When I first heard of Lawrence + Memorial Hospital's new offshore business venture, it was by way of a rumor circulating prominently in political circles around the city, that the nonprofit community hospital has parked $20 million in the Caribbean banking capital Grand Cayman.

Needless to say, I put a call into the New London hospital to find out about its Grand Cayman connection.

What I learned after a conversation Thursday with Lou Inzana, chief financial officer, is that the hospital has indeed set up a new corporation in Grand Cayman, one that now provides L+M with its medical malpractice insurance.

It's a fairly routine practice, now used by a large number of American hospitals, including, for instance, all the teaching hospitals in Boston affiliated with Harvard, Inzana said.

Also, L+M hasn't moved $20 million offshore, Inzana assured me.

Only $120,000 is on deposit in Grand Cayman, he said.

The $13 million in reserves held against any possible malpractice judgments or settlements is invested in the U.S., mostly bonds, Inzana said.

The $13 million used to establish the new insurance company, he explained, was money the hospital previously used in a combination of coverage in which it self-insured and bought some more catastrophic coverage from commercial carriers.

A principal reason for moving coverage to the new independent company in Grand Cayman, away from simply self-insuring, Inzana said, is because the hospital may eventually use the new Grand Cayman company to profitably sell malpractice coverage to private doctors affiliated with L+M but not on staff.

Hospital officials said that in Connecticut, they couldn't set up the company to insure itself, known as a captive, because state regulations would not allow it.

They could have set it up in some other states that would allow it, Vermont, for instance, but that would have been more expensive, because of additional regulations, than going to Grand Cayman, Inzana said.

So, unlike many for-profit corporations that move business and money offshore solely for tax purposes, L+M, a nonprofit, did it to avoid certain state regulations in the U.S., following the lead of other large hospitals.

The captives are also used in other high litigation risk industries, like construction.

L+M officials did say the new company has an office in Grand Cayman, although it doesn't have an actual L+M sign shingle hanging on the street. Presumably, hospital officials go there from time to time to execute business.

I suggested to Inzana that the reason so many rumors have been circulating about L+M's Grand Cayman connection is because people are suspicious of any organization, especially a local nonprofit hospital, moving their business offshore to avoid U.S. regulation or taxes.

I asked him if the hospital hadn't considered, for instance, lobbying for a change of Connecticut regulations to allow here what they are doing in Grand Cayman.

He said, in general, the hospital has been fighting an uphill battle in Washington and in Hartford to cut costs and operate effectively in a changing environment.

"I wish I could rely on our legislators to do the right thing," he said.

In the long run, Inzana said, moving the hospital's new insurance business offshore is going to be good for employees and patients here, because it is going to lower costs.

"Quite frankly, it is cheaper to operate out of Grand Cayman right now," he said.

That would seem to indicate the system is broken, though I am not sure what the best diagnosis might be for mending it, or whom to sue if they fix it wrong.

This is the opinion of David Collins.