Understanding Self-Insured Retention (SIR) Programs Healthcare Equipment Maintenance

The current economy has forced healthcare organizations across the country to search for ways to save money. As a result, many organizations are investigating the annual cost of maintaining their healthcare equipment inventory. In the past, it was common practice for healthcare organizations to purchase Original Equipment Manufacturer (OEM) service agreements for all their healthcare systems from patient monitoring to sophisticated diagnostic imaging systems. However, OEM service agreements are often quite expensive, service options are limited, and reports on financial cost benefit analysis, vendor issues, or equipment performance are rarely provided.

As a means to reduce maintenance costs and gain control over their maintenance budget, many healthcare organizations are challenging the rising cost of OEM service agreements by building in-house service capabilities, purchasing multi-vendor service programs, and working with providers of Equipment Maintenance Management Programs for customized solutions. Many healthcare organizations have found that a hybrid solution, using a combination of in-house biomedical staff with an Equipment Maintenance Management Program (EMMP) and the selective purchase of necessary OEM service agreements, provides the best long-term and cost effective solution. This approach provides the greatest level of control, vendor flexibility, and cost containment possible to handle the wide range of equipment utilized by healthcare organizations.

Over the past few years, insurance brokers have been promoting an insurance solution to address the healthcare maintenance cost issue - the Self-Insured Retention (SIR) Program. In insurance terms, this product is known as a deductible program. While the SIR Program is currently offered by a handful of insurance companies, aggressive insurance broker marketing of this product in the healthcare space has created interest, questions, and some confusion. 

The SIR Program is explained in detail below. It is important to note that the potential financial benefits of the SIR Program rely on many variables and can be overstated by the insurance broker if they rely upon unreasonably low maintenance cost assumptions. In order to evaluate the potential benefit of the proposed SIR Program, it is imperative to consider all the factors described below.

What is the SIR Program?

SIR stands for Self-Insured Retention, which is an insurance policy using an aggregate deductible structure as a means for limiting overall maintenance costs for insured equipment. Unlike your typical personal insurance experience, whereby a homeowner’s policy may include a “per event” deductible limit, the SIR Program is an aggregate deductible. This means the insured must pay for the cost of maintaining their equipment, and the insurance policy will provide no financial protection, until the policy deductible limit has been satisfied. At that point, the deductible policy begins to function like a traditional insurance policy and future maintenance expenses, “losses”, may be eligible for reimbursement.

The SIR Program replaces OEM service agreements with an insurance vehicle for limiting maintenance costs. The healthcare organization identifies specific equipment to be insured, cancels the OEM service agreements, and enters into the SIR Program to limit maintenance cost exposure for that equipment. The insured (healthcare organization) pays the provider insurance premium for the coverage, plus an administrative fee to cover account servicing and insurance broker commissions. The insurance coverage only becomes relevant when the client has satisfied the policy deductible. The insurance company unilaterally determines what maintenance expenses will be applied to the deductible. The client is responsible for paying all maintenance costs for the covered equipment until such time as the insurance company agrees that the maintenance expenses were both eligible for coverage under the contract and have reached an aggregate level equal to the deductible.

Example 1:     $100,000 in OEM Service Agreement

SIR Premium Plus Administrative Cost                                 $25,000

Insurance Policy Deductible                                                   $60,000

Total Cost                                                                               $85,000

Proposed Savings                                                                  $15,000 (15%)

Insurance brokers will often present proposals that demonstrate the additional savings possible to the client should actual maintenance costs be less than the deductible.

Example 2:     $100,000 in OEM Service Agreement

SIR Premium Plus Administrative Cost                                  $25,000

Insurance Policy Deductible                                                   $60,000

Actual Maintenance Costs Paid By Client                             $30,000

Maintenance Costs Reimbursed By Insurance Policy            $0

Clients Net Maintenance Costs                                               $30,000

Total Program Cost ($25,000 + $30,000)                              $55,000

Illustrated Savings / Losses                                                   $45,000 (45%)

Under this example, the insurance broker can argue that potential savings will be a minimum of 15%, but could be much larger (45% illustrated above). Unfortunately, it is more complicated than described above and like any insurance deductible program, the devil is in the details. The insurance contract defines what types of maintenance events are eligible for coverage under the policy. It is critical that the SIR policy coverage exactly match service agreement coverage or there will be coverage gaps that lead to unexpected higher costs for the client. It is possible that some maintenance events will be declared ineligible for coverage under the insurance policy leaving the client responsible for the payment. Further, it is the responsibility of the insured (healthcare organization) to track all maintenance activity, collect all maintenance documentation required by the insurance company, and submit the information and documentation to the insurance company in a timely manner in order to have the claim applied against the policy deductible (or reimbursed once the deductible is satisfied). Unless the healthcare organization has the systems, personnel, and processes in place to handle all this additional administrative work, there is a good chance that potentially covered maintenance events may not be counted against the deductible or ultimately reimbursed under the insurance contract.

In the following example, we consider the possibility that maintenance expenses incurred are declared ineligible for coverage under the policy. The resulting financial impact to the healthcare organization could result in a significant increase in maintenance costs relative to the original OEM cost baseline. Please note that insurance contracts terms and conditions, policy exclusions, and defined coverage levels will dictate the level of protection provided by the SIR Program. It is critical that potential purchasers of these insurance programs conduct their own review of the specific contract.

Example 3:     $100,000 in OEM Service Agreement

SIR Premium Plus Administrative Cost                                  $25,000

Insurance Policy Deductible                                                   $60,000

Actual Maintenance Costs Paid By Client                             $99,000

Maintenance Costs Reimbursed By Insurance Policy            $10,000

Clients Net Maintenance Costs                                               $89,000

Total Program Cost ($25,000 + $89,000)                              $114,000

Illustrated Savings / Losses                                                   ($14,000) (-14%)

Example 3 demonstrates that the SIR Program could actually result in the client paying more than the original OEM Service Agreement cost. In the case of diagnostic imaging equipment, that contain proprietary X-Ray tubes that can cost over $200,000, one maintenance event declared ineligible for coverage or not applied against the deductible can turn the economics of this type of insurance program upside down for the client.

Who can utilize the SIR Program?

Any healthcare organization that currently purchases equipment maintenance contracts on their electronic equipment is able to utilize the SIR Program.

When is the SIR Program beneficial to the client?

The SIR Program may be beneficial to a healthcare organization if:

1) They possess the internal systems, personnel, and controls to administer the insurance claims submission process;

2) The policy coverages and limits contained in the SIR contract mirror and conform to the prior service agreement coverages; and

3) If actual maintenance expenditures incurred are favorable (less than normally expected for healthcare equipment).

The client is typically required to take on all the administrative duties of processing and tracking every claim on every single piece of equipment under the program. Every maintenance event must be paid immediately by the client with satisfactory documentation and proof sent in a timely manner to the insurance company. The insurance company reviews the claim, determines coverage eligibility, and either denies the claim, seeks additional information, or applies the claim against the deductible policy. Because the very nature of the SIR Program is to utilize a sophisticated insurance contract to insure the maintenance cost exposure of healthcare equipment, it is imperative that the client be familiar with all policy inclusions and exclusions. It is important to note that the maintenance requirements of complex healthcare systems do not always conform to the straight-forward “black and white” terms and conditions of the insurance contract.

Where is the SIR Program sold?

The SIR Program is sold by insurance brokers nationwide in the healthcare market segment. This type of product, which is primarily an insurance deductible policy, is generally sold to healthcare organization risk managers and CFO’s.

Why is the SIR Program sold?

The SIR Program is sold as an insurance vehicle to address the financial risk associated with equipment maintenance. The insured pays the premium upfront, pays all maintenance expenses, and submits claims to the insurance company to be applied against the deductible or for reimbursement once the deductible is satisfied. If the client’s actual maintenance expenses are less than the deductible, and everything works as promised, it is possible for the client to save money relative to the original service agreement cost baseline. If maintenance costs are high, if the client lacks the internal staff and processes to handle the additional administrative workload, if claims are not submitted in time, or the insurance company denies submitted claims due to coverage limitations or policy exclusions, it is possible the client may actually pay more than the original service agreement cost baseline.

 Conclusion

The SIR Program is an alternative to Original Equipment Manufacturer (OEM) service agreements. This type of program is a sophisticated insurance vehicle designed to transfer some of the financial risk of maintaining healthcare equipment to an insurance company. Like all insurance policies, it is critical that policy coverage levels, inclusions, exclusions, and policy terms and conditions provide coverage equal to (or greater) than what was provided by the OEM service agreements. The SIR Program client must also possess the tools and resources necessary to track maintenance activity throughout the year. There should be no question as to which invoices were paid, denied, and reimbursed. Finally, it is critical that the actual equipment maintenance cost performance, and the types of maintenance events incurred, fall under the insurance policy defined coverage levels. The SIR Program can provide a wide range of financial outcomes based upon a number of variables. The healthcare organization would be wise to perform significant “due diligence” and not rely upon the optimistic promises offered by the insurance broker, who is not an expert on healthcare equipment maintenance. In other words, caveat emptor or “Let the buyer beware.”