Academic journal article Journal of Corporation Law

Keeping Medical Liability Costs Down: How Captive Insurance and Damages Caps Could Help Control Rising Healthcare Costs

Academic journal article Journal of Corporation Law

Keeping Medical Liability Costs Down: How Captive Insurance and Damages Caps Could Help Control Rising Healthcare Costs

Article excerpt

I. INTRODUCTION II. BACKGROUND    A. How Captives Work       1. Popular Types of Captives       2. Benefits of Captives       3. Risks of Captives    B. Considerations When Forming a Captive    C. Captives and Medical Liability       1. Damages in Medical Malpractice Cases       2. Damages Caps       3. Damages Caps Nationwide       4. Challenges to Damages Caps    D. Captives as the Platform for Medical Liability Reform III. ANALYSIS    A. Benefits of Captives for Insuring Against Medical Liability    B. How Captives Can Be Used in the Context of Medical Liability       1. Benefits of Damages Caps       2. How Captives and Damages Caps Work Together IV. RECOMMENDATION V. CONCLUSION 


Insurance costs continue to rise annually generally because of increased administrative costs relating to processing and paying claims, litigation costs arising from claims, and certain types of risks becoming more expensive to insure. (1) Two issues contribute to large health care costs: (1) the use of defensive medicine, and (2) the increasing costs charged to consumers to help offset the high costs of medical malpractice insurance premiums. (2) Insurance for medical liability is among the most expensive types of insurance, costing physicians anywhere from $10,000 to $100,000 a year. (3) As of 2008, medical liability costs--including medical malpractice insurance, claims, and attorney and litigation costs--totaled 2.4% of the United States' annual health care spending, or roughly $55.6 billion each year. (4) Though these high costs might seem reasonable to insure against the possible risks often encountered in the medical field, even more costs are incurred as physicians often resort to an increased practice of defensive medicine--the practice of preforming more procedures and tests than medically necessary--in an attempt to avoid litigation. (5)

These rising costs often lead consumers, in this case physicians and medical institutions, to look outside of commercial insurance in order to affordably manage their risks. This leads consumers toward self-insurance and commercial insurance. (6) Captive insurance companies (captives) are subsidiaries created and wholly owned by noninsurance parent companies to provide insurance to the parent companies. (7) Over the last few decades, this form of self-insurance has gained a popularity that keeps growing in today's healthcare market.

This Note will discuss the history of captive insurance, the problems with the current state of medical malpractice liability, and ways in which health care costs related to health care malpractice can be decreased. This Note will also explore using captives as an alternative to commercial insurance companies and using damages caps as a way to keep down costs associated with medical liability.


Captives have existed for centuries, beginning with Frederic M. Reiss, who coined the term captive in the 1950s when he used it as a way to describe his creation of an insurance company that provided insurance only to its parent. (8) Reiss then incorporated American Risk Management in 1958. U.S. regulations at that time made it very expensive to form and operate captives within the U.S. This led him to look at offshore jurisdictions to domicile the captives. (9) He settled on Bermuda--which has since become the leading captive domicile. (10)

Though it took some time for the captive concept to gain popularity, there are thousands of captives worldwide, with over 3,000 currently domiciled in the U.S. (11) In general, captives largely remained domicile offshore due to the unfavorable U.S. regulations that made it costly to operate a captive domestically. (12) This was the case until the 1970s when the first law was passed in the U.S. to encourage captive formation--with Colorado, Tennessee, and Vermont being the first states to adopt the captive-favorable legislation. (13)

Though "insurance" is not defined in the Internal Revenue Code or the Treasury Regulations, it is clear through common law doctrine that "an arrangement will constitute insurance only if it incorporates requisite risk shifting and risk distribution. …

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