Understanding,Self-Insured,Ret business, insurance Understanding Self-Insured Retention (SIR) Programs Healthca

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The current economy has forcedhealthcare organizations across the country to search for ways to save money.As a result, many organizations are investigating the annual cost ofmaintaining their healthcare equipment inventory. In the past, it was commonpractice for healthcare organizations to purchase Original EquipmentManufacturer (OEM) service agreements for all their healthcare systems frompatient monitoring to sophisticated diagnostic imaging systems. However, OEMservice agreements are often quite expensive, service options are limited, andreports on financial cost benefit analysis, vendor issues, or equipmentperformance are rarely provided.                 As a means to reduce maintenancecosts and gain control over their maintenance budget, many healthcareorganizations are challenging the rising cost of OEM service agreements bybuilding in-house service capabilities, purchasing multi-vendor service programs,and working with providers of Equipment Maintenance Management Programs forcustomized solutions. Many healthcare organizations have found that a hybridsolution, using a combination of in-house biomedical staff with an EquipmentMaintenance Management Program (EMMP) and the selective purchase of necessaryOEM service agreements, provides the best long-term and cost effectivesolution. This approach provides the greatest level of control, vendorflexibility, and cost containment possible to handle the wide range ofequipment utilized by healthcare organizations.                                       Over the past few years,insurance brokers have been promoting an insurance solution to address thehealthcare maintenance cost issue - the Self-Insured Retention (SIR) Program.In insurance terms, this product is known as a deductible program. While theSIR Program is currently offered by a handful of insurance companies,aggressive insurance broker marketing of this product in the healthcare spacehas created interest, questions, and some confusion.                                                       The SIR Program is explained indetail below. It is important to note that the potential financial benefits ofthe SIR Program rely on many variables and can be overstated by the insurancebroker if they rely upon unreasonably low maintenance cost assumptions. Inorder to evaluate the potential benefit of the proposed SIR Program, it isimperative to consider all the factors described below.                                                         What is the SIR Program?SIR stands for Self-InsuredRetention, which is an insurance policy using an aggregate deductible structureas a means for limiting overall maintenance costs for insured equipment. Unlikeyour typical personal insurance experience, whereby a homeowner’s policy mayinclude a “per event” deductible limit, the SIR Program is an aggregatedeductible. This means the insured must pay for the cost of maintaining theirequipment, and the insurance policy will provide no financial protection, untilthe policy deductible limit has been satisfied. At that point, the deductiblepolicy begins to function like a traditional insurance policy and futuremaintenance expenses, “losses”, may be eligible for reimbursement.  The SIR Program replaces OEMservice agreements with an insurance vehicle for limiting maintenance costs.The healthcare organization identifies specific equipment to be insured,cancels the OEM service agreements, and enters into the SIR Program to limitmaintenance cost exposure for that equipment. The insured (healthcareorganization) pays the provider insurance premium for the coverage, plus anadministrative fee to cover account servicing and insurance broker commissions.The insurance coverage only becomes relevant when the client has satisfied thepolicy deductible. The insurance company unilaterally determines whatmaintenance expenses will be applied to the deductible. The client isresponsible for paying all maintenance costs for the covered equipment untilsuch time as the insurance company agrees that the maintenance expenses wereboth eligible for coverage under the contract and have reached an aggregatelevel equal to the deductible. Example 1:     $100,000 in OEM Service Agreement SIR Premium Plus Administrative Cost                                 $25,000Insurance Policy Deductible                                                   $60,000Total Cost                                                                               $85,000 Proposed Savings                                                                  $15,000(15%) Insurance brokers will oftenpresent proposals that demonstrate the additional savings possible to theclient should actual maintenance costs be less than the deductible. Example 2:     $100,000 in OEM Service Agreement SIR Premium PlusAdministrative Cost                                  $25,000Insurance Policy Deductible                                                   $60,000 Actual Maintenance Costs Paid By Client                             $30,000Maintenance Costs Reimbursed By Insurance Policy            $0Clients NetMaintenance Costs                                               $30,000Total Program Cost($25,000 + $30,000)                              $55,000 Illustrated Savings /Losses                                                   $45,000(45%) Under this example, the insurancebroker can argue that potential savings will be a minimum of 15%, but could bemuch larger (45% illustrated above). Unfortunately, it is more complicated thandescribed above and like any insurance deductible program, the devil is in thedetails. The insurance contract defines what types of maintenance events areeligible for coverage under the policy. It is critical that the SIR policycoverage exactly match service agreement coverage or there will be coveragegaps that lead to unexpected higher costs for the client. It is possible thatsome maintenance events will be declared ineligible for coverage under theinsurance policy leaving the client responsible for the payment. Further, it isthe responsibility of the insured (healthcare organization) to track allmaintenance activity, collect all maintenance documentation required by theinsurance company, and submit the information and documentation to theinsurance company in a timely manner in order to have the claim applied againstthe policy deductible (or reimbursed once the deductible is satisfied). Unlessthe healthcare organization has the systems, personnel, and processes in placeto handle all this additional administrative work, there is a good chance thatpotentially covered maintenance events may not be counted against thedeductible or ultimately reimbursed under the insurance contract. In the following example, weconsider the possibility that maintenance expenses incurred are declaredineligible for coverage under the policy. The resulting financial impact to thehealthcare organization could result in a significant increase in maintenancecosts relative to the original OEM cost baseline. Please note that insurance contractsterms and conditions, policy exclusions, and defined coverage levels willdictate the level of protection provided by the SIR Program. It is criticalthat potential purchasers of these insurance programs conduct their own reviewof the specific contract. Example 3:     $100,000 in OEM Service Agreement SIR Premium PlusAdministrative Cost                                  $25,000Insurance Policy Deductible                                                   $60,000 Actual Maintenance Costs Paid By Client                             $99,000Maintenance Costs Reimbursed By Insurance Policy            $10,000Clients NetMaintenance Costs                                               $89,000Total Program Cost($25,000 + $89,000)                              $114,000 Illustrated Savings /Losses                                                   ($14,000)(-14%)  Example 3 demonstrates that theSIR Program could actually result in the client paying more than the originalOEM Service Agreement cost. In the case of diagnostic imaging equipment, thatcontain proprietary X-Ray tubes that can cost over $200,000, one maintenanceevent declared ineligible for coverage or not applied against the deductiblecan turn the economics of this type of insurance program upside down for theclient. Who can utilize the SIR Program?Any healthcare organization thatcurrently purchases equipment maintenance contracts on their electronicequipment is able to utilize the SIR Program. When is the SIR Program beneficial to the client?The SIR Program may be beneficialto a healthcare organization if: 1) They possess the internalsystems, personnel, and controls to administer the insurance claims submissionprocess; 2) The policy coverages andlimits contained in the SIR contract mirror and conform to the prior serviceagreement coverages; and 3) If actual maintenanceexpenditures incurred are favorable (less than normally expected for healthcareequipment).  The client is typically requiredto take on all the administrative duties of processing and tracking every claimon every single piece of equipment under the program. Every maintenance eventmust be paid immediately by the client with satisfactory documentation andproof sent in a timely manner to the insurance company. The insurance companyreviews the claim, determines coverage eligibility, and either denies theclaim, seeks additional information, or applies the claim against thedeductible policy. Because the very nature of the SIR Program is to utilize asophisticated insurance contract to insure the maintenance cost exposure ofhealthcare equipment, it is imperative that the client be familiar with allpolicy inclusions and exclusions. It is important to note that the maintenancerequirements of complex healthcare systems do not always conform to thestraight-forward “black and white” terms and conditions of the insurancecontract.  Where is the SIR Program sold?The SIR Program is sold byinsurance brokers nationwide in the healthcare market segment. This type ofproduct, which is primarily an insurance deductible policy, is generally soldto healthcare organization risk managers and CFO’s.  Why is the SIR Program sold?The SIR Program is sold as aninsurance vehicle to address the financial risk associated with equipmentmaintenance. The insured pays the premium upfront, pays all maintenanceexpenses, and submits claims to the insurance company to be applied against thedeductible or for reimbursement once the deductible is satisfied. If the client’sactual maintenance expenses are less than the deductible, and everything worksas promised, it is possible for the client to save money relative to theoriginal service agreement cost baseline. If maintenance costs are high, if theclient lacks the internal staff and processes to handle the additionaladministrative workload, if claims are not submitted in time, or the insurancecompany denies submitted claims due to coverage limitations or policyexclusions, it is possible the client may actually pay more than the originalservice agreement cost baseline.  ConclusionThe SIR Program is an alternativeto Original Equipment Manufacturer (OEM) service agreements. This type ofprogram is a sophisticated insurance vehicle designed to transfer some of thefinancial risk of maintaining healthcare equipment to an insurance company.Like all insurance policies, it is critical that policy coverage levels,inclusions, exclusions, and policy terms and conditions provide coverage equalto (or greater) than what was provided by the OEM service agreements. The SIRProgram client must also possess the tools and resources necessary to track maintenanceactivity throughout the year. There should be no question as to which invoiceswere paid, denied, and reimbursed. Finally, it is critical that the actualequipment maintenance cost performance, and the types of maintenance eventsincurred, fall under the insurance policy defined coverage levels. The SIRProgram can provide a wide range of financial outcomes based upon a number ofvariables. The healthcare organization would be wise to perform significant“due diligence” and not rely upon the optimistic promises offered by theinsurance broker, who is not an expert on healthcare equipment maintenance. Inother words, caveat emptor or “Let the buyer beware.”