How To Insure A Hospital

Transcription

1 Options for Insuring Employed Physicians Considering all the nuances, there is an almost infinite variation in the way hospitals insure their employed physicians for medical malpractice liability. However, the most common approaches are listed below in order of their relative complexity to implement initially: 1. Allow the employed physicians to get their own insurance 2. Insure the employed physicians on the hospital s professional liability (HPL) insurance 3. Buy a separate group policy from the hospital s professional liability insurer to insure the employed physicians 4. Buy a separate group policy from an insurer other than the hospital s professional liability insurer to insure the employed physicians 5. Insure the employed physicians in a protected cell in an existing captive, i.e., the rent-a-captive approach 6. Insure the employed physicians in a hospital owned captive insurance company, i.e., the pure captive approach 7. Insure all the physicians in a hospital created risk retention group (RRG). Of course, in practice many hospitals use some combination of these approaches rather than just one. The following paragraphs and the spreadsheet at the end of this paper compare the approaches with regard to: Cost; Administration; Limits; The ability to benefit from a coordinated defense; Underwriting clout; Retention levels; The possibility of coverage conflicts; The possibility of tail coverage issues; Whether the physicians losses affect the hospital s cost of insurance; Physician satisfaction; Hospital satisfaction; and Program control. Allowing the Physicians to Obtain Their Own Insurance This approach can have several advantages. The advantage to the hospital is that the physician has to do most of the work. In addition, for some physicians at least, this approach provides a relatively high level of satisfaction, because it allows them to control the process and retain a feeling of greater personal autonomy. Finally, if the responsibility for obtaining the insurance rests squarely with the physicians they have to figure out the tail issues for themselves if they leave the hospital s employment.

2 The physician s loss experience under this approach has little if any effect on the hospital s HPL premium. This cuts two ways. It is an advantage if the loss experience is unfavorable and it s a disadvantage if the physician s loss experience is favorable. However, this approach has a number of disadvantages. It can be costly, because the physicians are not necessary the most skillful shoppers and negotiators in this environment. Furthermore, if the hospital is paying the premium, the physicians have relatively little incentive to get the best price. There is a hidden cost as well. Does they hospital want its highest paid employees spending their time negotiating insurance? When the physicians get their own insurance, there is no opportunity to benefit from a coordinated defense when both the physician and the hospital are named in a claim. There may be no common defense of the suit and instead of having one coordinated approach, there will be separate attorneys working for different companies with potentially conflicting motivations (each preferring that the other assume responsibility). This results in duplicate defense costs in all cases and may result in one party paying more than a fair share of any settlement value in order to obtain a reasonable good settlement. Physician insurers often settle out on the physician side and leave the hospital holding the bag so to speak. Instead of working together with a joint defense strategy, there is often finger pointing and stonewalling, which frequently is detrimental to the hospital. Under this approach, the hospital usually has very little clout with the insurer in the event of an under writing or claims issue, because the hospital has little, if any, additional premium to use as leverage to obtain a satisfactory resolution of the issue. The motivation of the physician company not to settle a claim may not be aligned with the realities of the case or the needs of the hospital. For example, the physician may withhold his or her consent (National Practitioners Data Bank concern) or the plaintiff attorney may try to divide and conquer negotiating with the physician to specifically blame other hospital employees. This adversarial finger pointing relationship that might develop between the hospital and the employed physician only works to benefit the claimant s attorney and increase the likelihood of an unfavorable settlement or award. When physicians are allowed to get their own coverage they usually get no deductible and fairly low limits. The lack of the deductible can result in higher costs. The low limits can be much more problematical. The hospital as the employer is ultimately responsible for the physician s malpractice liability. So if the physician s limits are too low, the hospital, in effect, becomes the excess insurer without any insurance of its own to cover any loss above the physician s limits. Insure the Physicians on the Hospital s HPL Insurance If you take the personnel issue out of the equation, this is the approach preferred by most hospital risk managers. Typically it is the lowest cost option because of the acceptance of a large self insured retention and the hospital s clout with its HPL insurer. This approach can be very cost effective if the physicians loss experience is favorable and generally it is for employed physicians. On the other hand, if the physicians have unfavorable lost experience, it can be a costly option and have a detrimental effect on the HPL pricing. This approach typically provides fairly easy administration, because there is only one insurer and one policy. One possible drawback is that the hospital has to manage the tail coverage issues that arise when a physician leaves. This approach affords the maximum opportunity to save money on claims because of the benefits of a joint defense strategy. In addition, the hospital has significant clout with the insurer which makes it relatively easy to resolve any coverage, claims, and underwriting issues that may arise. Normally when the physicians are covered under the hospital s HPL policy they have the benefit of very high limits with respect to what they might obtain on their own or under some of the other approaches. This can

3 increase physician satisfaction and many physicians welcome the opportunity not to have to deal with the whole process of obtaining and maintaining their own insurance. On the other hand, some physicians do not like any approach that impinges on their autonomy. Buy One Group Policy from the Hospital s HPL Carrier This is very similar to insuring the physicians on the hospital s HPL policy. Most of the same advantages and disadvantages apply. The primary difference is that both the deductible (retention) and the limits are usually lower under a separate policy. In the case of a lower retention this is likely to increase the cost. Although the lower limits have some positive affect on the premium, it is usually not nearly enough to offset the additional cost associated with a lower retention. It should be noted that many HPL carriers will not write physicians on a stand alone basis. Therefore, this option may not always be available even when the HPL insurer is willing to insure the physicians very economically on the hospital s HPL policy with that policy s higher retention. Buy One Group Policy from Other Than the Hospital s HPL Carrier Like group policies in general, this approach can result in a competitive premium and relatively simple administration. The major disadvantage relative to a group policy from the hospital s HPL insurer is that the joint defense opportunities are lost and there is a reduction of clout with the insurer, because the total premium is much less. Rent a Protected Cell in an Existing Captive, Create a Captive, or Create an RRG These three options are very similar and therefore, are grouped together for discussion purposes. Insurable risks may be insured or financed in a number of different ways. Of course, the traditional way is to purchase insurance with no deductible or with a relatively small deductible, transferring essentially all of the risk to the insurer. This is the approach many hospitals take with respect to their employed physicians, especially if they number of employed physicians is less than 100. However, over the past 25 years, many larger hospitals have become more sophisticated in their approach to financing risk. Many now retain more risk through large deductibles or self-insured retentions (SIR s), either to lower their premiums or because insurance market conditions requires them to do so. Some carry risk retention further and become qualified self-insureds or elect even more sophisticated alternative risk transfer mechanisms such as captive insurance companies or risk retention groups. Captive alternatives include pure captives, wholly owned insurance subsidiaries; rent-a-captives, renting a cell in another organization s captive; or participating in group captives. In general terms, a captive is an insurance company which primarily insures the risks of its owners and sometimes those of related or affiliated firms. Today, there are more than 5,000 captives worldwide. There are three main captive structures: the single parent or pure captive, the rent-a-captive, and the group or association captive. The pure captive is an insurance company with a single owner. Basically, it is an insurance subsidiary of the parent company. Underwriting profit and investment income, which typically are earned by an insurance company under an insured program, instead inure to the parent company s benefit. Of course, just like commercial insurers, captives can also lose money when losses exceed premiums collected. A "rent-a-captive" is an existing insurance company which rents its capital, surplus, and license to a company wanting to establish a self-insurance program, but which does not want to set up its own captive insurance company. The rent-a-captive usually provides administrative services and reinsurance, and sometimes, an admitted fronting company. (Fronting refers to the practice of a nonadmitted insurer, or an insured with a

4 captive insurance company, contracting with a licensed insurer to issue an insurance policy for regulatory or certification purposes.) A group or association captive is an insurance company owned by more than one entity. The owners/insureds may be a homogeneous group made up of companies from the same industry or may be heterogeneous with insureds from a wide variety of industries. The owner/insureds generally share in the risks of the other participants. Risk Purchasing Groups (RPG s) and Risk Retention Groups (RRG s) are alternative risk mechanisms which came into existence under the Federal Liability Risk Retention Act enacted by Congress in 1981 and amended in The original intent of the Act was to address the product liability crisis of the early 1980 s by permitting an alternative market mechanism, thereby increasing the amount of insurance available to consumers. HPL and physician malpractice liability can be insured in RRG s. It should be noted, however, that the insureds are the owners which can present control issues for hospitals especially if nonemployed physicians are insured. A full discussion of these alternative risk transfer arrangements is beyond the scope of this paper. Suffice to say that before a captive or RRG can make sense for most hospitals to insure their employed physicians, they need to have a minimum of $1,000,000 in annual premium. This is because the start up and administrative costs can be relatively high and many of the benefits sought after can be obtained by the use of simpler risk retention alternatives such as deductibles or swing rated plans that reward good loss experience. In any case, a captive feasibility study is highly recommended before deciding to undertake any of these alternative risk transfer arrangements.

5 Options for Insuring Employed Physicians Option No Option Description Create a Captive Let the Physicians Get Their Own Insurance Insure the Physicians on the Hospital's HPL Insurance Buy One Group Policy from the HPL (Same) Insurer Buy One Group Policy with a Different Insurer from the HPL Rent a Protected Cell in an Existing Captive Create an RRG Cost Administration Limits of Liability Ability to Benefit from Coordinated Defense Clout with Insurer Physician Retention Level Possibility for Conflict with Insurer on Coverage Issues Tail Issues for Hospital Do Losses effect HPL? Physician Satisfaction Hospital Satisfaction Program Control or Low to * Low to or or Low Low Low or or Low or Low or or Low Low or initially or or or Low Low Low or Low or or or initially or or or Possibly Unlikely Unlikely Possibly Unlikely Unlikely Unlikely Unlikely Possibly Possibly Possibly Possibly Possibly Possibly No Yes, good or bad Yes, good or No No No No bad Unknown Unknown Unknown Unknown Unknown Unknown Unknown Low or or Low or or *Depending on Losses Low or or or or