 267 JAMA 1359, 1361 (1992); see also Carol B. Liebman & Chris
Stern Hyman, A Mediation Skills Model to Manage Disclosure of Errors and Adverse Events to

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evidence developed by Gerald B. Hickson and colleagues suggests that

patient complaints have a predictive qualitythe more dissatisfied the
patient, the more likely a malpractice claim will result.17 Additionally,
James W. Pichert, studying feedback from patients, identified individual
units within an institution that could be considered high risk.18
B. Damage Caps
Historically and predominantly, medical liability reform has consisted
of state legislation to reduce the frequency and severity of recovery for
malpractice claims.19 Damage caps are the major strategy to reduce severity
and bring predictability to the medical liability insurance market. Damage
caps and reduced statutes of limitations have been shown to reduce
severity and frequency, respectively.20 Damage caps in medical malpractice
cases have been effective in controlling the cost of malpractice insurance. 21
Damage caps have also been criticized as hurting malpractice claimants to
the benefit of providers and liability insurers.22
C. The Patient Safety Movement
The Patient Safety Movement, inspired by the Institute of Medicines
(IoM) report, To Err Is Human, has precipitated a sea change in the way
healthcare providers and policy makers perceive the problem of medical
injury.23 This IoM report made several important findings and observations
that have contributed to this sea change: (1) an estimated 44,000 to 98,000
people die each year in hospitals from medical injury; and (2) systems
failures, rather than poor performance by individual practitioners, cause at

Patients, 23 HEALTH AFF. 22, 24 (2004) (listing factors that lead to the decision to sue, including
physician dishonesty).
17 See Gerald B. Hickson et al., Patient Complaints and Malpractice Risk, 287 JAMA 2951, 2955
(2002).
18 See James W. Pichert et al., Identifying Medical Center Units with Disproportionate Shares of
Patient Complaints, 25 JOINT COMMN J. QUALITY IMPROVEMENT 288, 292, 298 (1999).
19

Kinney, supra note 5, at 101.

Patricia M. Danzon, The Frequency and Severity of Medical Malpractice Claims: New
Evidence, 49 LAW & CONTEMP. PROBS. 57, 71, 73-74 (1986); Frank A. Sloan et al., Effects of Tort
Reforms on the Value of Closed Medical Malpractice Claims: A Microanalysis, 14 J. HEALTH POL.
POLY & L. 663, 665, 678 (1989).
20

21 Leonard J. Nelson, III et al., Damage Caps in Medical Malpractice Cases, 85 MILBANK Q. 259,
269 (2007).
22

Eleanor D. Kinney, An Empirical and Critical Look at the Current Medical Liability Crisis,
FRONTIERS HEALTH SERVS. MGMT., Fall 2003, at 31, 34.
23 Ross D. Silverman, Patient Safety and Patients Rights, VIRTUAL MENTOR (June 2004)
http://virtualmentor.ama-assn.org/2004/06/pfor2-0406.html.

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least half of patient injuries.24 The IoM report concluded that eliminating
or minimizing unintended risks and hazards associated with the structure
and process of care, improvements in patient safety could decrease medical
liability claims.25 The IoM recommended that providers create a culture of
safety in institutions by: (1) focusing on reducing errors in systems
providing care; (2) borrowing from quality science in the engineering
industries; and (3) moving away from emphasizing placement of blame on
individual physicians and other providers.26
Additionally, the Patient Safety and Quality Improvement Act of 2005
authorized creation of Patient Safety Organizations (PSOs) at the state
level to improve quality and safety through the collection and analysis of
data on patient events.27 PSOs offer a secure environment where clinicians
and healthcare organizations can collect, aggregate, and analyze data,
thereby improving quality by identifying and reducing the risks and
hazards associated with patient care.28
An important development in the Patient Safety Movement has been
the identification of so-called never events, which are incidents that,
according to some authorities, should never occur in the provision of good
quality medical care.29 In 2002, the National Quality Forum (NQF)
published its report, Serious Reportable Events in Healthcare, which identified
twenty-seven adverse events occurring in hospitals that are serious,
largely preventable, and of concern to both the public and healthcare
providers.30 According to NQF, the reports objective is to establish
consensus among consumers, providers, purchasers, researchers, and
other healthcare stakeholders about those preventable adverse events that
should never occur and to define them in a way that, should they occur, it
would be clear what had to be reported.31

24 INST. OF MED., TO ERR IS HUMAN: BUILDING A SAFER HEALTH SYSTEM 26, 30 (Linda T.
Kohn et al. eds., 2000).
25 Patient Safety and Medical Liability Reform Demonstration Projects, supra note 11.
26 See INST. OF MED., supra note 24, at 49, 71; see also Lucian L. Leape, Error in Medicine, 272
JAMA 1851, 1852 (1994).
27

See Patient Safety and Quality Improvement Act of 2005, Pub. L. No. 109-41, 119 Stat. 424
(codified as amended at 42 U.S.C. 299(b)-21 to 299(b)-26 (2006)).
28 Patient Safety Organizations, AGENCY FOR HEALTHCARE RES. & QUALITY, http://pso.ahrq.
gov/psos/overview.htm (last visited Mar. 30, 2012).
29 Nancy Berlinger, Medical Error, in FROM BIRTH TO DEATH AND BENCH TO CLINIC: THE
HASTINGS CENTER BIOETHICS BRIEFING BOOK FOR JOURNALISTS, POLICYMAKERS, AND
CAMPAIGNS 97, 97 (Mary Crowley ed., 2008) (describing never events as a major
development in patient care).
30 Kenneth W. Kizer, Foreword to THE NATL QUALITY F., SERIOUS REPORTABLE EVENTS IN
HEALTHCARE: A CONSENSUS REPORT (2002), available at www.ahrq.gov/qual/nqfpract.pdf.
31

Patient

Safety:

Serious

Reportable

Events

in

Healthcare,

NATL

QUALITY

F.,

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The Centers for Medicare and Medicaid Services (CMS) have also
taken steps to limit payment for so-called never events including
hospital-acquired conditions. Specifically, section 5001(c) of the Deficit
Reduction Act of 2005 requires the Secretary to identify conditions that: (a)
are high cost or high volume, or both . . . .; (b) results in the assignment
of a case to a diagnosis-related group that has a higher payment when . . .
present as a secondary diagnosis; and (c) could reasonably have been
prevented through the application of evidence-based guidelines.32 In
August 2007, CMS adopted a final rule identifying eight never events for
which, beginning October 1, 2008, Medicare would not provide additional
payment to hospitals unless the events were present on admission. 33 The
ACA expanded reimbursement restrictions for never events to the
Medicaid program.34 In June 2011, CMS promulgated a final rule to
implement this ACA provision.35
D. Captive Insurance Companies
In recent years, both institutional and professional healthcare
providers have moved away from commercial insurance carriers toward
alternative insurance vehicles to provide malpractice liability coverage.36
Captive insurance is a self-funded insurance mechanism that is primarily
controlled by its owners and whose owners are typically the principal
insureds.37 The Captive Insurance Companies Association defines captive
insurers as follows:
http://www.qualityforum.org/projects/hacs_and_sres.aspx (last visited Mar. 30, 2012).
32

Deficit Reduction Act of 2005, Pub. L. No. 109-171, 5001(c)(1)(iv)(I)-(III), 120 Stat. 30
(codified as amended at 42 U.S.C. 1395ww(d)(4)(A)(iv)(I)-(III) (2006)); accord CTRS. FOR
MEDICARE & MEDICAID SERVS., DEPT OF HEALTH & HUMAN SERVS., HOSPITAL-ACQUIRED
CONDITIONS (HAC) IN ACUTE INPATIENT PROSPECTIVE PAYMENT SYSTEM (IPPS) HOSPITALS (Oct.
2011), available at https://www.cms.gov/HospitalAcqCond/downloads/HACFactsheet.pdf.
33 Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008
Rates, 72 Fed. Reg. 47,130, 47,217 (Aug. 22, 2007) (codified at 42 C.F.R. 411-13, 489); see also
MEDICARE NATIONAL COVERAGE DETERMINATIONS MANUAL, Ch. 1, Part 2, 140.6-140.8,
https://www.cms.gov/manuals/downloads/ncd103c1_Part2.pdf (last visited Mar. 21, 2012).
34 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 2702, 124 Stat. 319
(2010) (codified as amended at 42 U.S.C. 136b-1).
35

Payment Adjustment for Provider-Preventable Conditions Including HealthcareAcquired Conditions, 76 Fed. Reg. 32, 816 (June 6, 2011) (to be codified at 42 C.F.R. Pts. 434,
438, & 447).
36 See generally JAY D. ADKISSON, ADKISSONS CAPTIVE INSURANCE COMPANIES (2006); R.
WESLEY SIERK, III, TAKEN CAPTIVE (2008..
37
TOWERS WATSON, CAPTIVES 101: MANAGING COST AND RISK 2, available at
http://www.towerswatson.com/assets/pdf/2435/TW_Captives_101.pdf; see also ROBERT H.
JERRY, II, NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION 1.09 (2011); Arthur G.
Koritzinsky, The Captive Concept, in INSURANCE COVERAGE 2009, at 698, 691 (2009).

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Captive Insurance Company - A risk-financing method or form

of self-insurance involving the establishment of a subsidiary
corporation or association organized to write insurance. Captive
insurance companies are formed to serve the insurance needs of
the parent organization and to escape uncertainties of
commercial insurance availability and cost. The insureds have a
direct involvement and influence over the companys major
operations, including underwriting, claims, management policy,
and investments.38

Captive insurers, as they are known today, originated in the 1960s and
were primarily domiciled in Bermuda with its loose insurance regulation. 39
The laws in Bermuda facilitated easy incorporation of captive insurance
companies and light regulation and continue to do so today. In the 1950s,
only about 100 captive companies, domiciled in Bermuda, existed; by 1982,
over 1000 captives existed with the majority incorporated in Bermuda. 40
The global consulting firm Towers Watson estimates that there are now
some 5400 captive insurance companies worldwide with 885 incorporated
in Bermuda.41 However, more and more state insurance regulatory
schemes recognize captives and license them accordingly. Figure 1 lists the
U.S. jurisdictions that currently license captive insurers:

38 Captives Glossary, CAPTIVE INS. COS. ASSN, http://www.cicaworld.com/Resources/

CaptivesGlossary.aspx (last visited Mar. 30, 2012).
39 TOWERS WATSON, supra note 37, at 2.
40 Id.
41 Id.

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Figure 142
U.S. Jurisdictions Authorizing Captive Insurers
Alabama
Montana
Arizona
Nevada
Arkansas
New York
Colorado
Puerto Rico
Delaware
Rhode Island
District of Columbia
South Carolina
Florida
South Dakota
Georgia
Tennessee
Hawaii
U.S. Virgin Islands
Illinois
Utah
Kansas
Vermont
Kentucky
Virginia
Maine
West Virginia
There are two primary forms of captives: single-parent captives and
group captives.43 In a single-parent captive, also known as a pure captive, a
parent company forms an insurance company to insure its own risks. 44 In a
group captive, multiple, non-related organizations form or participate in an
insurance company to insure risks common to the group.45 Other
classifications of captives include an association captive, a rent-a-captive,
a sponsored or protected cell captive, and a risk retention group
(RRG).46
Captives are of interest to all industries because they allow corporate
control over the captive; reduce premiums that do not reflect profits for
commercial insurers or expenses related to any other non-associated risk;
and, for for-profit corporations, permit tax deductions for premiums paid
to the captive. Initially, industries use of captives generally was inhibited
by the tax treatment of premiums paid to the captive. In 1978, the U.S. Tax
Court ruled that a taxpayer corporations agreement with an insurance
company, to the extent it reinsured the taxpayers wholly owned
subsidiary, was not insurance for tax purposes and that payments made

42 Complete Listing of All U.S. and Offshore Captive Insurance Domiciles: Best Domiciles for
Captive Insurance Companies, WEALTH MGMT. SOLUTIONS, LLC, http://www.wmsolutionsnow.
com/captive_insurance_domiciles.htm (last visited Mar. 30, 2012).
43 See TOWERS WATSON, supra note 37, at 2.
44 Michael R. Mead, Captive Structures, IRMI.COM (Apr. 2002), http://www.irmi.com/expert
/articles/2002/mead04.aspx.
45
46

Id.
TOWERS WATSON, supra note 37, at 2.

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were not deductible as business expenses. 47 The Court of Appeals for the
Ninth Circuit affirmed.48
In 1986, to clarify tax policy, Congress enacted the Liability Risk
Retention Act of 1986 to recognize captives and other arrangements as
RRGs for tax purposes.49 An RRG must be domiciled in a U.S. state that
regulates it as a captive insurance company. 50 The RRG may then operate
nationwide, provided it registers with each state in which it is to operate.51
Of note, the U.S. Government Accountability Office has raised concerns
about the effectiveness of state regulation of captives. 52
In recent years, healthcare providers have increasingly used captive
insurance companies for their medical liability coverage.53 Over the past
several years, an increasing number of individual hospitals and consortia
of hospitals and physicians have begun to self-insure in a variety of ways.
In 2003, the American Hospital Association estimated that forty percent of
its member hospitals were self-insured.54 A more recent industry survey
conducted by AON Risk Solutions and the American Society for
Healthcare Risk Management found that 73 percent of systems surveyed
will self-insure the combined hospital-physician malpractice risk.55

47

Carnation Co. v. Commr, 71 T.C. 400, 415 (1978), affd, 640 F.2d 1010 (9th Cir. 1981).
Carnation Co. v. Commr of Internal Revenue, 640 F.2d 1010, 1013 (9th Cir. 1981); see 3
COUCH ON INSURANCE 39:2 (3d ed. 2011).
48

49

Pub. L. No. 99-563, 100 Stat. 3170 (codified as amended at 15 U.S.C. 3901(4) (2006)).
Id. 3901(4)(c).
51 Id. 3902(a).
52 See U.S. GOVT ACCOUNTABILITY OFFICE, GAO-05-536, RISK RETENTION GROUPS:
COMMON REGULATORY STANDARDS AND GREATER MEMBER PROTECTIONS ARE NEEDED 65-66
(2005), available at http://www.gao.gov/new.items/d05536.pdf.
53 Mark E. Battersby, Create a Strategy to Protect Your Practice, 88 MED. ECON. 65, 66 (2011);
Koviak, supra note 7, at 609; David B. Mandell & Maureen Verduyn, Captive Insurance
Companies: Why You Should Consider Them Now More than Ever, 26 DERMATOLOGY TIMES 82, 82
(2005); Mulcahey, supra note 7, at 622; see Michael J. Moody, 25 Years of Stability in Medical
Malpractice, ROUGH NOTES, Feb. 2008, at 68, 68, available at http://www.captive.com/
captives/FuturoArticle/Rough%20Notes%20Article%202-08.pdf; Steve Taravella, Frustrated
Healthcare Systems Seek Alternatives to Traditional Insurance, MOD. HEALTHCARE, May 13, 1988,
at 30, 31-32.
50

54 U.S. GEN. ACCOUNTING OFFICE, GAO-03-702, MEDICAL MALPRACTICE INSURANCE:

MULTIPLE FACTORS HAVE CONTRIBUTED TO INCREASED PREMIUM RATES 39 (2003), available at
http://www.gao.gov/new.items/d03702.pdf.
55 Healthcare Industry Faces Unprecedented Change in Hospital Landscape, AON (Oct. 18, 2011),
http://aon.mediaroom.com/index.php?s=43&item=2414.

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E. The Potential Contribution of Health Reform

The Affordable Care Act, enacted in 2010, has multiple provisions that
encourage providers to integrate their quality improvement, patient safety,
and care delivery activities, and thus could greatly benefit by the flexibility
accorded by captive insurance companies managing liability.56 One of the
most important provisions in this regard is the Shared Savings Program for
Medicare fee-for-service providers.57 Under this program, a group of
providers and suppliers of services (e.g., hospitals, physicians, and others
involved in patient care) collaborate to care for Medicare beneficiaries who
are not enrolled in Medicare Advantage plans in organizations called
accountable care organizations (ACOs).58 ACOs must adhere to certain
requirements and practices aimed at providing seamless, high quality care.
In November 2011, CMS promulgated a final rule to implement the Shared
Savings program and ACOs.59
II. Captive Insurance Coverage and Damage Caps
The patient safety movement has fundamentally changed the
perspective through which providers view the management of error and
injury. Rather than taking a completely defensive posture of blame and
subsequent concealment in many instances, providers are looking at errors
and injuries as system problems that need better internal management to
ameliorate wrongs and improve future practice.60 Thus, the infrastructure
is in place that allows providers to move toward remediating medical
injury and deflecting malpractice claims in a more proactive, effective, and
just manner.

56 See DAVID M. LINER & KATHLEEN E. ELY, HEALTHCARE REFORM: POTENTIAL

OPPORTUNITIES FOR CAPTIVES (2011), available at http://publications.milliman.com/publications/

healthreform/pdfs/potential-opportunities-for-captives.pdf; EDWARD M. WROBEL AND JEFFREY

LEVIN-SCHERZ, US HEALTHCARE REFORM (Dec. 2010), http://www.towerswatson.com/
assets/pdf/mailings/Towers-Watson-Captive-Review-Article.pdf.
57

See 42 U.S.C. 1395jjj (2010).

See Accountable Care Organizations: Improving Care Coordination for People with Medicare,
HEALTHCARE.GOV,
http://www.healthcare.gov/news/factsheets/2011/03/accountablecare03
312011a.html (last updated Nov. 16, 2011); Ctrs. for Medicare & Medicaid Servs., Overview:
Accountable Care Organizations, CMS.GOV, https://www.cms.gov/aco/ (last modified Feb. 7,
2012, 11:25 AM).
58

59

Medicare Program; Medicare Shared Savings Program: Accountable Care Organizations

Final Rule, 76 Fed. Reg. 67, 802 (Nov. 2, 2011) (to be codified at 42 C.F.R. pt. 25).
60 See NATL PATIENT SAFETY FOUND., RESEARCH PROGRAM: SUMMARY OF PROGRESS 2
(2010),
available
at
http://www.npsf.org/wp-content/uploads/2011/10/2010_Research_Summary_of_Progress.pdf.

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A. The Potential of Captives and Caps

While preferential to providers, damage caps provide an extraordinary
opportunity for real medical liability reform that benefits patients first and
foremost while mitigating the trauma of medical malpractice for physicians
and providers. Specifically, captive malpractice insurers and state damage
caps, working in conjunction, show great promise in closing the chasms in
medical error identification, risk management, and medical injury
compensation.
Specifically, captives can work better with providers to resolve
identified malpractice claims. Moreover, they can better identify and
compensate medical injury where claims are not pressed. The cap accords
the captive and provider knowledge of the full extent of their liability and
thereby establishes space for providers and the captive insurers to settle
claims expeditiously and fairly. The space also enables providers and the
captive insurers to go further and express apologies to patients who have
been injured in the care process.61 Consequently, providers have more
flexibility to manage medical injuries and/or claims more justly and make
disclosures of errors, frank apologies, and remediation without fear of
large jury verdicts that might include punitive damages.
Captives can assume this function because of the fact that the owners
of the captives, insured providers, can essentially direct the decisions
relating to underwriting, claims, and investments of the captive. Thus,
captives can take steps to limit medical liability claims and protect the
provider, as the provider is the only insured entity. Because they are acting
in the providers interest without another incentive, such as serving
shareholders or other insureds, they have greater flexibility to compensate
patients for medical injury as part of a providers patient safety program.62
In this regard, captives can act in ways that conventional commercial
liability insurers cannot. Conventional medical liability insurers are
incentivized to contest medical liability claims in pursuit of profits or
revenue. In their effort to control their liability, conventional liability
insurers have little incentive to work with provider patient safety
programs in compensating patients for medical injury.

61 See Richard C. Boothman et al., A Better Approach to Medical Malpractice Claims? The
University of Michigan Experience, 2 J. HEALTH & LIFE SCI. L. 125, 142, 144-45 (2009).
62 See Mary Chmielowiec & Brad Granger, Cost of Risk: Show Me the Money, US CAPTIVE,
Apr. 2011, at 26, 27-29, available at www.uscaptivemagazine.com/archive.asp (accessed by
following 2011 Issue hyperlink) (explaining that using data and data analytics can predict
risks, allow captives to be proactive by monitoring their exposure, and create financially
sound captives).

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B. Linking Quality Assurance, Safety Programs, and Risk Management

with Medical Injury Remediation
Patient safety initiatives are very useful in addressing medical
malpractice. With these initiatives, the circumstances are in place to link
quality assurance, patient safety, and risk management with the complete
remediation of medical injury. Of note, some important policymakers have
called for linking patient safety and liability reform. 63
The envisioned role of captive providers in the resolution of claims and
injuries is a major factor in enabling this linkage. By crossing the historical
chasm between risk management and remediation, many of the problems
now caused by adjudicating medical injury claims in the tort system would
be mitigated. Specifically, genuine medical injuries could be identified
early and resolved expeditiously. Also, grievances that do not involve
medical injury, but have caused concerns for patients, can be identified and
resolved, thus lessening the likelihood that the patient will seek satisfaction
through the tort system. In sum, early remediation can resolve incidents
and claims more promptly, privately, and informally, thus reducing the
high financial and emotional costs that attend traditional tort litigation.
C. Some Minor Caveats
There are some important considerations to take into account in
structuring captive insurance companies for hospitals and other healthcare
providers. As indicated above, the tax treatment of captives and premiums
paid by a hospital or other healthcare organizations is complicated.64
Also, complex Medicare reimbursement issues are implicated in
hospital ownership of captives. CMS, which administers the Medicare
program, issued Section 2162.2.A.4 of The Provider Reimbursement Manual
regarding the treatment of the cost of premiums paid to captive insurance
companies for Medicare cost reimbursement. 65 Specifically, Section
2162.2.A.4 limits cost reimbursement if the captives investments in

63 See, e.g., JOINT COMMN ON ACCREDITATION OF HEALTHCARE ORGS., HEALTHCARE AT THE

CROSSROADS: STRATEGIES FOR IMPROVING THE MEDICAL LIABILITY SYSTEM AND PREVENTING
PATIENT INJURY 6, 10 (2005), available at http://www.jointcommission.org/assets/1/18/
Medical_Liability.pdf [hereinafter HEALTHCARE AT THE CROSSROADS]; Hillary Rodham Clinton
& Barack Obama, Making Patient Safety the Centerpiece of Medical Liability Reform, 354 NEW ENG.
J. MED. 2205, 2205 (2006), available at http://www.nejm.org/doi/pdf/10.1056/NEJMp068100.
64 See supra notes 43-47 and accompanying text; see also James A. Christopherson, The
Captive Medical Malpractice Insurance Company Alternative, 5 ANNALS HEALTH L. 121, 122, 12526 (1996); Karen Gantt, Federal Tax Treatment of Medical Malpractice Insurance Alternatives for
Nonprofits, 52 DRAKE L. REV. 495, 501, 503 (2004).
65

See Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491-92 (D.C. Cir. 2010).

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equities exceed what state insurance regulators ordinarily require. 66 The

Circuit Court for the District of Columbia invalidated this rule in 2010,
creating some uncertainty regarding this policy.67
There is also question about the degree to which Medicare fraud and
abuse rules will permit institutional healthcare providers to assist affiliated
physicians with the cost of medical malpractice insurance through
captives. In 2004, the American Health Lawyers Association wrote a letter
to officials with the Internal Revenue Service and the U.S. Department of
Health and Human Services (DHHS) requesting details of the
permissible assistance that hospitals and other acute and long-term care
providers may provide to physicians and other health professionals to
lessen the effects of rising malpractice insurance premiums.68 DHHS
declined to offer a response to the letter given the restrictions of the
Medicare fraud and abuse authorities.69
D. A Major Barrier
There is one important barrier that threatens the possibility of the
integrative reforms suggested in this Article. A captive that insures a
corporate entity may also be covering providing coverage for physicians
and other professionals on a theory of vicarious liability.70 The captive as
the physicians insurer will have specific obligations to defend the
employee physicians. These obligations may be inconsistent with the
captives desire to resolve claims expeditiously.71
Specifically, medical malpractice claims have serious consequences for
individual physicians. One of the most serious consequences of a settled

66

See id.at 491-92.

See id. at 494, 496 (invalidating the rule on grounds that it had been improperly
promulgated); see also D.C. Circuit Reverses, Remands Judgment on Payment for Offshore Insurer
Coverage, 19 HEALTH L. REP. 1176, 1176 (2010).
68 Letter from Gerald M. Griffith, on Behalf of the Am. Health Lawyers Assn, to the U.S.
Dept of Health & Human Servs. and the Internal Revenue Serv. (Apr. 22, 2004), available at
http://www.healthlawyers.org/SiteCollectionDocuments/Content/ContentGroups/Press_Relea
ses/pi_MalpracticeLtr.pdf; see Attorneys Ask Agencies to Clarify Limits on Assisting with Coverage,
13 HEALTH L. REP. 677, 677 (2004).
67

69

With Little Help from Feds, Hospitals Explore Ways to Fix Staff Physicians Insurance Woes, 13
HEALTH L. REP. 1363, 1363 (2004).
70 See Leona Egeland Siadek, Vicarious Liability Spreads with Ostensible Partnerships, THE
DOCTORS CO.: THE DOCTORS ADVOC. (2007), http://www.thedoctors.com/KnowledgeCenter/
Publications/TheDoctorsAdvocate/CON_ID_000351 (discussing that doctors are often named
in lawsuits due to vicarious liability).
71

See HEALTHCARE AT THE CROSSROADS, supra note 63, at 5 (noting that a medical
malpractice lawsuit is lengthy and reduces the opportunity for quick resolution of unsafe
practices).

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malpractice claim against a physician is the obligation under the Health

Care Quality Improvement Act of 198672 to report settled claims to the
National Practitioner Data Bank (NPDB) that the U.S. Department of
Health and Human Services maintains. 73 Such reports to the NPDB follow
physicians throughout their careers and can limit employment and
advancement opportunities.
Indeed, the NPDB stands in the way of the reforms proposed in this
Article, as well as other forward-looking reforms, such as enterprise
liability for healthcare organizations. Further, the NPDB is not consistent
with the patient safety movements philosophy to focus less on blaming
individuals and more on addressing systemic problems that contribute to
medical injury. In closing, this Article calls for a reassessment of the
NPDBs value in todays era of access to information on the Internet and
the increased quality assurance and improvement methods of hospitals,
physicians, and all other healthcare providers.

CONCLUSION
Patient safety initiatives provide much promise in addressing medical
malpractice. Indeed, policymakers have called for linkages between patient
safety promotion strategies and the resolution of medical liability claims
and injuries. It makes great sense to link provider quality, patient safety,
and risk management efforts with remediation of medical injuries,
grievances, and medical malpractice claims. As providers become more
integrated under healthcare reform, captives can facilitate and support
integration initiatives. Captives and caps, working in the context of health
reform, provide an opportunity to resolve medical injury claims and events
internally and expeditiously. But such linkages should only be
implemented if physicians can be adequately protected from settlement
decisions that unfairly compromise their reputation. Reforming the
National Practitioner Data Bank would be a good first step in this regard.

72 Healthcare Quality Improvement Act of 1986, Pub. L. No. 99-660, 100 Stat. 3784 (codified
as amended at 42 U.S.C. 11101-11152 (2006)).
73

Id. 11131-11137.