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Captive Insurance Can Bring Windfall to Physicians

Captive Insurance Can Bring Windfall to Physicians

Depending on specialty and geographic area, malpractice insurance can add significant costs to running a medical practice. According to the Physicians Practice 2015 Physician Compensation Survey, the mean annual expense for malpractice coverage in a nonsurgical or obstetric specialty, was $9,697. For an obstetric or surgical specialty, this jumps to $102,678. It's no wonder then that physicians are willing to advocate for tort reform and also seek alternative ways to protect their practices and assets from lawsuits.

Recently, Physicians Practice associate editor Erica Sprey spoke with Philip Garrett Panitz, a tax attorney based in Westlake Village, Calif., a suburb of Los Angeles, in a two-part interview. Panitz is certified by the California Bar Association as a tax specialist and represents clients in confrontations with the IRS and other taxing agencies. He has also become an expert in an area called captive insurance, which is a vehicle that allows physicians to establish their own malpractice insurance companies.

Below is part one of the interview.

Erica Sprey: Can you tell me what captive insurance is?

Philip Panitz: Obviously professionals have very high insurance premiums, particularly doctors … for malpractice insurance, etc. And captive insurance has come on the scene as a potential alternative. And what it is, you create your own insurance company. You create this insurance company and you pay premiums to your own insurance company. That is sort of the overview, [a] simplistic way of looking at it. So rather than pay a private insurance company very high premiums, you are paying your own company premiums. And the advantage of that, of course, is that ultimately, if you don't have the claims and you retire as a physician, you get to dissolve your own insurance company and those premiums will come back to you. So that's one of the major advantages of captive insurance.

ES: Is this a single individual who does this or do you need to be part of a group?

PP: Well, the way it actually works, a physician or a group of physicians, contribute premiums to their captive insurance company. In order to qualify under the rules of insurance and also to pass IRS muster, the insurance company has to be legitimate. What does that mean? There has to be two elements to it: a shifting of the risk and a distribution of the risk. That's what insurance is. So let me explain those in a little more detail. So when you shift risk you take it away from one party and putting it on another party.

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