1. Advanced Concepts in Program Design A Case Study From The Stanford University Medical Center

2. Agenda A Medical Center’s Overall Financial Objectives A Captive’s Place in Overall Financial Strategy Risk Management & Financial Strategy Optimizing Captive Program Design Blazing the Trail & Change Management

3. Advanced Concepts in Program Design The CFO Perspective Roy Santarella, Chief Financial Officer, Stanford Hospital & Clinics

4. A Medical Center’s Overall Financial Objectives

5. A Captive’s Place in a Medical Center’s Overall Financial Objectives Captives offer an opportunity to: Reduce operating costs through lower insurance expenses Increase cash reserves vs. insurance premiums Increase alignment between physicians and hospitals in defending claims Align community physicians with the hospital Potential for creative financing of assets Each Captive must be structured for the organization /organizations it serves

6. Example of a Typical Captive Approach Stanford Hospital Stanford Clinics Children’s Hospital Children’s Clinics SHC/LPCH Insurance Company School of Medicine Shared Service Risk Management Department (Expenses Shared by SHC & LPCH)

7. Risk Management & Financial Strategy Cash reserves in the captive can become a significant asset Investment policy can affect earnings and premiums Investment policy can also allow for hospitals to potentially invest in nontraditional investment vehicles Expansion of risk management services beyond the hospital can become a source of revenue and investment capital.

8. Captive Program Design to Achieve Financial Strategy The captive may be treated on the hospital books as a consolidated or equity method of accounting Captives need to be aligned with the goals of the organization they represent Governance needs to be representative of the funding of the reserves Charters need to be specific as to the goals to be achieved

9. Advanced Concepts in Program Design Optimizing Captive Structure & Operations Jeffrey Driver, EVP & Chief Risk Officer, SUMIT/The Stanford University Medical Center

10. Risk Management and Financial Strategy Stanford University History Incorporated in March 2000 Class-2, Hawaii domiciled Wholly owned by Stanford Hospital & Clinics HPL, MPL, GL, EPL, E&O, Clinical Trials Liability 5 Insured Entities, 4000+ Employees, 750 Physicians Reinsurance in Bermuda and United States California TPA, shared service risk management Large captive board of directors Central discussion on cost allocations

11. Example of a Typical Captive Approach SHC/LPCH Insurance Company (SLICO) Stanford Hospital Stanford Clinics Children’s Hospital Children’s Clinics SHC/LPCH Insurance Company School of Medicine Shared Service Risk Management Department (Expenses Shared by SHC & LPCH)

12. Introducing the SUMIT Insurance Company Stanford University Medical Indemnity & Trust Insurance Company California Sierra Nevada Mountains

13. Optimizing Captive Program Design Why Change? Redirect insured hyper-focus to risk management v. cost and claim allocations Align and strengthen risk management incentives Strengthen insured control over risk financing and premium stabilization Push risk management and insurance decisions into the core of the insured organizations Assure best-in-class captive insurance practices

14. Optimizing Captive Program Design Alliance Duties Control the respective program and provide for losses in the primary layer Establish and oversee RM and claim best practices linked to “Key-Drivers” and established deliverables Track financial performance of Alliance and members and compare to market Determine premium allocations for each Alliance member Pay premiums as agreed to between Alliance members and the captive as a whole

15. Optimizing Captive Program Design Captive Duties Post statutory capital Regulatory Compliance Contract for risk, insurance, and claims services Establish and implement underwriting guidelines Establish and monitor investments Provide shared excess layer of coverage Purchase reinsurance on behalf of the captive Administer SHC/LPCH run-off liabilities prior to September 1, 2005

16. Segregated Portfolio Enterprise Model

17. RISK SERVICES ORGANIZATION (RSO) Dedicated Claims and Loss Control Teams for the SHC Risk Management Alliance, the LPCH Risk Management Alliance and the Stanford University Risk Management Alliance Stanford HospitalStanford Clinics SHC Risk Management Alliance LPC HospitalLPCH Clinics LPCH Risk Management Alliance Core Insurance Company (SUMIT) ABC Stanford University Risk Management Alliance School of Medicine QUALITY & SAFETY FUNCTIONS The Hospital and Medical Staff organizational departments and committees with charters and goals that co- benefit risk management objectives of the SUMIT Alliances

18. SLICO Captive Governance EntitySLICO Admin. Stanford Clinics Stanford Hospital Packard Clinics Lucile Packard Children’s Hospital SOM Board of Directors233320 Executive Committee 311010 Finance/Investment Committee 101010 Claims/U. Writing Committee 120300 A complicated and unbalanced governance structure…

19. Summit Captive Governance EntitySUMIT Admin. Stanford Clinics Stanford Hospital Packard Clinics Lucile Packard Children’s Hospital SOM/ SU Class A32 Class B111 Ex-Officio21 Balancing company control, insured voice, and captive support…

20. Alliance Governance CFO or Designee Stanford Hospital FPO Leader or Designee Stanford Clinics SHC Risk Management Alliance CFO or Designee L. P.C. Hospital FPO Leader or Designee L.P.C.H. Clinics LPCH Risk Management Alliance Stanford University Risk Management Alliance Dean for Finance or Designee School of Medicine Risk Management lives and breaths within closely held Alliances Which provide command and control …

21. Risk Management Services CRO/Exec. V.P. Dir. Claims & Litigation Management Claims Analyst Administrative Asst. Risk Manager SHC Alliance Risk Manager LPCH Alliance Systems Analyst and Administrative Asst. Office Manager SHC/LPCH Shared Service – Risk Management Sr. Dir. Risk Management Controls & Education Sr. Dir. Risk Finance Insurance Analyst and Administrative Asst. Sr. Dir. Claims and Litigation Management

22. The Risk Management Institute of the Stanford Medical Institutions President Dir. Claims & Litigation Management Claims Analyst Administrative Asst. Risk Manager SHC Alliance Risk Manager LPCH Alliance Systems Analyst and Administrative Asst. Office Manager The Risk Service Organization of the Stanford University Medical Insurance & Trust Company (SUMIT) V.P Risk Management Controls & Education V.P. Risk Finance Insurance Analyst and Administrative Asst. V.P. Claims and Litigation Management

23. Blazing the Trail and Change Management No Pain – No Gain… Emerging with conceptual designs Forging a plan and getting buy-in Senior leader project sponsors Advisory group clearing house Road-trips Advancing a proposal, listening, crafting Coming down the final stretch

24. Discussion

25. Thank you!