Current Trends in Malpractice Industry and Effect of Affordable Care Act Darryl K. Thomas ProAssurance PO Box 590009 Birmingham, AL 35259-0009 (205) 877-4490 dthomas@proassurance.com
Darryl K. Thomas is Chief Claim Officer and Senior Vice President of ProAssurance Corporation s Health Care Professional Liability segment. He has been a senior claim officer at ProAssurance since 1995. ProAssurance is the nation s 4th largest medical professional liability insurance company with 13 regional claim offices and over 7,000 open medical professional liability claims. ProAssurance s HCPL segment insures physicians, hospitals, dentists, podiatrists and other allied healthcare professionals. Mr. Thomas is a member of DRI and the State Bars of Indiana, Illinois and Michigan.
Current Trends in Malpractice Industry and Effect of Affordable Care Act Table of Contents I. Introduction...39 II. Presentation...39 Thomas 37
Current Trends in Malpractice Industry and Effect of Affordable Care Act I. Introduction DRI Mr. Medical Thomas Liability will provide and Health an overview Care of Law the medical professional liability industry from an insurance company Current perspective, Trends in with Malpractice an emphasis Industry on national and Effect claim trends. of Affordable He will discuss Care Act the continued consolidation Darryl of healthcare K. Thomas, providers, ProAssurance claim frequency trends and how this has impacted claim inventories, and defense attorney San assignments. Francisco, California Additionally, Mr. Thomas will provide an overview of the domestic and European reinsurance markets and how that too impacts the medical professional liability industry. II. Presentation I. Introduction and Opening Comments a. Discussion and overview of the Health Care Professional Liability Insurance Industry. II. III. ProAssurance Corporation Background a. Founded in the 1970s by physicians as a result of the tort crisis ; a lack of availability of affordable health care professional liability insurance for health care providers. b. A product of 20 plus mergers and acquisitions. c. Publicly traded company (NYSE:PRA) licensed in 50 states with a regional approach to claims, underwriting and risk management. d. Segmented companies selling insurance for health care professional liability, workers compensation, medical products and devices, and lawyers professional liability. Majority owner in Lloyds Syndicate 1729. Health Care Professional Liability Insurance Market Assumptions for 2015, we assume that there will be no significant change in the current Health Care Professional Liability marketplace. Specifically, we expect the market to remain extremely competitive, with the potential for new entrants and/or expansion of product lines or geographical reach by existing competitors. The consolidation of physicians into hospitals, and hospitals into larger systems will likely continue. We are not predicting the overall loss environment to change with claim frequency remaining flat and a gradual increase in claim severity of less than 3% on an annual basis. Industry profitability will remain strong by historical standards, although generally weakening as pricing continues to deteriorate. We do expect industry mergers and acquisition activity to continue and potentially increase... - ProAssurance Senior Management Health Care Professional Liability IV. The Health Care Professional Liability Insurance Industry Discussion a. Extended soft market conditions are resulting in highly competitive premium pricing throughout the health care professional liability industry. Thomas 39
Page 2 b. The consolidation of physicians into hospital based practices has been ongoing for approximately five to seven years. This has caused a decline in the solo and small group physician practice as physicians are choosing to become employed by hospitals. Consequently, health care professional liability insurance companies are losing insureds as physicians join hospital employed practices and hospital self-insured programs. This consolidation represents the largest single competitor in the health care professional liability insurance industry. c. The consolidation of smaller hospitals into larger hospital systems is ongoing and will likely continue as smaller facilities find it more difficult to survive due to escalating costs associated with technology, declining reimbursements and requirements associated with the Affordable Care Act, etc. d. Health care professional liability insurance companies continue to have reserve redundancies as claim trends remain favorable. This has resulted in excess capital throughout the industry. Pressure is mounting to do something with the capital. For the past eight to ten years, chasing market share through lower pricing is the norm for many carriers; however, and as seen in the past, this may have long-term consequences. The health care professional liability industry is littered with insurance companies that previously undercharged for their premiums. e. Although still strong, reserve redundancies are declining as the base of policyholders continues to shrink for insurance companies due to ongoing market pressures (consolidation of providers into hospitals and self-insured programs, etc.). f. Insurance company expense ratios will be under pressure due to falling premiums. 1. With expenses steady or rising, lower premiums drive up expense ratios and combined ratios. Profitability levels will become challenged. Will this cause the market/premiums to harden? Will prices increase? When will this happen? g. There are significant challenges to single state health care professional liability insurance companies. 1. Insurers must be able to write both physicians and hospitals and be able to do so on a national platform with geographic span. Few companies have that capability. Many have financial constraints, regulatory constraints and lack the expertise to meet the challenges of the multi-state and institutional insured. Additionally, the typical health care professional liability policyholder is changing. There now exists a more sophisticated purchaser of liability insurance who must take into 40 Medical Liability and Health Care Law March 2015
Page 3 consideration their own multi-state and multi-specialty liability insurance needs. Always present will be the solo practitioner and the small group practice; however, that is a shrinking market in the current health care environment. h. Loss Trends 1. Claim Frequency Trends (new claims opened) remain flat. Claim Frequency is the number of claims per exposure unit or per insured. Approximately eight to ten years ago there was a dramatic decline in the number of claims and suits being filed by the plaintiff s bar. Over the past several years, that decline has leveled off and has moderated. The health care professional liability insurance industry has not experienced an increase in Claim Frequency it remains flat and at an overall lower level than seen ten years prior. This has had a dramatic impact on the industry; mostly by perpetuating soft insurance premiums throughout the insurance industry. As a result, many defense law firms have felt the pinch of their own declining lawsuit inventories. 2. Claim Severity Trends industrywide are increasing at approximately three percent per year. This is considered moderate and is a decline from prior years where the severity trend was increasing at approximately five to six percent per year. One could argue, and speculate, that this is a result of more attention to risk management, better claim management and/or successful lawyering by the health care professional liability defense bar. Others argue it is a result of a persistent low inflationary environment. 3. Allocated Loss Adjustment Expense (ALAE). As a percentage of the total loss ratio (indemnity and ALAE) the health care professional liability industry spends approximately 35 50 percent on defense costs. Industrywide, defense costs have been increasing at approximately two to three percent per year, which is considered moderate and consistent with the persistent low inflationary environment. 4. Verdicts. Shock verdicts still occur on a regular basis; however, the magnitude or gravity of the verdicts, at least for some health care professional liability carriers, has moderated. Thomas 41
Page 4 V. Mergers and Acquisitions a. Insurance companies are awash in capital. This is especially true for the health care professional liability carriers. This is the result of flat frequency and moderate severity trends for health care professional liability claims. Pressure is mounting for some carriers to do something with their capital. Furthermore, there is increasing pressure on many health care professional liability carriers to insure multi-specialty and multi-state practices. The industry has a decreasing base of insureds due to the continuing consolidation of the solo practitioner and small group practice into hospital based programs. Consequently, the small single state carrier has serious decisions to make in regard to their future. Can they survive as a single state health care professional liability insurance company? It is likely industry M&A activity will continue and potentially increase in the next several years. VI. VII. Bad Faith a. The distinction between first-party and third-party bad faith in the event of a verdict that exceeds the insured s policy limits. b. The local consequence of the bad faith case. State court versus federal court. c. The discovery nightmare. Affordable Care Act (ACA) a. With the advent of The Affordable Care Act, 10 30 million people have or will have health care insurance. 1. How will the addition of millions of individuals with health care insurance affect health care professional liability? 2. There will likely be an increase in the use of Physician Assistants, Nurse Practitioners, Certified Registered Nurse Anesthetist, etc. What will be the consequences of these physician extenders? Will it impact professional liability? Will health care professional lawsuits increase? 3. Will patient frustration and unexpected outcomes drive patients to plaintiff s attorneys? 4. Health care delivery will be in continuous flux for years to come. At this time, no one really knows the consequence of the Affordable Care Act on the liability and tort system. b. Integrated Health Care Networks will involve multi-specialty and multi-state integrated networks encompassing individual, group and institutional health care 42 Medical Liability and Health Care Law March 2015
Page 5 providers. The liability insurance needs of these networks are evolving; however, the complexity is certain. The purchaser of liability insurance for these networks will be a sophisticated professional with complex insurance needs. The local insurance agents will neither have the expertise nor the sophistication to sell medical professional liability insurance to these networks. The local agent will likely not have access to the markets necessary to place this complex insurance. Distribution channels will be through large national insurance brokers (Marsh, Aon, Willis, etc.) who have the sophistication and expertise to access the marketplace necessary to place this type of insurance. VIII. IX. Early Resolution Claim Programs a. Early resolution programs involve attempts to timely resolve health care professional liability incidents; often within days, weeks or a few months of the untoward event. Many of these programs are in their infancy and their success is yet to be determined. They involve a quick but thorough investigation to determine who is at fault and then a full disclosure to the patient or the patient s family. The remedy often involves a disclosure of corrective measures to insure improvement in patient care by the health care providers and a reasonable offer of compensation to the patient or the patient s family. Early resolution programs are being institutionally driven (by hospitals) with pressure from the Obama administration through sub-agencies of the Health and Human Services Agency. The Obama administration, during the health care reform debates, pushed back on the number of medical professional liability law suits and the costs of those law suits. If successful, health care providers (hospitals) and health care professional liability insurance companies should, in theory, see a decline in Allocated Loss Adjustment Expense (ALAE). b. Health care professional liability defense attorneys should anticipate the implications to their law firm s revenue stream in regard to early resolution claim programs, especially if these programs are successful and grow throughout the industry. Cyber Security Risk a. See Appendix for ProAssurance Best Practices and Ten Mandatory Standards for Its Defense Law Firms. Thomas 43
Page 6 X. Health Care Professional Liability Reinsurance Industry a. The European and Domestic Marketplace. b. There is downward pressure on health care professional liability reinsurance rates due to an abundant supply of capital which is continuing to outstrip demand. Additionally, the reinsurance industry has seen several years of a benign loss environment within the health care professional liability industry. The consequence of this loss environment will be lower rates charged and expanded terms of coverage offered to the health care professional liability primary carriers. This too will likely cause a continuation of low or soft premiums paid by health care providers for their health care professional liability insurance as these saving are passed on to the insureds. XI. Mass Torts A Trend? Over the last few years, health care professional liability insurance companies have seen an increase in mass tort lawsuit fillings related to medical devices, pharmaceuticals and specific procedures performed on a particular patient population. Some carriers believed that the mass tort law suit filings (cardiac stents, cardiac defibrillators, compounding steroids, pharmaceuticals, narcotics, and various treatments, etc.) were an anomaly and the existing claims would run their course and the law suit filings would be short lived. Thus far, that has not been the case and carriers are continuing to see an influx of new cases under new circumstances being filed by plaintiffs attorneys. The trigger or tip-off for the plaintiffs attorneys is often the federal indictment and prosecution of the health care provider for insurance and Medicare fraud. Thereafter, the solicitation by select plaintiffs attorneys begins and carriers start receiving claims in mass. To the health care professional liability insurance company, and specifically the claim department, there is a significant complexity that exists in indemnifying and defending mass tort cases. The cases typically involve allegations of fraud and intentional acts which are likely not covered by the insurance policy. However, plaintiff s attorneys are skilled at including allegations of medical malpractice in the complaint. Thereafter, an expensive and uncertain coverage dispute can unfold involving reservations of rights, declaratory judgments and possible coverage denials. Defending these cases is unusually difficult especially if the health care provider has plead guilty in the underlying criminal prosecution. Additionally, the law suits are further complicated if the health care provider has 44 Medical Liability and Health Care Law March 2015
Page 7 invoked Fifth Amendment rights and thereafter refuses to provide testimony in the civil cases. XII. Closing Comments Thomas 45
Page 8 Appendix A. ProAssurance Cyber Security Best Practices for Its Defense Law Firms 1. The firm should have clearly established accountability and ownership of the cyber security program. This should include assigned specific roles and responsibilities for the management along with proper staffing and financial resources. 2. The firm should have a process to conduct regular and comprehensive cyber security risk assessments. 3. The firm should restrict the use of unauthorized software and hardware through written policy. 4. The firm should conduct regular internal and external vulnerability scans testing for client, server, and network infrastructure. 5. The firm should have documented procedures for monitoring, analyzing and responding to cyber security incidents. 6. The firm should follow a formal change management process for all network hardware and software assets on its networks. 7. The firms should centrally store logs from all IT systems and review them on a regular basis. 8. Cyber security awareness should be provided to all employees on a periodic basis. 9. The firm should maintain a current enterprise-wide knowledge base of its users, devices, and applications, including but not limited to software and hardware asset inventory, network maps, network utilization, and performance data. B. ProAssurance Cyber Security Ten Mandatory Standards for Its Defense Law Firms: 1. Background check to be performed prior to hiring an employee. 2. An established cyber security policy with supporting procedures in place that sets forth how the law firm will identify and manage its cyber security risk. 3. Implementation of security tools. a. Intrusion Detection b. Firewalls 46 Medical Liability and Health Care Law March 2015
Page 9 c. Anti-virus Software d. Spam Filtering e. Laptop Encryption f. Mobile Device Encryption 4. Tight controls that manage the use of administrative privileges. Removal of administrative access from all users unless there is an established valid business reason. 5. Strong authentication mechanisms to manage user identities and access to the law firm s system. a. Complex Passwords b. Minimum Password Length c. Password History Set to a Minimum of Five d. Passwords Reset Every 90 Days 6. Access to the physical servers and network devices limited to authorized personnel with an established valid business reason. 7. An established process to obtain, test and automatically deploy security patches and updates in a timely manner based on risk. 8. An established data destruction process in place which includes paper shredding and secure disposal of all electronic hardware. 9. A process in place to review the cyber security risk associated with cloud based services including a notification policy for a breach. 10. An in-force cyber risk insurance policy with minimum policy limits of $1 million. Thomas 47