This article was republished with permission from WTOP’s news partners at Maryland Matters. Read the story at Maryland Matters.
Maryland state officials are revisiting the issue of how the state’s nonprofit hospitals manage substantial funds through “captive insurance” companies based in the Cayman Islands, raising the question of whether these funds should be taxed by the state.
This week, representatives from hospitals, a national whistleblower, and officials from the Maryland Insurance Administration convened virtually for an initial public information session, focused on understanding how Maryland can ensure that nonprofit hospitals are compliant with state tax laws regarding their offshore insurance accounts.
Although this topic was examined more than a decade ago, renewed scrutiny has emerged following a national whistleblower’s recent comments during the 2026 legislative session about potentially billions of dollars in untaxed funds owed to the state.
Historically, many hospitals believed they were exempt from this tax; however, there are concerns that other nonprofit organizations have been paying it, which raises important questions regarding the enforcement actions of the insurance administration and whether it may be overlooking millions of dollars owed to the state.
“Detecting these internal transactions is quite challenging for the Maryland Insurance Administration, and compliance with the tax relies largely on an honor system,” stated Jason Schupp, the whistleblower who has brought attention to the use of captive insurance by nonprofit hospitals, during his testimony on Wednesday.
“While a few captive insurance owners accurately report their transactions and pay the premium tax, the majority do not,” Schupp noted. He had remained mostly anonymous until he publicly testified in April before the House Ways and Means Committee, claiming that as much as $3 billion belonging to nonprofit hospitals may be accumulated within these offshore captive accounts.
Captive insurance involves a business establishing its own insurance subsidiary—essentially a captive—to manage financial risks that traditional commercial insurance might not cover. Hospitals often create captives to handle financial exposures related to medical malpractice claims, cybersecurity incidents, and more.
Maryland is among 15 states that do not currently have a regulatory framework for companies to establish captive insurance entities within the state. Consequently, many nonprofit hospitals in Maryland have opted to set up these captives in offshore jurisdictions such as the Cayman Islands, decades ago.
Over the years, however, questions have surfaced regarding whether the Maryland Insurance Administration should have been collecting tax revenue from nonprofit hospitals utilizing offshore captive insurance, as other nonprofit organizations are subject to similar statutory obligations.
Most hospitals maintained beliefs that they were not liable for this tax.
“The amount hospitals reserve is based on detailed actuarial evaluations of their unique risks,” explained Andrew Nicklas, senior vice president of government affairs and policy, and general counsel at the Maryland Hospital Association, during Wednesday’s meeting.
Nicklas emphasized that hospitals using captive insurance do not gain tax deductions from this practice. Additionally, due to state-imposed restrictions on insurance rates, hospitals find themselves with limited options for raising funds to insure against distinct risks.
This reality contributes to their reliance on channeling their own funds into captive insurance accounts originally.
“This is not a novel or malicious practice,” he suggested, recommending that state officials consider mandatory registration of these captives to enhance transparency regarding their operations.
Conversely, Schupp expressed unease regarding the use of captive insurance during his tenure in the insurance sector.
He highlighted two significant advantages for nonprofits, like those in Maryland, when they create captive insurance entities.
“Firstly, the funds can be kept out of the nonprofit’s primary financial oversight, thus eliminating accountability related to executive spending and travel, for instance, since those funds are managed in the Cayman Islands,” Schupp pointed out. “Secondly, the complexities involved in these transactions make it exceedingly difficult for tax authorities to enforce compliance, leaving it largely up to the entities to self-report.”
The discussions held on Wednesday will contribute to a comprehensive study required of lawmakers by January 1, 2027. This study will include recommendations from the Maryland Insurance Administration on how to address the matter, which could lead to new legislation if necessary.
Insurance Commissioner Marie Grant underscored that Wednesday’s meeting represents the beginning of an ongoing dialogue rather than the conclusion of the discussion.
“This public meeting is a vital part of our information-gathering and consultation process,” Grant stated. “It is not the only means through which we are seeking information or feedback.”
The inquiry emerged from an earlier proposed bill intending to mandate nonprofit hospitals to pay the tax moving forward. Senate Bill 890, put forth by Senator Dawn Gile (D-Anne Arundel), was originally set to clarify the tax exemption for hospitals’ captives. However, the bill was amended to require hospitals to pay a 3% tax in the future, leading economic policy advocates to push for back taxes to be collected.
In response to additional scrutiny, lawmakers revised the bill to freeze tax collection entirely for two years while the MIA conducted its review. Following further debate, they ultimately agreed to remove the tax moratorium, opting only to formalize efforts already undertaken by state insurance officials to study the issue.
