Opportunities Increasing for Healthcare Bonds

Healthcare is big business in the U.S., encompassing everything from hospitals, long-term care facilities and medical providers to healthcare systems and insurers. The industry, which accounts for 17.6% of the nation’s GDP, offers a range of opportunities for the surety industry.

Bond producers may be most familiar with the smaller bonds they can write for this market, such as the DMEPOS (durable medical equipment prosthetics, orthotics and supplies) required by Medicare or state-required bonds for patient trust funds or third-party administrators. (See sidebar.) But there are other, less well-known areas where surety bonds can offer financial advantages for healthcare organizations and revenue opportunities for bond producers.

For example, some hospitals and healthcare systems are now using surety bonds rather than a letter of credit (LC) to back their self-insured workers compensation programs and to secure their insurance deductibles. 

Robin Amstutz

“Historically, carriers have not allowed the use of a bond for insurance deductibles, but that’s changed in the last 10 to 15 years. More carriers are now saying that they will take 15% or 30% as a bond,” said Robin Amstutz, Surety Senior Account Executive, Commercial Lines, at Risk Strategies. “The other 70% to 85% can be covered with surety-backed letter of credit if the company’s financials warrant it.”

There are several reasons it makes sense for healthcare organizations to replace LCs with surety bonds. A surety bond premium costs less than an LC and, unlike an LC, does not require a cash escrow to secure it. That frees up the healthcare company’s capital for other uses, and improves the organization’s balance sheet.

While large hospitals may be familiar with the benefit of surety bonds, small-to-midsize healthcare organizations often are not. But they are usually interested in learning more.

Stefan Engelhardt

“When we come in and educate them about surety, they certainly understand and appreciate how it is better from a cost of capital standpoint,” said Stefan Engelhardt, Broker with CAC Specialty.

“If I go to this group that has a $10 million letter of credit that’s secured with a $10 million escrow fund, I can tell them that with a surety bond in the best case scenario they’re going to get $10 million back in their pockets within three to six months. In fact, in a high interest rate environment, they could put the cash into an index fund and make more money than the cost of the surety premium,” Englehardt said. “It’s very easy for me to sell that to a customer and tell them, ‘This is a better business plan for you.’”

Accountable Care Organizations

The Medicare Shared Savings Program (MSSP) under the Centers for Medicare & Medicaid Services (CMS) is another area where healthcare organizations are beginning to use surety bonds as an alternative to letters of credit.

MSSP is a voluntary federal program; healthcare delivery organizations that participate—Accountable Care Organizations (ACOs)—work to reduce the benchmarked cost of medical care provided to Medicare patients while improving the quality of that care.

There are several different versions of CMS ACOs that healthcare organizations can participate in. But generally, if the ACOs can reduce the cost of the medical care they provide over the course of a year, Medicare will split the savings with them. However, if the ACOs exceed the benchmarked costs of medical services, they must repay the difference to Medicare. CMS requires some guarantee that an ACO will be able to make those repayments. That’s where surety bonds, with their multiple advantages, come in.

There is also the potential for writing surety bonds for subcontractors who are working with ACOs, said Amstutz, who recently served as  Chair of the NASBP Commercial Surety Committee. Companies that manage an ACO’s data, for example, may promise to reduce costs for them. These data management companies can purchase surety bonds to cover them in case they don’t deliver the required cost savings and need to repay the ACO.

In some states, Medicaid, the joint federal/state program that helps pay for medical services for low income individuals, offers cost-cutting programs similar to CMS. Surety producers may find opportunities to provide bonds for health care organizations that participate, but requirements differ in each state and it’s important to understand the various regulations.

There are challenges in writing bonds for ACOs under any value-based care arrangement. The underwriting process can be complex; a producer and/or underwriting team must have a thorough understanding of the intricacies of the program and be prepared to undertake a detailed analysis of the organization’s current performance and projections of how it will perform in the future.

Tim Bowen

“For us, the biggest hurdle that we have to deal with is Medicare’s understanding of surety. They will release bond forms without having surety people look over them,” said Tim Bowen, Assistant Vice President, EPIC | Edgewood Partners Insurance Center. That can lead to problems like a bond requiring payment within five days of a claim, which doesn’t leave sureties enough time to investigate that claim. So sureties should be prepared to work with CMS on the bond form language in such cases.

There is another unknown in 2025 that could complicate the use of surety bonds for ACOs: the impact that the new administration in Washington will have on the CMS programs. A new head of CMS could decide to deregulate some portions of the healthcare industry so that bonds are no longer required, or could increase regulation, making it harder for health care groups to get a bond. Either scenario could slow the growth of bonds in this market.

Moving into the Healthcare Market

Producers who write smaller DMEPOS or licensure bonds for healthcare customers may find those customers requesting much larger bonds over time. “When you handle their entire surety program, you can instill trust that you know how to handle healthcare bonds. And hopefully, when they get into the ACO program or if they decide to get an insurance deductible, you have opened the door for a much larger book of business,” said Bowen.

When EPIC takes on a new healthcare client, “One of the things that we do on the broker side is review the financial statements and see if there’s anything in the notes that indicates they have an outstanding letter of credit that they could replace with a bond,” he added. When the company is making a pitch to a new client, Bowen says he makes sure that surety is always included, even if only briefly, in the presentation.

In his conversations with healthcare companies, Englehardt said he finds at least one every day who has never heard of surety bonds. The surety industry needs more people who can have educated conversations with healthcare groups about surety and its role in more complex areas like ACOs.

“I think the hardest part is that there are so few brokers who know about this and who are providing appropriate solutions,” said Englehardt. “If brokers don’t explain it well enough, the organization may decide that surety is not for them; they’re going to stay with the line of credit. The problem is that it’s not the best use of their funds; in most cases, surety is the best from the cost of capital standpoints.”

Producers who want to provide these more complex surety products to the healthcare industry should plan on spending some time to learn about it. “You can’t expect to come in within three months and write this big book of business, because you won’t know what you are talking about. No one will listen to you because you don’t the know the terms, the words, and the people,” said Englehardt. “Find the type of business you want to do, educate yourself, and then start approaching people in that area and really listen to them.”

Being active on NASBP’s Commercial Surety Committee and joining organizations like the National Association of ACOs, https://www.naacos.com/, and the American Society for Healthcare Risk Management, https://www.ashrm.org/, is a good place to start making contacts. Producers can also check healthcare organizations participating in ACO programs at the CMS website, https://www.cms.gov/priorities/innovation/innovation-models/aco

Healthcare can be a good market for surety bond producers, said Amstutz. “The opportunities within healthcare are growing, and healthcare is one of our country’s largest markets. So why wouldn’t you want to be involved in it?”

Find Out More

Access this NASBP Virtual Seminar on surety bonds in the healthcare industry: https://learn.nasbp.org/products/just-what-the-doctor-ordered-an-overview-of-surety-bonds-prescribed-in-the-healthcare-industry. Access all NASBP Virtual Seminars here: https://learn.nasbp.org/.

Smaller Bonds Could Lead to Bigger Healthcare Opportunities

Surety bond producers who want to gain entryway into the healthcare industry could build clients’ trust and begin learning the industry by providing some of these smaller bonds.

Medicare DMEPOS

Medicare established this bond in 2009 after ongoing problems with fraudulent claims for durable medical equipment, prosthetics, orthotics and supplies problems. The program requires that any business that bills and receives payment from Medicare for this type of equipment obtain a $50,000 bond for each location from which they operate. In the case of hospitals, pharmacy chains and retailers, this would require multiple bonds, boosting the premium potential. The goal is to ensure that Medicare will be repaid if there are any overpayments to these providers or if there are any fraudulent invoices from them.

Patient Trust Fund Bonds

Nursing homes, long-term care and assisted living facilities that manage their clients’ finances are required by state regulatory agencies to have patient trust fund bonds. The bonds serve as a financial guarantee that these healthcare facilities will responsibly hold, safeguard, manage and account for the personal funds of any residents.  The principal of the bond is the facility and the agency that mandates the bond (usually a state health department or Medicaid) is the obligee.

Nurses’ Registry Bond

These bonds are required for any business that provides nursing services for healthcare organizations or individual patients, such as a staffing agency or an individual like a self-employed private duty nurse, The bond guarantees that nurses will perform their required duties according to applicable laws and regulations.

Medicaid Provider Bond

A few states, including Alabama, Florida, Texas and Minnesota, require providers of services to Medicaid (such as health systems, provider groups, DME suppliers and home health agencies) to procure a $50,000 bond that guarantees that provider will repay any uncollected Medicaid overpayments.

Third Party Administrator Bond

Required by states for any business or individual that handles claims processing for third party administrators and insurance companies. It provides a financial guarantee that these businesses will comply with state regulations while performing their duties and acting in a fiduciary capacity.