Risk Retention Groups Offer Healthy Risk Control for Healthcare Organizations

For a rural hospital administrator, there is a constant whirl of worries, from the threat of Medicaid eligibility changes to competing for a shrinking number of providers, to reimbursement challenges, to ever-tighter operating margins and more.

One option for healthcare organizations is to join with a couple of dozen others in their region to establish a risk retention group (RRG) for managing liability risks. Having emerged from the provisions of the federal Liability Risk Retention Act of 1986 (LRRA), RRGs are risk retention vehicles created by groups of organizations or individual practitioners who face similar liability risks.

On the surface, RRG programs appear to be remarkably similar to traditional group captive insurers, but there are several key differences. RRGs are normally created to address a single common risk exposure or line of exposures, while captives can be structured to cover multiple types of risks.

The structure is viewed as a domestic insurer only in the state where the RRG is domiciled. Elsewhere, the RRG is seen as a foreign insurer that will be mandated to register and pay any required taxes. Even states that lack formal legislation for accommodating the creation of new RRGs are generally willing to accept registrations. This allows RRGs to insure members throughout the US.

A well-structured RRG typically provides sufficient coverage for lower premiums than members can obtain from the commercial insurance market. In addition, RRGs can be used to address specific coverages or higher coverage levels than traditional insurers are willing to assume. As with captives, RRGs use loss-reduction strategies to reduce claim frequency.

Several facets of the healthcare industry continue to leverage RRGs as an opportunity to control liability coverage costs and reduce the incidence of claims. In addition to facilities such as hospitals and outpatient facilities, specialized medical practices recognize the benefit of addressing malpractice and other liabilities unique to their specialties. Beyond the savings available by aggregating their risk purchasing, RRGs mitigate the ebbs and flows of the traditional market with greater stability and predictability. In addition, adopting the RRG approach provides access to the reinsurance market.

RRGs can also be structured to allow members to receive dividends during periods when total claims outperform expected projections. That creates a powerful incentive to adopt strategies for reducing individual claims, reinvesting in risk management strategies, and more.

The loss-reduction aspect is especially important to any RRG's efficacy. In the case of an RRG for rural hospitals, members would be required to document best-in-class compliance with specific standards for patient safety and similar factors. RRGs often subject new members who are carrying potentially adverse losses to a probationary period.

Risk retention groups can be structured in a variety of ways to address multiple coverage tiers. While it usually isn't necessary to involve a fronting insurer because the RRG acts as its own fronting insurer, some RRGs choose to do so as an additional layer of protection or at the request of an insurer. An insurer participating as a front in an RRG structure does shoulder substantial credit risk, such as for outsized claims, but the insurer's recognition of the professionalism of the RRG's underwriting and actuarial expertise may make the insurer's involvement more affordable. Some risk retention groups choose to become rated companies through Demotech or AM Best—whether of their own volition or at the behest of an insurer providing part of the coverage.

The process of determining whether creating a risk retention group is the best choice for a hospital, professional practice, or other type of healthcare organization begins with ensuring that all the participants have a similar ability to take on risk. Remember that all the RRG's owners must be insured parties. Every member has an ownership interest in the RRG, with the group sharing responsibility for claims (along with any participating insurers).

Finally, while risk retention groups are generally pursued for cost reduction, establishing an RRG is not an inexpensive effort at the onset. In some jurisdictions, minimum capitalization from members may start at $500,000 or $1 million; this minimum can be higher based on the level of risk assumed by the entity. The values and the legal requirements vary, so as with all alternative risk financing vehicles, organizations benefit from the expertise of consultants with deep experience in developing this highly effective strategy.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.