Why Did MHAA Create A Captive Insurer?

Written By Harry Tipper, Chief Underwriting Officer of Alliance Captive Managment, LLC

Every medspa owner know that healthcare liability, often referred to as "medical malpractice," refers to the legal responsibility of healthcare providers for damages or injuries resulting from negligence or failure to meet the accepted standard of care. They also know that, over the past several years, the risk landscape for medspas like other parts of the health care world has grown more complex, driven primarily by rising claim severity. While overall claim frequency in the overall healthcare industry has remained relatively stable in many regions, the size of individual verdicts and settlements has increased significantly, particularly in jurisdictions experiencing nuclear verdict trends. And, although medspas have proven to be better risks from a claims perspective, they often are lumped in with the riskier segments of this market. As a result, the cost of insurance coverage has risen significantly. Higher premiums, reduced capacity, and selective underwriting have made it more difficult for many providers to secure adequate coverage as several insurers have scaled back or exited the line entirely.

Another significant trend is the consolidation of healthcare systems and the changing structure of physician employment.

The number of physicians working in independent practice has declined steadily over the past decade. According to the American Medical Association, just 46.7 percent of physicians remained in private practice in 2022. A 2023 report by Avalere Health and the Physicians Advocacy Institute found that, as of early 2024, nearly 78 percent of physicians were employed by hospitals, health systems, or corporate entities. As a result, many independent physicians (and others) have begun adding aesthetic services to their practice as they seek new revenue sources. This trend is blurring the line between traditional healthcare and the medspa market.

Overlaying all of these developments are broader legal and social trends. The impact of social inflation, an increase in class action lawsuits, and a greater use of punitive damages have collectively driven up the cost of liability coverage across the board. In some cases, even providers with strong risk management practices find that commercial insurance pricing and availability are no longer aligned with their actual risk profile.

Medspas now face a wide range of liability exposures. Among the most common traditional risks are the following.

• Medical malpractice and professional liability

• General liability

• Cyber-security and data breaches

• Regulatory and compliance risks

In addition to these well-established risks, emerging exposures are becoming increasingly important in healthcare risk management strategies. These include the following.

• Telemedicine and virtual care

• Reputational risk stemming from social media or public scrutiny

What is a captive? Captive insurance companies are wholly owned subsidiaries that trade associations form to insure the risks of their members. They offer a strategic alternative to commercial insurance or pure self-insurance. Captives provide flexibility in coverage design, better alignment with internal risk management goals, and potential long-term cost savings. Captives have been underwriting the risks of hospitals and physicians from the early 1970’s. So, there is a track record of their effectiveness in financing risk in this marketplace.

Increasingly, the biggest issue medspas encounter is not an increase in frequency but in claims severity, that means large medical malpractice damage awards, occasionally reaching seven digits.

Emerging risks also are shaping the liability landscape. These include telehealth and cyber exposures particularly ransomware attacks. Another area of concern is liability risk related to the emerging inclusion of behavioral and mental health treatment within some medspas’ “wellness” service offerings. Too often, medspa owners are unaware of the increased liability these expended services mean for their business.

For MHAA forming a captive helps its members meet today's increasingly complex liability challenges by offering strategic advantages not available in the commercial market:

• Customized professional liability coverage: Captives allow medspas to have coverage for excluded or high-severity risks such as telehealth errors that many traditional insurers now avoid.

• Policy flexibility: Captives provide access to tailored terms that better align with clinical realities and legal exposures that medspa not the broader healthcare world faces.

• Integration with risk management: Captives support proactive mitigation efforts such as client safety initiatives for the individual medspa’s specific exposure profile.

Effectively managing medspa liability requires a structured approach grounded in real-world operational challenges. They like most healthcare organizations should follow a four-phase risk management process:

1. Risk Identification and Assessment

All organizations, not just medspas, must evaluate their exposure across clinical operations, legal obligations, digital infrastructure, and public reputation. For example, telehealth programs and high-severity malpractice risks (for example, invasive aesthetic services) all require close scrutiny in today's environment.

2. Risk Control and Prevention

This phase involves implementing policies, training, and technologies to reduce the likelihood and impact of adverse events. Common initiatives include staff credentialing protocols, cyber-security upgrades, and infection prevention strategies.

3. Integration into Enterprise Risk Management (ERM)

ERM must be embedded into broader strategic planning, ensuring that leadership aligns on key exposures. An ERM framework helps define ownership and accountability among all the medspa’s staff.

4. Ongoing Monitoring and Refinement

Risk environments evolve quickly. Continuous review especially of client safety outcomes, legal trends, and regulatory developments is critical. Across all phases, the ultimate goal is not just regulatory compliance but improving outcomes by building resilience into the organization's risk posture.

In short, MHAA sponsored its captive to do its part in making your medspa’s future bright for your clients and you!