Why is NUMC using captive insurance set up in the Cayman Islands?

Nassau University Medical Center executives revealed Monday they found $110 million in new financial losses that for years had gone unreported, adding to already mounting debts totaling more than $1.4 billion.

The shortfall is traced to how the taxpayer-funded hospital insures itself against medical malpractice lawsuits, relying on so-called "captive" insurance registered in the Cayman Islands to maintain that protection. Officials blamed a series of undisclosed settlements for the shortfall. 

News of NUMC's shortfall sheds light on a insurance structure that big hospitals routinely set up in a British territory more than 1,500 miles from New York.

Here's a look at how captive insurance works, using publicly available documents.

What exactly is captive insurance?

Captives are self-insurance groups created by a hospital’s parent company to insure them against medical malpractice claims. Captives give hospitals more control over how much medical malpractice they  can pay out, protecting doctors and the hospitals' financial risk, proponents say.

These offshore companies also give hospital executives more control over how they manage financial risk — or how much money they think a captive needs to avoid financial ruin — through actuaries, according to an article by the law firm Loeb Smith, which specializes in managing captives.

Most of these companies based in the Cayman Islands require somewhere between $100,000 and $600,000 of seed money that usually comes from a hospital’s savings and are significantly less than traditional insurers, according to the insurance regulator Cayman Islands Monetary Authority. Plus, U.S.-based insurers impose  stricter rules for public hospitals.

That's why many healthcare captives insuring public hospitals are established in the Cayman Islands, allowing them to pay little to no taxes while being more flexible in funding them,  according to Risk Management Advisors, which specializes in captives.

Why is NUMC's captive in the news? 

NUMC chief executive Thomas Stokes said on Monday the East Meadow hospital recently learned about the $110 million shortfall related to its captive that went unreported for years. A probe into the hospital’s captive found it was mismanaged for years, he said.

After former hospital executives in 2020 fired the captive's third-party manager, the hospital started overseeing the claims itself, Stokes said. Following this change, NUMC took longer to settle cases, lost track of medical malpractice claims and made fewer settlement payouts, according to current hospital officials.

Stokes said on Monday that the hospital was reviewing the role of four private firms involved in the claims process: Marsh Management Services Cayman Ltd., the captive’s manager; Oliver Wyman, an actuary; Grant Thornton, the auditor; and Honigman LLP, the captive’s legal counsel.

Requests to Wyman and Honigman LLP were not answered. Spokespeople for Marsh and Grant Thornton declined to comment.

The insurer's board also did not meet annually in the Cayman Islands between 2020-25, Stokes said, making it non-compliant with the Cayman Islands Monetary Authority, the British territory's financial regulator.

The board was brought back to compliance after a recent meeting in Grand Cayman. 

But why the Cayman Islands? Is it normal to set up shop there?

Yes, the Cayman Islands is the No. 1 country where U.S.-based public hospitals register their captives, thanks to a large swath of experienced industry professionals with offices there. 

Lax rules in the Cayman Islands also provide captives with way more flexible options to manage their policies, compared with  traditional U.S. commercial insurers. 

How do they help public hospitals and ultimately me, the patient?

Proponents of these insurers argue that it helps hospitals free up cash compared with traditional U.S.-based insurance, which usually just keeps money public hospitals give as premiums. Captives allow hospitals to keep any money each facility  doesn't use while having greater say over how much money in yearly premiums they earmark, Newsday has reported. So if claims are lower than expected one year, the captive can ultimately reinvest that cash into new equipment or upkeep instead of letting third-party insurers keep it. 

For medical staff, the offshore insurer also legally protects them should a patient sue, easing the burden that, for example, an independent physician with their own practice would face if they were sued. Most of the time, these cases are settled even before going to court, with payouts anywhere between $10,000 to $10 million, depending on the case.

Should a settlement or jury award be reached, the hospital uses its captive to pay it. 

When and why did NUMC create a captive insurance company?

NUMC set up its captive, NHCC Ltd., in 1999, becoming operational in April 2001, records show.  The hospital's parent company, NHCC, is the captive’s singular owner, meaning there are no other stockholders or partners.

Just why NUMC established a captive is not known. By then, however, captives in the Cayman Islands had become the go-to insurers for public hospitals.

Questions about the captive were raised in 2018, when Newsday found hospital executives had spent more than $113,000 to stay at Caribbean resorts between 2012 and 2018, flying to the Cayman Islands, Bermuda and St. Maarten. Hospital executives also stayed at beachside resorts to attend captive board meetings, running a tab of $200 to $500 per night, Newsday reported.

The NHCC board later passed a resolution to cap the number of captive board members eligible for reimbursement travel at two, Newsday reported. Reimbursed travel was capped at one day, and the meetings were moved to sites near the airport, according to the resolution.
While the captive's  history of settlements is currently unclear, Newsday found that between 2020 and 2026, NUMC, its doctors and other medical staff were sued dozens of times.

What’s going to happen to NUMC's captive? Is it completely broke?

Stokes announced Monday that he made a number of changes to get the hospital more time to pay out its settlements and to keep the captive active.

He raised the NHCC’s per-claim deductible from $1 million to $5 million, and shifted $65 million in liability from the captive to NHCC.