HUD Regs Threaten

Nursing Home Captives

Pending regulations adopted by the U.S. Department of Housingand Urban Development could effectively rule out governmentmortgages for nursing homes that cover medical malpractice risksusing unrated captive insurers or risk retention groups, a captivemanagement executive warns.

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 the ruling.

Under the changed regulations that HUD published on Jan. 6, morestringent insurance and financial reporting guidelines would becreated for long term care providers wishing to qualify forgovernment-insured mortgages through the “Professional LiabilityInsurance for Sec. 232 Programs.” Section 232 of the Housing Actprovides Federal Housing Administration insurance for privateconstruction mortgage loans to finance new or rehabilitated nursinghomes 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.

The issue was spotlighted last week in Scottsdale, Ariz., at theCaptive Insurance Companies Association annual conference by ChrisKramer, senior vice president with Neace Lukens ManagementServices, a captive management firm in Beachwood, Ohio.

William P. White, captive director for Washington, D.C., toldNational Underwriter that with the new requirements, “youhave now hamstrung the very organizations that are trying to getinsurance in a very difficult market.”

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 [insurance] market through a riskretention group or other alternative market mechanism,” and now“their captive is being required to be rated and have an A-rating.”He said the situation would present two problems:

The first is that many of the captives and RRGs have beenrecently established.

“We have been stringent in our requirements and make sure theyare strategically focused and do have the right underpinning,” hesaid. “But they aren't rated, and many of them aren't old enougheven 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 added that HUD needs to “reevaluate the situation so thatthese nursing homes 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 mechanism,most of which 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 market associations, including CICA and the NationalRisk Retention Association, have been notifying members to writetheir concerns to Michael McCullough, director, office ofmultifamily housing development, 451 7th St. SW, Room 6138,Washington, D.C. 20410-5000; or by e-mail at [email protected] .

HUD could not be reached for comment.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, March 25, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.