HUD Regs Could Restrict Nursing Home Captive Use

By Caroline McDonald

NU Online News Service, March 23, 12:41 p.m.EST?Pending regulations adopted by the Department ofHousing and Urban Development could effectively rule out governmentmortgages for nursing homes that insure medical malpractice risksusing unrated captive insurers or risk retention groups, accordingto a captive management executive.[@@]

Although HUD has said the rules with stringent coveragerequirements have been adopted, it has held off their impositionuntil March 31 with a request for public comment on theruling?Notice 2004-01.

Under the changed regulations which HUD published on Jan. 6,more stringent insurance and financial reporting guidelines wouldbe created for long term care providers wishing to qualify forgovernment insured mortgages through the "Professional LiabilityInsurance for Sec. 232 Programs."

Section 232 of the Housing Act provides FHA insurance forprivate construction mortgage loans to finance new or rehabilitatednursing homes and other types of care facilities.

According to HUD, the professional liability insurance itrequires would need to be obtained through a carrier with an "A"rating or better from A.M. Best Company. If the guidelines areadopted, the minimum required coverage would be $1 million peroccurrence, $3 million aggregate, and a per occurrence deductiblenot to exceed $25,000.

William P. White, captive director for Washington, D.C., toldNational Underwriter that by requiring insurance to come from"A"-rated insurers and requiring a deductible of no greater than$25,000 per occurrence, "you have now hamstrung the veryorganizations that are trying to get insurance in a very difficultmarket."

The issue was spotlighted last week in Scottsdale, Ariz., at theCaptive Insurance Companies Association's annual conference byChris Kramer, senior vice president with Neace Lukens ManagementServices, a captive management company in Beachwood, Ohio. NeaceLukens, he said, had recently notified him of the situation.

Mr. White said that many of the long term care providers, suchas nursing homes, have found a way to deal with "a terriblesituation in the current hard market through a risk retention groupor other alternative market mechanism," and now "their captive isbeing required to be rated and have an A-rating."

Mr. White said the situation would present two problems. Thefirst is that many of the captives and RRGs have been recentlyestablished. "We have been stringent in our requirements and makesure they are strategically focused and do have the rightunderpinning," he said. "But they aren't rated and many of themaren't old enough even if they wanted to be rated."

The second, he said, is that limiting the deductible to $25,000per occurrence imposes limitations for captives or RRGs trying tonegotiate coverage. "They need flexibility in order to make theirprograms work," he said.

Mr. White added that HUD, while trying to satisfy itsconstituency, "may be creating problems for a differentconstituency." He said he has identified who should be addressed atHUD and hopes to schedule a meeting as soon as possible. He notedthat HUD needs to "reevaluate the situation so that these nursinghomes aren't put in a very, very bad situation."

According to Lancaster Pollard Mortgage Company in Columbus,Ohio, about half of all long term care professional liability risksare insured by some form of alternative risk transfer, most ofwhich are not rated by A.M. Best.

Scott Moore, president of Lancaster Pollard, said in a statementthat the new HUD guidelines could limit financing options for longterm care facilities. He said that providers should learn moreabout the impact of the notice and direct comments to HUD and stateassociations.

Alternative insurance associations, including CICA and theNational Risk Retention Association, have been notifying members tocontact Michael McCullough, director, office of multifamily housingdevelopment, 451 7th St. SW, room 6138, Washington, D.C.20410-5000, or by e-mail at [email protected].