In this episode, we are joined by Clay Ogden of SRA, to help us understand what an 831(b) plan is and how they can help healthcare providers mitigate risk.
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Highlights of this episode include:
- What is an 831(b) plan
- How 831(b) plans helped businesses during COVID
- Which entities are good candidates for an 831(b) plan
- Different kinds of risks
- What to do to get started
Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. In today’s ever-changing risk environment, it’s important for successful businesses to develop a comprehensive risk management program. 831(b) plans address tangible asset risk through traditional insurance carriers and intangible asset risks. To help us understand more about what an 831(b) plan is and how they can help healthcare providers mitigate risk, I’m joined by Clay Ogden of SRA, an 831(b) plan administrator. Clay, welcome to the show.
Clay Ogden: Thanks for having me.
Mike: So Clay, why don’t we start out with the easiest question. What is an 831(b) plan?
Clay: So an 831(b) plan, it’s actually a section of the tax code that’s existed since mid to late ’80s and basically allows a business owner to take excess profits, excess revenues, and set them aside for uncommon, unforeseen, uninsured types of risk that ultimately falls to them on their balance sheet right now to manage with after-tax money and cash flow. And so these programs are really designed to just bring some efficiencies to how they manage those particular risks.
Mike: Excellent. And so back in 2020, something called COVID came along. And I’m wondering, how did 831(b) plans help businesses during COVID?
Clay: COVID was, honestly, a prime example of why these programs exist, why 831(b) plans even exist. It exposed a lot of the uninsured types of risks, right, lots of business owners, lots of frustrations that, “I pay a lot for my traditional coverages. But this isn’t covered. All [the incidences?] are not covered,” and ultimately ended up falling to the business owner to bear the brunt of. And that’s really where these programs fill in and are really plug and play for those that have lots and lots of exposures to risks that, they don’t happen all the time. But when they do, they typically tend to hurt. And that’s really where the uncommon, unforeseen, uninsured events come into play through these types of programs is to help cover you in the event you have a supply chain interruption. Supply chain policies are attainable through the open market, but what they often don’t cover is loss of income or specifically to the medical specific industry is things like brand and reputation damages or dispute resolution policy, someone bringing legal action on you or the practice or the business.
I think data breach, cyber losses are a growing concern for any and every business, things specific to professional liability, maybe endorsements for medical malpractice. You have a professional liability policy now, and it doesn’t cover something. This is where this type of a program would absolutely cover an incident that wouldn’t be covered by your traditional insurances. We saw lots and lots of clients that went through maybe a employee liability interruption or an employee bringing legal action on the employer. I think we’ve only seen the beginning maybe of some of the issues that could’ve spawned from COVID specific with lockdowns and quarantines and not being able to perform specific procedures, maybe a loss of a key employee due to an accident or an illness. Again, something that’s not covered, but really, that’s where these programs really hone in. It’s on those uninsured types of risk.
Mike: Got it. And when you think about our audience, which is primarily comprised of healthcare providers from hospitals and health systems, all the way down to smaller private practices, which entities would you think would be good candidates for an 831(b) plan?
Clay: All of the above, potentially. We have a lot of medical professionals that use our program, whether they have their own practice or their own clinics, or we have some clients that are involved in hospitals. All of the above, honestly, could be a very good fit. It really would come down to, “Do we have excess revenues? Do we have excess cash flow that we could set aside for these potential risks?” and, “What is the ownership structure?” right, “Do we have a single member, partner? Do we have two or three partners? Do we have 35 partners?” It could get a little bit more dicey trying to figure out ownership structures with that many involved. But the simple answer would be that all of your clients or anyone in those particular spaces could potentially be a client. We already have existing clients in those particular areas.
Mike: And you mentioned different kinds of risks. What kind of risks do businesses have that an 831(b) could potentially help with specifically?
Clay: Yeah. I think looking back to business interruption, business interruption is a huge one that a lot of medical professionals, unfortunately, were hit with pretty heavily through 2020, not being able to perform specific procedures that they are used to performing. Maybe they were closed down for four weeks to three, four months. That was something that we saw quite a bit of and clients filing claims because the bulk of their revenue stream had now been put on pause because they were locked down or forced to quarantine or close their business or whatever have you. And so loss of income, loss of revenue is a huge one. I think the brand and reputation side for a medical professional is massive. Sometimes that falls under the professional liability. But those policies and when something big tends to happen, sometimes it’s not covered. And that’s where being able to lean on your own 831(b) plan would be very effective.
Again, I think the data breach policies for malicious coding, ransomware, phishing, malware is only a growing concern, especially in today’s environment. You start looking at things like the loss of a key employee or those professional liability policies or even the events that we talk to– or talked about earlier, where those are political risks, government bodies deciding who’s an essential and nonessential business, deciding whether or not you can remain open to perform your everyday procedures. If someone’s deciding that that’s not something that you need to do or aren’t necessarily needed at the moment, that’s where those business interruptions start to come into play. And so a lot of our clients have filed claims over the last two or three years largely due to the pandemic and all of these events that have come about.
Mike: Makes sense. So we talked a few minutes ago about the different kinds of companies that could potentially benefit from an 831(b) plan. But there’s a four-part test that you have available. What are the elements of the four-part test that an organization must pass to be able to participate in an 831(b) plan?
Clay: Yeah. So in our industry specifically, just like everything else, there’s a right and wrong way to do it. And that’s really what our job is at SRA is to make sure that we keep you in compliance. We keep the client in compliance. And the four-part test plays a massive role in that. Right? And that four-part test, really, what that comes down to is it falls on us as the 831(b) plan administrator to make sure that we are abiding by that. And that four-part test is making sure that we have a proper transfer of risk, making sure that there is proper distribution of risk inside of the program, again, things that we can kind of dive into with the client and specifics and what those things look like. The third would be making sure that the risks that we’re looking at are fortuitous in nature. They are things that happen by chance. They are not a all-day, everyday business risk. And then the last one would be making sure that we’re following the principles of insurance, making sure that we have proper investment of the funds that they put in, making sure that we’re actually issuing policies.
They have policy language that stipulates what is a covered claim and what’s non-covered inside of that particular policy. Those things are extremely important, especially when you start looking at utilizing the law of large numbers. How do I insure against these, quote-unquote, “self-insured risks” that I’m self-insuring right now? I’m just using whatever’s left in cash flow. And if I can utilize a program like this in an 831(b) plan and get these risk coverages to become more efficient inside of my business by setting dollars aside, what are those steps that I need to do to make sure that I do this, it’s efficient for me, and it keeps me out of harm’s way by doing it the correct way in the eyes of the IRS? And so that’s really what the four-part test is, and it really falls on us to make sure that that’s done and done properly.
Mike: So Clay, what does an organization need to do to get started with an 831(b)?
Clay: I mean, we would actually, typically talk with the client, their CPA, their advisors, etc., and ask them some questions about their business, kind of learn where their pain points are, learn what risks they feel are hampering them in their business or have been exposed, especially over the last few years. And let’s find policies that might be able to ease that potential pain. And a lot of the times, we work with the client and their advisors and their CPAs to work through what those questions might be. They can reach out to us at 831b.com. They can always send us, me and my team, emails as far as potential questions that they have. Is this a fit? Can we set up a Zoom to discuss it? Usually, we can identify a client in a relatively quick fashion, 30 to 60 minutes, and ask some questions, get some answers, and be able to know if it’s something that’s worth pursuing for them. And once we’ve done that, usually, we can get a client started in the process and moving towards creating this inside of a month. But there is some due diligence that’s needed on our side just to have those personal conversations and learn some information to see if they’re a fit for our program and vice versa.
Mike: Sounds good. Clay, if someone wanted to find out more about SRA, where can they go?
Clay: Yeah. Our website is 831b.com. 831b.com. It is a very in-depth place to go and find out more. Lots of information on there about 831(b)s in general, our program specifically. It’s a great place for lots of training and articles and up-to-date information. Our team has done a really good job with that. And then they can always reach out to me on my email at Clay@831b.com. And me and my team are always available and always excited to talk with new business owners and see if this is something we could potentially fit for them.
Mike: Excellent. Well, Clay Ogden, thanks so much for joining us today on the Hospital Finance Podcast.
Clay: Absolutely. Thank you very much.
[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER, SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.
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