Via Christi Health, the largest nonprofit health care system in Kansas, maintained an insurance company in the Cayman Islands for nearly 20 years, according to forms the group files with the IRS.
The company, Sunflower Assurance, was used to handle medical malpractice insurance for the health system, said David Hadley, chief financial officer for Via Christi Health.
Now that Via Christi is under the umbrella of Ascension Health, the Cayman Island captive insurance company has been acquired by Ascension, Hadley said.
A captive insurance company is owned by a parent company and is used to insure its own risks.
Under federal law, you have to do medical malpractice through an insurance company, and so thats the reason for the captive is you have to have a wholly owned insurance company in order to do that, Hadley said.
Such off-shore captive insurance companies are common among medium and large organizations both nonprofit and for-profit in health care and other sectors, said Eric Nordman, director of the National Association of Insurance Commissioners and director of the Center of Insurance Policy and Research, based in Kansas City, Mo.
Its a formal self-insurance program for companies that are generally big enough to decide not to buy insurance if they dont want to, Nordman said.
Taxes and regulations
According to the Cayman Islands Monetary Authority, the islands are the leading country for health care captives, with 254 companies that focus specifically on medical malpractice liability as of September.
About 90 percent of all insurance captives in the Cayman Islands are for companies insuring risks in North America.
Via Christi officials said having a for-profit insurance company based in the Cayman Islands allowed Via Christi to better maintain its focus on its mission of health care in the state instead of financially supporting an outside insurance company.
It keeps it in a not-for-profit, nontaxable environment, Hadley said.
You just cant set that up in the state of Kansas because you dont have that. That legal avenue doesnt exist.
But according to the Kansas Insurance Department, companies have been able to set up insurance captives in the state since 1988.
An online Department of Labor document put the total assets for Sunflower Assurance at about $38.5 million in 2011.
The goal of maintaining the separate insurance company is to contain costs, Hadley said, explaining that if the company were set up in the U.S., it would be taxed at a rate between 15 and 35 percent.
He said regulations, rather than taxes, were the primary reason Via Christi established the company offshore.
The insurance regulations in the states are significantly more bureaucratic than the Cayman. ... If the fed regulations would just let us put that money on the Via Christi Health balance sheet and let us fund it all right here, wed do it here. But the feds require you to have a licensed insurance company, Hadley said.
And so this is the cheapest and most economical way to do that to keep costs down, and then what that does is instead of paying premiums and ultimately a profit to a for-profit insurance company, were able to keep our premiums lower to our hospitals and thus keep our costs down.
Over the past 30 years, captives have grown significantly, Nordman said, from about 1,000 to more than 5,000 globally.
A way to self-insure
Forming captives is not unique to the U.S. health care system, Nordman said.
Many large and midsize businesses have formalized self-insurance programs, he said. From a tax perspective, one of the reasons to form a captive essentially a formalized self-insurance company is some advantages in dealing with the IRS.
Sunflower Assurance was created in 1994, shortly before Via Christi Health was created with the merger of the Sisters of the Sorrowful Mother, which sponsored St. Francis Hospital, and the Sisters of St. Joseph of Wichita, which sponsored St. Joseph Hospital.
Via Christi hospitals pay premiums of about $4.1 million, and its physicians pay premiums of about $2.9 million annually for medical malpractice, according to Via Christi officials.
Since Via Christi was acquired in April by Ascension Health the largest nonprofit and largest Catholic health care system in the country Sunflower Assurance has become affiliated with Ascensions offshore insurance company as of Oct. 1, Hadley said.
Ascension Health Insurance Ltd., which is also in the Cayman Islands, was established in 1986, according to the Cayman Islands Monetary Authority.
Ascension is keeping Sunflower Assurance active because it has permission from the Department of Labor for life insurance coverage, while Ascensions captive does not, Hadley said.
Its not clear how much money is held in Ascensions captive, but its likely significantly more than what Sunflower Assurance holds.
Ascension alone is a $20 billion company versus Via Christi, which is a $1 billion (organization), Hadley said.
Theyre insuring and doing medical malpractice for hospitals in 27 states, so its pretty significant, he said. Coming together, that brings stability and a larger base to share risk, and ultimately we believe that our costs will actually improve some, because were sharing risk within a larger pool, which would be one of the benefits of the Ascension acquisition.
The most recent Via Christi Health 990 IRS form showed a transfer of $9.5 million to Sunflower Assurance from Via Christi in 2011, which was used to build cash reserves at Sunflower, Hadley said.
The long-term objective was to get Sunflower to the point where it had enough income to where we would not have to charge the individual hospitals for their medical malpractice. ... The interest income off of that would basically pay the premiums for the hospital.
Under Ascension, Via Christi hospitals will still pay premiums for medical malpractice, but Hadley hopes the larger risk pool will help bring those premiums down.
A management company in the Cayman Islands takes care of the books for Sunflower Assurance, and the company has no employees, Hadley said.
Captives in the U.S.
There are about 30 states that allow the formation of captives, Nordman said. In the mid-1990s, when Via Christis captive was set up, not many states allowed them.
Going back 20 years or so, most were formed in the Bahamas or Bermuda places with fairly liberal regulatory regimes, Nordman said.
Although Kansas has allowed captive insurance companies since 1988, there is only one such company registered in Kansas, according to a spokesman for the Kansas Insurance Department.
Travel Air Insurance Co. Ltd. was established for Beechcraft, but the company is now dormant. According to U.S. Securities and Exchange Commission documents, Travel Air Insurance Co. was incorporated as a Kansas captive in 1990.