A cost-benefit analysis (CBA) is a systematic process for calculating and comparing the benefits and costs of a project or decision. The three parts of a CBA are identifying potential costs, recording anticipated benefits, and examining the differences to determine if the positive benefits outweigh the negative costs.

The following is a cost-benefit analysis for implementing a captive insurance company as a risk financing strategy for a large, multi-hospital healthcare system, referred to as “Unified Health Systems” (UHS).

Executive Summary

Unified Health Systems (UHS) is a large healthcare organization with multiple hospitals and clinics facing increasing premiums and limited coverage options from commercial insurance markets for its professional liability and workers’ compensation risks. This analysis recommends establishing a captive insurance company to manage these risks. The CBA shows that over a five-year period, the benefits of forming a captive, including reduced insurance costs, improved claims management, and increased investment income, are projected to significantly outweigh the initial and ongoing costs. The net present value (NPV) of the project is estimated to be $25 million, indicating a strong financial justification for this risk financing strategy.

Background and Problem Statement

Unified Health Systems currently relies on the commercial insurance market for its primary lines of risk, including professional liability (malpractice) and workers’ compensation. Over the past five years, UHS has experienced a 20% increase in premiums, despite a relatively stable claims history. The commercial market is becoming increasingly volatile, offering less favorable terms, higher deductibles, and reduced coverage limits. This situation poses a significant financial risk to UHS, as rising insurance costs strain the operating budget and divert funds from patient care, facility upgrades, and strategic initiatives. The organization’s current risk financing approach is unsustainable and fails to leverage its strong safety culture and favorable loss experience.

Proposed Solution: Captive Insurance Company

The proposed solution is to establish a wholly-owned captive insurance company. A captive is essentially a specialized insurance company created and owned by a parent company (or group of parent companies) to insure the risks of its owner. This model would allow UHS to self-insure a portion of its risks, effectively capturing the underwriting profits and investment income that would otherwise go to a commercial insurer. The captive would be structured as a pure captive, insuring only the risks of UHS and its subsidiaries. This approach offers greater control over claims, risk management, and insurance program design.

Rationale

• Cost Control: By bypassing commercial insurers, UHS can eliminate the profit margins and administrative overhead charged by third parties.
• Tailored Coverage: The captive can design policies that perfectly match the unique risks and needs of UHS, avoiding gaps or unnecessary coverage.
• Investment Income: Premiums paid to the captive can be invested, generating income for the organization.
• Enhanced Risk Management: The captive structure creates a direct incentive to invest in and improve risk management and patient safety programs, as the financial benefits of reduced claims stay within the organization.

Cost-Benefit Analysis

This analysis covers a five-year projection period, from 2026 to 2030, and uses a discount rate of 5% to calculate the present value of future costs and benefits.