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AVENTURA, Fla. -- Changes in the health care industry are creating new exposures for medical providers and changing the way their captive insurers operate.

Managed care expansion and health industry consolidation are giving rise to new liabilities and creating new challenges for health organization group captives, said John McCarthy, president of Harvard Risk Management Foundation, the Cambridge, Mass., parent of Controlled Risk Insurance Co. Ltd. of the Cayman Islands.

CRICO, founded by 13 shareholder hospitals, now provides professional liability coverage to several dozen hospitals as well as managed care organizations and generates about $60 million in annual premiums, Mr. McCarthy said.

A large percentage of the managed care groups, including health maintenance organizations, preferred provider organizations and physician groups, have joined CRICO in the past three years. The captive in 1995 established a Vermont-domiciled affiliate specifically to insure the managed care companies in an onshore facility, he told an audience at the 7th World Captive and Alternative Risk Financing Forum last month.

CRICO's growth obscures another trend, Mr. McCarthy suggested: competition-driven mergers and acquisitions among health care organizations.

"Even if you do everything right, you can still lose some of your shareholder organizations" to mergers, he observed.

Three of CRICO's original shareholders, for example, have merged into one company that now produces 48% of the insurer's revenue, he said.

"Over time, the shift has been to larger and larger organizations," he noted.

This has precipitated changes in the way the Harvard Risk Management's operations are governed.

While each CRICO shareholder formerly had one vote on its board of directors, representation is now proportional, with large shareholders having more voting power than smaller shareholders, Mr. McCarthy said.

Consolidation among shareholders puts other pressures on captives like CRICO, he added. A captive, for example, may have excess capital at a time when its owners need more capital themselves to support mergers and acquisitions, creating an issue of how much the captive should remit as dividends.

"Capital can be a destabilizing thing," he observed. "Capital is a two-way street."

Mergers and creation of new managed care groups also bring new management and new systems of decision-making that can create new liabilities, Mr. McCarthy said.

While liability claims in prior years typically involved one doctor, they now run up and down a chain of managed care organizations and affiliates of the doctor, he explained, noting that "enterprise liability" is an issue health care providers will increasingly face.

Rationing of health care under managed care programs also can lead to claims from patients who think they did not get enough care, and "telemedicine" -- such as diagnosing conditions via the Internet -- will create "scary" new theories of liability, Mr. McCarthy predicted.

Operators of health care group captives should follow a few guiding principles, said Daniel Wolfson, president and CEO of

The HMO Group, a New Bruns-wick, N.J., organization of independent group practice prepayment plans.

The HMO group has operated a Bermuda captive writing stop-loss insurance for 13 participating plans and producing about $4.3 million in annual premiums, he said.

These guiding principles include:

*Defining the group's mission to include not only providing insurance but also risk management advice and managed care consulting on issues such as preventing premature births, one of the group's largest sources of claims.

*Empowerment of the group's provider members, who should run the insurance operation. "They make the rules, they live with them," Mr. Wolfson said.

*Remembering that the insurance company is "not a club." Captives should have clear underwriting guidelines and strategies for dealing with members that produce big losses. The HMO Group's strategies include claims reviews and raising the member's deductible; if nothing else works, "we will throw them out," Mr. Wolfson said.

*Maintaining fairness. HMO Group members are experience-rated, and the rating for each member factors in the experience of all members.

*Making sure "the grass isn't greener" in the commercial insurance market. "We have to justify our rates every year," Mr. Wolfson said, noting that The HMO Group found that its rates last year were 20% below commercial market rates.

*Keeping members interested, including looking out for new lines of business for the captive.

Mr. Wolfson predicted that recent reductions in the rate of health care inflation won't last and that "we are going to see higher inflation through 1999."

One reason for this, he said, is the consumer backlash against managed care, which will trigger costly procedures for appealing claim denials.

Both Mr. Wolfson and Mr. McCarthy conceded that managed care organizations have not focused enough on the quality of the care they provide.

"A lot of what's out there masquerading as managed care is not managed care, it's managed indemnity," Mr. Wolfson said. "We are still (focusing) on price, we are still (focusing) on choice, and the market has not grappled with quality in a major way."

"If managed care is done right, it can be better care," said Mr. McCarthy, who predicted that future competition among health care organizations will be based less on price than on comparable quality of care.