Why Delaware hospitals stash millions in the Caymans

A catheter left in a man's jugular after he was shot, a missed diagnosis leading to a "permanent" neurological disorder, and a botched surgery causing paralysis. These are just some examples of medical malpractice claims Delaware hospitals have settled in recent years.

Oftentimes, hospital lawyers will go through the motions: deny the claim, try to get it dismissed and then likely settle with the plaintiffs, rather than face a costly and revealing trial.

But for years, Delaware's nonprofit hospitals have quietly operated secretive, for-profit insurance companies in the Caribbean, where they've stashed hundreds of millions of dollars for such legal payouts.

Hospitals also are able to reinvest profits from the insurance companies back into the health system without any real oversight. Typically, hospitals must invest excess revenues back into the health system to advance their mission.

By sending regulated nonprofit revenues offshore, the hospitals are able to, in theory, bring those revenues back onshore as dividends to spend on what they choose.

"Once that money leaves the nonprofit, that restriction is gone," said Jason Schupp, a lawyer who challenged the practice in Maryland. "That's unrestricted money."

The hospitals have established what are called "captive insurance companies," which they use to pay out medical malpractice and workers' compensation claims, domiciling them in the Cayman Islands.

The tiny British territory with fewer than 100,000 residents has been a boon for nonprofit hospitals' captive insurance companies because it does not impose taxes on premiums or capital gains. Nothing about the practice is illegal, and it's quite common for hospitals looking to insure their complex, risky businesses.

Hospital lobbyists in Maryland insisted that when a health system sends millions of dollars to what it reports is an insurance company, it is not actually purchasing insurance. Instead, they believe they are simply setting aside their revenues in the event of any payouts.

Schupp argues this claim is simply a way for hospitals across the country to skirt what would otherwise become hefty tax liabilities. Hospitals also have no incentive to domicile in the United States because of the taxes they can circumvent by remaining in the Cayman Islands, Schupp explained.

The Internal Revenue Service did not say if any Delaware captives or their parent hospitals have paid federal taxes that apply to foreign insurance companies covering United States organizations. State insurance authorities also declined to say whether the captives have paid state insurance taxes.

Nonprofit hospitals already receive enormous tax breaks. They pay next to no taxes annually, and at times, are able to generate hundreds of millions of dollars in excess revenues from their patient care alone.

Spotlight Delaware reached out to the five healthcare systems in the state that run captives with detailed questions about their operations. Many declined to answer questions about their tax liabilities, and one directed Spotlight Delaware to the state's hospital lobbying organization.

TidalHealth, which is a regional health system that operates hospitals in Delaware and Maryland, said the assets in its captive insurance company are not simply unrestricted funds that can be used for any purpose.

Instead, they pay claims the hospital has already incurred or expects to pay out soon. Additionally, the hospital system said it does not circumvent any federal taxes, and that it elects to be taxed as a U.S. organization.

"The captive's Cayman domicile does not mean its income escapes U.S. taxation," a spokesperson for the hospital said.

Brian Frazee, CEO of the Delaware Healthcare Association. | SPOTLIGHT DELAWARE PHOTO BY JACOB OWENS

Brian Frazee, CEO of the Delaware Healthcare Association, declined an interview but offered a written statement defending the practice. He said that in recent years the cost of insuring hospital liabilities has grown, and hospitals make multi-year plans to make sure those risks are covered.

"A captive is an insurance company that a hospital owns to insure its own risks, with reserves set aside specifically to pay claims," Frazee wrote. "It is a common, regulated approach used by health systems nationwide, and Delaware hospitals using captives do so under the same oversight as any other insurer."

The companies fall under the regulations of the Cayman Monetary Authority, not the Delaware Department of Insurance, which regulates commercial insurance companies like Highmark and Aetna.

How much are hospitals sending offshore?

After reviewing the most recent tax returns for each of the state's hospital systems, Spotlight Delaware only found one hospital that did not run an offshore insurance company – Beebe Healthcare in Lewes.

All the state's other hospital systems, including ChristianaCare, Bayhealth, Nemours Children's Health, Trinity Health, and TidalHealth, have captives domiciled in the Cayman Islands. In their tax returns, the hospitals claim these companies as "organizations taxable as a corporation or trust."

Delaware's hospital systems, excluding Trinity, control more than $257 million within their offshore captives, according to their most recent tax returns and financials. With Trinity included, that total jumps to more than $1.1 billion.

It's important to note that Trinity is a massive, national health system operating in 23 states, and that it established its captive in 1989, making it the longest-running of the group. The system operates Saint Francis Hospital in Wilmington, but does not break out state-specific information in its tax returns.

The captives insure the hospitals for tens of millions of dollars each year, and allow the hospitals to purchase what is called reinsurance, which is an added layer of protection for its captive and liabilities, covering any liabilities that may exceed its insured limits.

Many of Delaware's hospitals offered either no comment or little response about their captives and tax positions. Some, like Bayhealth and Nemours argued in state bond filings their captives were exempt from certain local taxes under Cayman Islands laws.

Since forming its captive in 2019, ChristianaCare has amassed nearly $128 million in its insurance company. The hospital system offered little in the way of a response to questions about how it operates its captive and the taxes it may owe on its offshore transactions.

"ChristianaCare adheres to applicable laws and industry best practices in the operation of its captive insurance company," a spokesperson for the hospital system said.

Bayhealth in Kent County also formed its captive insurance company in the Cayman Islands and wrote in recent bond filings that its captive is not taxed on "premium and investment income."

Since establishing the company in 2023, it has accrued $18 million in assets. Bayhealth sent Spotlight Delaware a nearly identical statement to ChristianaCare, and declined to answer questions about its tax obligations.

What taxes might they be on the hook for?

Delaware companies that offload their risk to insurers that are "not authorized to engage in the business of insurance in this state" are subject to a 3% self-procurement tax.

The Delaware Department of Insurance declined to comment on whether the state's hospitals have paid any self-procurement tax in recent years, citing the offshore nature of the captives and disclosure rules.

A spokesperson for the department did say for captives domiciled in Delaware, a parent company's nonprofit status does not exempt them from any of the state's premium taxes.

Still, Insurance Commissioner Trinidad Navarro said he was "disappointed" the state's hospital systems have acted as "highly opaque entities."

Delaware Insurance Commissioner Trinidad Navarro said that more transparency is needed in the captive insurance market. | PHOTO COURTESY OF DOI

"We are supportive of efforts to improve transparency in their fiscal operations, especially given the substantive finances held by these so-called nonprofits," Navarro said in a statement.

At the federal level, offshore captives have wiggle room in how they are taxed.

Ellen Sue Bernards, the executive vice president of HUB International, an insurance brokerage firm, told Spotlight Delaware captives are tested in their domiciles on two different fronts early in their formation.

Whether they qualify as an insurance company for regulatory reasons, and whether they qualify for tax reasons. She said in most cases with for-profit companies with captives, they want to qualify as insurance companies for both reasons, and will often elect to be taxed as a U.S. organization.

But for nonprofits, the goal is to qualify as an insurance company for regulatory reasons, but then argue they fail the tax examination, so they aren't viewed as taxable as U.S. entities. Each year, since their formation, however, Delaware's hospitals have claimed their captives as "organizations taxable as a corporation or trust."

Asked why the hospitals would do this, if the goal is to be viewed as nontaxable entities, Bernards said it's on the parent company of a captive to be able to support and substantiate their tax position. Still, she added the IRS has "their right" to prod that position as it chooses.

Since most of the hospitals declined to answer questions from Spotlight Delaware about their tax positions, it is unclear if they believe their captives should be exempt from the federal income tax.

Only one hospital system answered questions about its captive's tax position, TidalHealth, and said it elected to be treated as "a domestic corporation for federal tax purposes and is taxed in the United States on its worldwide income."

As nonprofits, it is to be expected that a hospital would not calculate these taxes on its revenues earned in service to patients. But it is unclear if the hospitals would owe taxes on revenues generated by their captives, such as dividends or returns made from investments.

Federal tax returns for the nonprofit hospital systems show that in the 2024 tax year, only two of those hospitals, Bayhealth and TidalHealth, paid the 21% federal income tax. Though it is unclear whether those taxes were tied to the captives or one of their many other for-profit enterprises and partnerships.

Bayhealth paid more than $2 million and declined to say whether those revenues were captive-related or part of one of its other for-profit enterprises. TidalHealth also paid $453,623 but said those revenues were separate from its captive.

A spokesperson for the hospital system said the captive files its own, separate tax returns. Spotlight Delaware was unable to view those tax returns because for-profit companies do not have to publicly release their tax returns in the same way that nonprofits do.

Nemours and ChristianaCare reported paying $0 in federal income taxes for that year.

IRS officials declined to say whether the hospital captives or their parent companies have paid any federal taxes, citing disclosure laws that prevent officials from discussing tax returns with outside parties.

Limited transparency in market

Schupp has worked as a lawyer and insurance industry expert for more than 25 years. Earlier this year, he accused Maryland's hospital systems of gaming the state's insurance premium laws.

His complaint led him to the Maryland General Assembly, where lawmakers examined whether the hospitals owed back taxes on premiums they have written since the formation of their for-profit insurance companies.

Maryland lawmakers ultimately kicked the question a year down the road, passing a watered down bill that compelled the state to conduct a study on the "use, regulation, and taxation" of captive insurance companies.

Schupp told Spotlight Delaware he is not against captive insurance companies, but the industry is "extremely opaque."

Little is consistent in how and at what level nonprofit hospitals report sending money outside the U.S. each year, he said. That makes it difficult for state taxing authorities to investigate any tax liabilities for hospital captives, he added.

Delaware's hospitals declined to offer any type of argument as to whether they believe they owe taxes on their captives, but pieces of their reasoning can be found in Maryland.

In written comments submitted by the Maryland Hospital Association, a lobbying arm of the powerful American Hospital Association, the organization supported the amended version of the bill that called for a study into the use of captive insurance.

Representatives also pointed to additional use of the funds that differs from simply covering its liabilities. If claims aren't paid out, the hospitals can reinvest their funds back into the system, a process Schupp said lacks any transparency.

Bernards said these transactions typically require approval from the captive's insurance regulators, which in this case would be the Cayman Islands. She also said those regulators aren't concerned with how the parent company spends its dividends, only that if it pulls the funds out, the captive would remain on stable financial footing.

During the hearing where lawmakers debated the bill, representatives from the Maryland Hospital Association also argued that when they send their money to the offshore captive, they are "not purchasing insurance."

Schupp challenged that assertion, saying the hospitals make such an argument to avoid the tax liability that comes with being an insurance company.

"Because if they said it was to buy insurance, then they owe a bunch of tax," Schupp said. "So then, why did you move that money if it wasn't for the purchase of insurance?"

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