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 Evaluating Patient Trust Fund Surety Bonds

It’s a good time to evaluate trust fund bond costs, as various factors  in the surety bond industry are reducing LT/PAC centers’ costs.

 

Jason O'LearyThe commercial surety bond market experienced a greatly improved pricing environment for buyers over the past year. A combination of a strong economic climate, technology advances in surety delivery and processing systems, and increased competition significantly lowered costs for surety bond buyers nationwide. The time is ripe for long term/post-acute care (LT/PAC) providers to reevaluate their coverage and make sure they are using the best resources to price their bond.

Surety Bonds Defined

Nursing centers, assisted living communities, and businesses that offer home care in nearly every state are required to post and maintain resident/patient trust fund surety bonds as a state licensing requirement if they manage their customers’ finances.

These bonds, also known as nursing center trust fund bonds, protect LT/PAC patients and their families by ensuring that the center complies with state laws and regulations, and administers patient trust funds in an ethical and financially responsible manner. In the event that a patient’s money is lost or stolen, a claim against the surety bond would repay the patient.

Additionally, businesses that offer in-home care or elderly care must maintain another type of bond called a business service bond to protect customers from acts of theft, larceny, or fraud committed by employees.

The bond amount (or required coverage) varies by state but typically ranges from $10,000 to $100,000 for nursing center fund surety bonds. A third party who has been damaged financially by the bonded principal’s violations of applicable provisions of the state laws may file a claim against the bond seeking to recover damages. The liability to the surety company is typically limited to the statutory bond amount, which varies by state.

How Bonds Are Priced

Most nursing center trust fund bonds are priced and purchased for an annual term but may be offered by surety companies for multi-year terms with favorable rates on later years. Other bonds must correspond with licensing dates or may have a fixed expiration date that is set by the governing authority.

Price shopping a center’s bond six weeks before the expiration is an industry best practice. As explained below, prices can fluctuate dramatically with different agents and carriers, with changes to historical claim and loss activity in the market, and based on the center’s individual business and credit history.

Risk of Loss Also a Factor

Surety bonds are priced based on a combination of the risk of loss associated with the specific bond type and the risk of loss associated with the specific applicant. The risk of loss for a bond type is based on the nature of the underlying statutory obligation and historical claim and loss activity experienced by the insurance carrier or industry for the particular bond.

The risk of loss associated with the applicant is based primarily on experience in the business, along with personal and business credit history. In this way, surety bonds are underwritten more like a credit product and less like a traditional insurance product. In today’s market, most nursing center trust fund bonds will be priced with an annual rate from 0.5 percent to 3 percent of the bond amount. That means that a $50,000 center bond will cost most applicants between $250 and $1,500 per year.

Why are Prices Dropping?

A favorable macro-economic environment is the first factor driving down nursing center bond prices nationwide. The overall economy is relatively strong and continues to show moderate growth. As a result, most nursing centers are doing well financially and insurers that assume the risk of loss on surety bonds are faced with fewer claims and loss payouts.
 
Another factor leading to lower bond prices is the growing use of technology to improve operating efficiencies at specialized bonding agencies and insurance companies. Technology strides, including instant quoting systems, automated underwriting, and more robust bond management systems, have led to lower operating costs for these agencies and companies. These lower costs are then passed on to nursing center bond buyers through lower prices.
 
These new technologies make the annual or biannual bond shopping exercise a quick and easy process. These developments are analogous to how shopping for auto insurance and mortgages has changed in recent years with the advent of companies that aggregate information from multiple insurance companies to provide customers multiple quotes. 
 
Lastly, several years of low-cost capital, coupled with profitable surety industry results, have attracted new competition into the market. Many large insurance companies are now focusing capital and resources on developing a surety bond business. These new competitors are acquiring business through aggressive pricing initiatives.
 
“Over the past year, we have seen rates drop for many resident/patient trust fund surety bond customers,” says Eric Fauerbach, president of Surety Bonds Direct.  “We are working with new insurance carriers that are willing to compete on price for this type of bond business.”
 
Note that it is always important to work with a licensed and reputable bonding company or insurance agent.
 
Jason O’Leary is vice president, product and technology, for Surety Bonds Direct. He can be reached at joleary@suretybondsdirect.com.
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