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Addiction Risk Management
January 2006

In the 1970s, David Sterling was studying at the University of Wisconsin and, frankly, at that time was not getting all that serious about his future. But then came a call from home with some news from his father, who had founded an insurance brokerage in New York with his brother as partner decades earlier.

What Sterling learned upon arriving home was that his father wanted to take the firm in a new direction, perhaps taking over the business in its entirety. What the father wanted to know was, would David help him run the company if he bought his brother out? Sterling’s father also made an emotional appeal, telling David that he wanted to pass the firm along to him one day.

“At that point, when I became aware of how my father felt and that he wanted to set up a family succession, I was very moved,” said Sterling. “I resolved to devote myself to building up the firm.”

Fast forward 25 years, and David Sterling is sitting at the helm of a $300 million a year agency, a firm Sterling has built into one of the largest insurance brokerages in the nation. Along the way, Sterling has emerged as among the country’s most successful and respected insurance men, with widely recognized sales skills and a keen, in-depth understanding of the highly complex commercial insurance markets.

Two years ago, Sterling & Sterling entered the treatment industry commercial lines business through its purchase of the Van Wagner Group. Founded by Tom Van Wagner in the 1970s, the Van Wagner Group is by far the nation’s leading addiction industry insurance agency, with over 7,000 therapist liability policies and 700 treatment programs on its books.

Bagging the Elephant

The Van Wagner Group has now, under Sterling’s guidance and direction, bagged the elephant. Last month, the agency signed an exclusive deal with Therapeutic Communities of America, TCA, the leading trade association representing the publicly funded side of the treatment business. With the association, Sterling will now attempt to persuade TCA’s members, which include huge industry players like Phoenix House, Daytop Village and Gateway Foundation, to pool their risk by buying their insurance through Van Wagner.

Outgoing TCA chairman Richard Steinberg, who in his day job is the CEO of fast growing WestCare Foundation, believes strongly that the membership should pursue insurance purchases through TCA’s arrangement with Van Wagner: “I believe that over the long-term that it can only make sense for us to pool our risk. And Sterling really knows what he is doing, having put together some in-depth programs for other associations.”

Certainly, the TCA deal is vintage David Sterling, who has driven much of the growth at Sterling & Sterling by signing similar deals with associations. “We go to these associations and tell them that we can save their members money on insurance premiums because that is exactly what we do,” said Sterling, who says he expects his deal with TCA will be generating $10 million in annual premiums relatively quickly, reaching $20 million within a few years.

Big Cost Center

There is no doubt that insurance premiums are a very major cost at all treatment centers. In its research, Treatment Magazine has found that larger treatment facilities tend to spend between 5 percent and 7 percent of their total expenses on insurance premiums, excluding employee health care, while medium and small-sized centers spend between 7 percent and 12 percent of expenditures. The Caron Foundation’s experience is fairly typical of a larger institution in the treatment field. Says CFO Andrew Rothermel: “This is definitely a very significant cost for us, we spend about $1.2 million a year in premiums, not including employee health, which is about 6 percent or 7 percent of our cost base. There is no doubt that we are constantly working to keep our premiums down.”

And that is exactly what David Sterling does for his industry association clients, a case in point being his experience helping the International Association for the Leisure and Entertainment Industries, IALEI, which represents the family fun park business. The IALEI had been desperate to get its members soaring insurance costs under control, according Carol Sjolander, the association’s executive director. “We had approached several agencies, but in the end only David came through for us. Our members have averaged about a 25 percent reduction in their premiums since we launched the program, which has proven a boon for attracting new members.”

A Niche Market

Sterling & Sterling, based on Long Island in Woodbury, NY, is an insurance brokerage, which means it is in the business of the selling insurance products that are underwritten by a wide variety of insurance carriers. And while its carrier partners, showing a high degree of trust in Sterling & Sterling, often devolve underwriting powers to the agency as a means of saving time and money, selling is the principal business of the brokerage.

There are many, many carriers that underwrite addiction treatment risk, most of them targeting certain risks on a piecemeal basis, writing a counselor liability policy here, a workers compensation policy there, and a property casualty risk somewhere else. There are very few carriers who target the addiction treatment business for what’s known in the insurance business as comprehensive coverages. When a carrier targets a business for comprehensive coverage, what what it’s doing is targeting businesses whose operations it wants to insure in their entirety, offering every type of coverage in a comprehensive umbrella, in effect forming a risk management partnership with the business it is insuring. When it comes to comprehensive coverages, there are really only three players who are currently working the addiction treatment and behavioral health marketplaces, industry giant American International Group, AIG, Philadelphia Insurance Companies and more recently ACE Insurance Company of North America.

“We’ve been a signifi cant writer of social services agencies and non-profi ts for over twenty years,” says Cole Henry, Senior Vice President Commercial Lines at Philadelphia Insurance Companies, which is based in Bala Cynwyd, PA. “We do perhaps $500 million a year in premiums there.”

But it has only been in the last fi ve years or so that Philadelphia Companies has made a tighter focus on offering comprehensive coverages specifi cally to mental health and addiction treatment centers. “This has been a very fast growing business for us, one that I have had to apply the brakes to at times, says Henry. “We do about $100 million in premiums in this area now, about 30 percent of which is with addiction treatment centers.”

Due to the specialization and expertise required underwriting addiction treatment and behavioral health risk, not many carriers are in the business of providing comprehensive coverages, according to Henry. “It is most defi nitely not a commodity business, which had its attractions for us.”

ACE Insurance, an $18 billion a year company and much larger than Philadelphia Companies, nevertheless has a smaller presence in behavioral health and substance abuse underwriting risk, but addiction treatment is a market that the company is very keenly interested in expanding substantially. “We have been involved in mental health for some time, but on a different level,” says Ross Bertossi, President of Ace Medical Risk. “We are going to be working closely with David Sterling to develop the kind of comprehensive coverages he’s seeking for the industry.”

ACE began its involvement in mental health risk many years ago when it began insuring members of the American Psychological Association, 40,000 of whose members are now covered for liability at the insurance company.

Risk Managers

David Sterling says his intention is to work very closely with carriers that are offering comprehensive coverages to better manage risk throughout the treatment business, with the aim of lowering premiums for treatment centers that do business with the Van Wagner Group and Sterling & Sterling.

For outgoing TCA President Richard Steinberg, it was Sterling’s strong expertise and skill in managing insurance risk that was the major reason behind the association’s choice of the Van Wagner Group for its program. “The one thing that David Sterling talked about more than anything else was risk management,” said Steinberg. “They have put together an in-depth program for us that was a real driving force behind our choosing the agency.”

When insurers talk about risk management, what they are refering to is a century old practice by agencies and carriers working together to examine their clients business from an insurance risk perspective, helping fi nd ways to mitigate that risk and lowering the risk profi le of the business overall. Since insurance companies are in the business of correctly pricing risk, lower risk usually translates into lower claims, which means more profi ts at the insurance companies. But in practice, what also occurs, largely because insurance markets tend to be hotly competitive, is that carriers often give the lion’s share of that savings back to the customer in the form of lower prices. Lower risk equals lower prices.

Sterling is indeed very familiar with this process, having helped many associations and their members lower their risk profi les in the manner described above. “What we do, and have done already with the treatment business, is assign what we call loss control engineers to the task of looking at risk industry-wide and by visiting specifi c facilities,” said Sterling. “The results from this level of study can often be very dramatic, with big premium savings realized”

But when treatment centers, or other businesses, buy their insurance piecemeal, - workers comp from one carrier and property casualty from another, for example - it is virtually impossible for businesses to get comprehensive risk management advice unless a consultant is hired expressly for that purpose.

“If you’re a factory owner, the property casualty guy is going to tell you you need fi re doors so fi re won’t spread to the rest of the building, but the workers comp guy is going to say that workers may be injured or trapped by such doors,” says Sterling. “You need someone to help you navigate this confl icting advice. That’s exactly what we do, taking into account the entirety of our client’s risk profile.”

But in order to do this Sterling must be writing coverages that are comprehensive, writing policies that cover the entire business of the treatment facility, or at least as much of it as possible. “This is why we are working so closely with the carriers,” says Sterling. And it is one major reason why TCA decided to go with his agency. “We are looking to David to explain the nature of our risk to the carriers, hoping that new ones will take a look at our business and the risks involved.” Certainly, Sterling is already doing this, having recently persuaded ACE Insurance to enter the business of coverig inpatient facilities.

And while Sterling and Van Wagner will certainly have a leg up in selling comprehensive coverages to the TCA membership, which number about 50 mostly quite large treatment centers, there is nothing in the deal that guarantees the TCA members’ business to Sterling and Van Wagner. “Sterling has the very strong backing of the board, which believes very deeply that pooling our collective risk in a program together will have substantial long-term benefi ts,” says Steinberg. “But David has still got some selling to do with the individual members.” TJ

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written by Bree Wakefield, May 28, 2015
Great article. Very informative and eye-opening. Thank you! www.completehealthcare.us
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