HealtHTREK PHYSICIAN LIABILITY RISK FINANCING IN THE POST-HEALTH CARE REFORM WORLD INTRODUCTION

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1 PHYSICIAN LIABILITY RISK FINANCING IN THE POST-HEALTH CARE REFORM WORLD By Robert L. Syder, JD, ARM Willis Health Care Practice INTRODUCTION HealtH Care PraCtiCe HealtHTREK December This summer s U.S. Supreme Court decisio 1 upholdig the major provisios of the Patiet Protectio ad Affordable Care Act (PPACA) ad, more recetly, the re-electio of Presidet Barack Obama, take together make it clear that health care reform is here to stay for the foreseeable future. (Note: Curret refereces to the federal law are geerally abbreviated to ACA.) Sice the Presidet s sigig of the legislatio early i 2010, ad eve earlier, the health isurace idustry has bee movig apace to reshape its provider aligmet ad paymet models. Thus we expect to see the emergece of commercial models alog the lies of accoutable care orgaizatios (ACOs), essetially ruig o parallel tracks to the federally legislated ACOs applicable to govermet fuded programs for Medicare ad Medicaid. I short, a ew world of provider aligmet ad paymet is upo us, which creates profoud implicatios for physicias ad the etities that will bear the liability risk for physicias activities i the future. IMPACT OF PROVIDER/PHYSICIAN RE-ALIGNMENT ON LIABILITY RISK FINANCING Isurig (or otherwise fiacig) physicia liability risk used to be a fairly straightforward propositio. The majority of physicias were private practitioers, either i solo practice or with physicia groups. Solo practitioers ad small groups typically bought professioal liability isurace from the groud up, bearig o risk themselves, while larger groups might veture ito alterative risk fiacig via

2 deductibles or self-isured retetios, or, for very large ad well-fuded groups, by participatig i or creatig captive isurace compaies or risk retetio groups. The idividual physicia s relatioship with a hospital was usually as a idepedet cotractor grated privileges (legally, the cocept of a licese ) to admit ad treat the physicia s patiets i that facility. The hospital was ad is legally resposible for the coduct of its urses ad other employees, but, barrig certai recogized legal exceptios, the hospital was ot legally resposible for the coduct of idepedet physicias. Hospitals as a matter of prudece would ad still do set miimum requiremets for physicias to carry professioal liability isurace as part of the hospital s credetialig process, but the hospital did ot purchase isurace or otherwise fud liability risk for physicias. Direct employmet of physicias by hospitals or itegrated health systems today is fairly commo ad is, i fact, a rapidly acceleratig tred. This tred icludes both the hirig of idividual physicias geerally i areas of eed for the hospital (hospitalists, for istace) ad the acquisitio of medical group practices as part of a health system s strategy to add sources of reveue ad patiet referrals withi the itegrated system.* A sigificat majority of hospital systems expects to employ more physicias ad to acquire medical groups over the ext 12 moths. (See Figure 1.) Further, direct physicia employmet covers a rage of specialties from primary care to surgical ad other itervetioal specialties, e.g. cardiology. (See Figure 2.) Figure 1 Figure 2 * Three separate federal provisios, together called StarkLaw, gover physicia self-referral for Medicare ad Medicaid patiets. 2 Willis North America 12/12

3 A wave of physicia practice acquisitios by hospitals 15 to 20 years ago proved fiacially disadvatageous for may hospitals. By 1998 the Office of Ispector Geeral (OIG) of HHS estimated that 62% of all forprofit ad ot-for-profit hospitals owed physicia practices. 2 Durig this era, accordig to OIG, oe of the major reasos hospitals purchased physicia practices was to establish physicia etworks to compete with maaged care products offered by isurace compaies. 3 Ufortuately, may hospitals proved ot adept at fairly valuig physicia practices ad sigificatly overpaid for these acquisitios. At the same time, physicias who were used to practicig idepedetly did ot, i may istaces, adjust to workig withi a hospital or health system s more regimeted structure ad productivity substatially eroded. The acquisitio tred was reversed to a large degree early i this decade, ad may previously acquired practices were divested. The differece ow is that the ACA is desiged to, amog other features, promote collaboratio amog etworks of providers with respect to the trasformatio of paymet models ad care delivery. The years betwee 2011 ad 2015 are particularly importat withi the trasformatio timelie, as illustrated by The Commowealth Fud below. 4 TIMELINE FOR PAYMENT AND SYSTEM INNOVATION Productivity Improvemet 10% Medicare Primary Care Icrease Medicare Shared Savigs (ACOs) Natioal Medicare Paymet Budlig Pilot Idepedet Paymet Advisory Board (IPAB) Value-based Purchasig for Physicias Patiet-Cetered Outcomes Research Iovatio Ceter (CMMI) Pioeer ACOs Medicaid Primary Care up to Medicare Levels Reduce Paymet for Hospital Acquired Ifectios All-Payer Demos ad Health Iovatio Zoes Budled Paymet for Care Improvemet Iitiative Physicia Group Practice Trasitio Demostratio Value-based Purchasig for Hospitals Improve Physicia Feedback Reduce Paymet for Prevetable Readmissios 3 Willis North America 12/12

4 Thus, iterest i health system physicia employmet ad acquisitio of physicia practices has bee rekidled. Notably, with the advet of accoutable care orgaizatios uder the ACA, physicias will be employed ad egage i a variety of collaboratios ot previously cotemplated. Physicias may cotract with ACOs as providers, they may be employed by health systems establishig ACOs, or they may themselves be egaged i the creatio of ad directly employed by ACOs or other etities. We have recetly observed medical services orgaizatios (MSOs) beig formed with private capital to cotract with physicia practices to provide a array of practice maagemet services, such as staffig, billig, credetialig ad cotractig with payers. I some istaces the ed game of the busiess model is for the MSO etity to create or evolve ito a ACO itself. What do we make of physicia liability i the post-reform world? EXPANDING THEORIES OF LIABILITY CREATE ADDITIONAL RISK The situatio with respect to the liability for the acts of physicias is fluid ad volatile withi the process of trasformatio. ACOs, for istace, uder the ACA, are distict legal etities. The legal resposibility that ACOs ad other etities cotractig with or employig physicias bear for the acts of physicias will likely evolve over time. Isurig (or fiacig risk via alterative vehicles) physicia liability is boud to be more challegig i this eviromet. Legal theories of vicarious liability, such as ostesible agecy ad respodeat superior are likely to be tested as well. Various state tort claim limitatios, such as caps o o-ecoomic damages, will be challeged as to their applicability to various etities that effectively cotrol physicias, where these etities themselves do ot fall withi the defiitio of health care provider. For its part, the most the federal govermet has offered to date to help clarify this muddy water ad set some parameters aroud tort liability is a study project, the details of which are yet to be developed. The legacy liability represeted by claim tails for professioal liability claims arisig from prior acts of acquired physicia groups is a sigificat risk fiacig cosideratio ad a importat area of egotiatio for both acquirig etities ad physicia practices seekig to be acquired. Questios must be addressed, such as: Whose resposibility is it to provide tail coverage? How will the cost be determied? Who will pay for the coverage? Are there tax implicatios to ay proposed solutio? Further, etity liability with respect to activities such as credetialig, peer review, maaged care cotractig, codig ad billig, etc. must be evaluated aew as the trasformatio process ufolds. Also, pre-loss, cliical risk maagemet is a importat compoet of the overall equatio. Fiacial success uder ay ACO model, whether of the federally legislated variety or as a virtual ACO cotractig with commercial payers, will be icreasigly quality drive as time goes by. The developmet of protocols relatig to reducig physicia risk ad improvig patiet safety, ad the cost of implemetig ad maitaiig quality-focused programs are key cosideratios impactig liability. THE ROLE OF INSURANCE Traditioal physicia liability isurers, hospital/health system liability isurers ad maaged care orgaizatio liability isurers, as well as reisurers are all workig to uderstad the evolvig physicia liability ladscape. How will isurers address ot oly the direct liability of physicias as health care providers but also the liabilities arisig from a array of cotractual requiremets that are likely to be complex? For example, liability isurers have take varyig positios with respect to exclusios relatig to cotractual liability, medical director liability, credetialig/peer review ad other committee service liability. A rage of proposed commercial market solutios will emerge, but ay sort of oe-size-fits-all set of solutios will likely prove usatisfactory. Alterative risk fiacig structures, such as self-fuded trusts, sigle paret captives, risk retetio groups ad segregated portfolio compaies come with their idividual sets of perceived advatages ad challeges. The ucertai liability issues i the post-reform era may trasced the liability cocers addressed by previous approaches to physicia chaelig programs utilized by health systems seekig to fiace physicia risks i the past. 4 Willis North America 12/12

5 Further, with respect to alterative risk fiacig structures, such as captives, i most istaces risks that a captive seeks to uderwrite will still have to be reisured at some level, meaig that the attedat risks will have to be uderstood ad deemed acceptable to commercial reisurers. Obviously, health systems ad other etities fiacially positioed to retai substatial levels of risk will have more leverage i egotiatig risk trasfer solutios. But start-up etities of various atures may ot be well eough capitalized at the outset to effectively employ alterative risk fiacig strategies. The situatio with respect to the liability for the acts of physicias is fluid ad volatile withi the process of trasformatio. ACOs, for istace, uder the ACA, are distict legal etities. The legal resposibility that ACOs ad other etities cotractig with or employig physicias bear for the acts of physicias will likely evolve over time. Isurig (or fiacig risk via alterative vehicles) physicia liability is boud to be more challegig i this eviromet. Legal theories of vicarious liability, such as ostesible agecy ad respodeat superior are likely to be tested as well. A thorough uderstadig ad clear articulatio of ay proposed physicia aligmet busiess model will be ecessary for a health care etity to assess its risk ad develop optimum risk fiacig solutios. We thik it is importat for this uderstadig to be developed as part of the plaig process for ay particular etity, with the orgaizatio s risk maagemet team fully egaged. CONCLUSION Physicia aligmet models are i a sigificat state of trasitio, largely as a result of health care delivery trasformatio uder both the ACA ad commercial payer restructurig. A prudet director of risk maagemet or chief risk officer will recogize that orgaizatioal risk relatig to relatioships with physicias is likely to be icreased. The icreased risk arisig from physicia liability has a material ifluece o the cost of risk fiacig, whether with commercial liability isurers or i a self-fuded risk fiacig vehicle, such as a captive isurace compay. Whether servig o behalf of a hospital or health system employig (or cotemplatig employig) physicias, a medical practice group, or, potetially, a ACO, fiacial risk maagers are well advised to thoughtfully evaluate: The terms of ay cotracts speakig to idemificatio, hold harmless ad requiremets to maitai isurace for physicia liability The physicia s legal status withi the cotemplated delivery model, whether direct employmet, cotracted service provider, equity participat, or other The impact of icreased physicia risk o the cost of primary ad excess liability isurace ad reisurace Legacy claim exposure arisig from a physicia or practice group s prior acts Icreased demads o iteral cliical risk ad claim maagemet staff I short, a thorough risk assessmet aroud the liability issues associated with physicias i ay particular itegratio model will make for iformed decisio makig as to the preferred risk fiacig alterative. The author gratefully ackowledges cotributios derived from presetatios made by Willis colleagues Deaa Alle, Marya McGivey, Brad Norrick ad Sea Rider. 5 Willis North America 12/12

6 CONTACTS For further iformatio, please visit our website o willis.com or cotact ay of the followig: Frak Castro Health Care Practice Leader Los Ageles, CA frak.castro@willis.com Deaa Alle Atlata, GA deaa.alle@willis.com Paul A. Greve, Jr. Fort Waye, IN paul.greve@willis.com Ke Felto Hartford, CT keeth.felto@willis.com Robert L. Syder II, JD, ARM Housto, Texas bob.syder@willis.com Jacquelie Bezaire Los Ageles, CA jacquelie.bezaire@willis.com Sady Berkowitz Malver, PA sady.berkowitz@willis.com Kathy Kuigiel Sarasota, FL kathy.kuigiel@willis.com The observatios, commets ad suggestios we have made i this report are advisory ad are ot iteded or should they be take as medical/legal advice. Please cotact your ow medical/legal adviser for a aalysis of your specific facts ad circumstaces. 1 Natioal Federatio of Idepedet Busiess v. Sebellius, 132 S. Ct The case was heard together with Florida v. Departmet of Health ad Huma Services. 2 U.S. Departmet of Health ad Huma Services. OIG, Hospital Owership of Physicia Practices. 9/99pdf. 3 Ibid. 4 How Paymet Reforms Ca Help Achieve a High Performace Health System, K. Davis, The Commowealth Fud, presetatio to Secod Natioal ACO Cogress, 11/1/ Willis North America 12/12