Insurance considerations for the nursing home care industry

The population of Baby Boomers age 85 and over is expected to triple by 2050, according to the U.S. Census Bureau. This growth may result in a greater need for nursing home care services—increasing the industry’s risk exposure. In their recent Captive Review article entitled “Preparing for the Boomers,” Milliman consultants Jill Rosenblum and Tony Bloemer answer several questions nursing home management should consider related to their insurance programs.

Here is an excerpt from the article:

Am I big enough to self-insure?
According to the US Centers for Disease Control and Prevention, the average nursing home houses approximately 88 residents. Generally speaking, a single 88-bed nursing home is not big enough to take on much risk or start a captive. For a larger nursing home or system, the decision to retain risk is dependent on the financial stability and risk appetite of the insured. A [well-capitalized] nursing home system should consider a large-deductible plan and based on its annual insurance expense could consider forming a captive. Several concerns specific to nursing homes, such as the large variance of claim costs by state and the impact of Medicaid residents on claim frequency and severity, are important to consider when assessing the overall size of the [program] and the ability to self-insure. An annual insurance expense of $500,000 across all casualty coverages is a rough starting point when considering a large-deductible [program] or formation of a traditional single-parent captive. Forming an 831(b) captive, popular as of late, can be considered if the annual insurance expense is less than $1.2m.

What are the advantages and disadvantages of retaining risk?
Purchasing insurance provides financial stability in the short term but is less cost-effective in the long term. It is no surprise that insurance companies charge more than the expected cost of claims in order to generate a profit. Most small insureds are willing to pay the insurer a profit margin in order to [stabilize] their own results. However, when an insured becomes large enough to absorb some of its own volatility, it makes sense to start retaining some risk to keep the insurer’s embedded profit in-house. An easy way to do this is by taking on a large deductible. With the baby boomer generation on the long-term care horizon, now is a great time for nursing home systems in particular to reassess their insurance [program].