Long-Term Health Care Professional Liability ... Where Are We Now?
March 2000
Bonnie Boone looks at the current professional
liability market for long-term health care, including events leading up to this
stage and causes of the problems with this coverage line. In addition, advice
is offered for insurers and risk managers interested in this class of business.
by Bonnie
Boone
Willis Health Care Practice
The current professional liability market for long-term health care providers
is in an abysmal state. Have the medical malpractice/professional liability
insurers created their own problems? Or is it the industry itself that has not
practiced clinical risk management in this area?
This article examines the current state of the insurance market for long-term
health care, including events leading up to this stage and causes of the problems
with this class of business. In addition, advice is offered for insurers and
risk managers interested in this class of business.
Historical Perspective
In the 1970s, when I first started as an underwriter, I quickly learned that
the medical malpractice/professional liability market is very cyclical. For
most health care organizations, it was a period of excessive judgments and defense
costs. The insurance marketplace dried up in response, affecting hospitals,
physicians, and other allied health care professionals. In the mid-1970s, it
was virtually impossible to purchase coverage in litigious environments, such
as Harris County, Texas; Wayne County, Michigan; Cook County, Illinois; and
Dade and Broward Counties in Florida.
From this low point, the medical community fought back, creating provider-owned/mutual
insurance companies, such as physician-owned companies, Medical Liability Mutual
Insurance Company, Princeton Insurance Company, and State Volunteer Mutual Insurance
Company. While some insurers pulled out, others countered by writing only claims-made
policies, increasing their rates, and purchasing more reinsurance. The market
gradually recovered, and clinical risk management was a focal point. Competition
was alive and well again, and market share was the name of the game.
In the mid-1980s, the health care liability insurance industry entered its
second crisis. Once again availability was as much of an issue as affordability.
First-dollar coverage became a thing of the past. Hospitals and physicians were
expected to share in their risk. Deductibles, captives, maintenance deductibles,
and self-insured retentions (SIRs) were introduced and would become permanent
fixtures.
Specialized areas of the insurance industry responded to the crises. Stock
carriers touted their specialization in the field from the claims perspective
and the clinical risk management areas. The London market answered a critical
need by providing coverage for large urban teaching institutions.
Ways to limit and cap coverages were introduced, including the sunset clause,
nose coverage, the seven deadly sins, etc. Patient compensation funds were created
on a state-by-state basis to help protect citizens while capping non-economic
damages. These responses were created to help deter large jury verdicts and
provide new direction to the industry.
While these two crises were quite severe for most of the medical profession,
long-term health organizations were largely shielded from them. Malpractice
losses did not skyrocket and the insurance market was much less affected. It
was not uncommon to hear cynical claims managers justify the low awards this
way: “Their pain and suffering is to be expected; their life expectancy is short;
and their departure results in little or no loss of earnings.”
The Current State of the Market
Now, over 15 years later, we are facing yet another coverage shortage in
the medical malpractice/professional liability market. Numerous insurers can
no longer survive because the rates and premiums charged are not equal to current
claims payouts. Market share is once again the primary goal. New problems and
obstacles have arisen, such as consolidation—when insurers/markets can no longer
survive, they look for outside capital to increase their surpluses or assist
with their growth plans.
While not a focal point of the crises in the previous decades, long-term
health care has been single-handedly creating it’s own crisis. This health care
area has been in a fully developed crisis stage for approximately 12 to 18 months.
How has the long-term health care industry escaped the cycles experienced
by its colleagues? Was it because the professional liability insurance community
did not consider it health care? Was this class of business not written in every
commercial package department with no specialization or coverage hindrance,
such as claims-made reporting forms? (Until recently, this coverage was written
on a first-dollar basis with an occurrence coverage trigger.)
Another question to ask is: Why now? Why has long-term health care become
such a visible area of interest for every citizen in this country? One reason
has to do with increased life expectancy. Basically, we are living longer, and
how we live is of interest and importance to us all.
Another reason is media coverage. Articles have appeared in People magazine, USA Today, The Wall Street Journal, and numerous
other periodicals addressing the litigiousness environment, increasing verdicts,
the power of plaintiff’s attorneys, and newfound exposures. The media has capitalized
on the frenzy, with “DateLine,” “20/20,” and other television shows showing
horrific conditions in long-term health care facilities. Advocates of patient’s
rights have responded by assisting states in enacting laws to protect the elderly
from abuse, and increased litigation has resulted.
Jury verdicts in excess of $1 million dollars are beginning to be the norm.
These verdicts are in response to industry negligence, wrongful deaths, breach
of contract, professional liability, negligent hiring, and failure to supervise.
Exposures associated with liabilities include medication errors, sexual abuse,
elopement, negligent hiring and screening practices, and physical abuse.
The plaintiffs’ bar in numerous states has taken advantage of this crisis.
Their incomes have increased right along with the verdicts. These experts key
in on such issues as Statue 400 (the Residents Rights Acts in Florida).
Since 1998, the increase in large jury verdicts against for-profit long-term
health care chains has been phenomenal, as has the public interest in these
cases. Consider the case of William v Beverly
Enterprises Inc., where a Texas jury handed down a $83 million verdict
for fraud and gross negligence (later reduced to $ 54.6 million). Or consider
the Yreka case, where a nursing home was
not only found negligent but was assessed $94.7 million in punitive damages.
Are these isolated cases?
Insurer Studies
The long-term health care markets have paid out average claims of $1.3 million
dollars. This is four times what it was just 3 years ago! CNA Insurance and
the St. Paul Fire and Marine both have conducted studies on this class of business.
In its “1999 Long-Term Care Update,” St. Paul Fire and Marine reported that
between 1994 and 1998, average indemnity payments capped at the $100,000 level
increased 61 percent, while payments capped at the $1 million level increased
41 percent. Clearly, awards between $100,000 and $1 million have driven up the
average overall payments. As a result, St. Paul pulled out of the long-term
health care market for skilled facilities in July 1999. (However, the insurer
recently announced that it will be lifting the moratorium and will soon begin
underwriting business in 17 states.)
There is no question that insurers have pulled out of this market in the
last year as a result of their poor experience for large for-profit health care
chains. Their underwriting results have forced them to hire experts in this
area for clinic risk management claims and underwriting (health care specialists).
Most insurers will not release their combined loss ratio for this class.
However, estimates are all in excess of 200 percent, with some insurers posting
at 400 percent and higher. Should attention have been given to this class of
business sooner?
Some Advice for Insurers
What follows are some guidelines for insurers attempting to write this class
of business.
- Require insureds to retain an amount of risk that corresponds to the
financial size and assets of the company.
- Work with insureds and brokers to examine those hazardous areas of operations
or exposures from a risk management perspective. Track and trend data to
support your recommendations. For example, hiring and screening practices,
elopement safeguards, medication errors, and wound management should all
be examined and tracked for trends.
- Conduct a cost/benefit analysis. Increase rates gradually, possibly
tying rate increases to loss indexes. Not all long-term care businesses
are bad business.
- Consider requesting Heaton Reports to establish a feel for the institution’s
operations/risk management violations on an industry wide basis.
Some Advice for Risk Managers
The following are some tactics for risk managers to consider.
- Allow your insurer to come and review your facility. Be cooperative.
Enter into and maintain a mutually beneficial relationship.
- Place your business with an insurer who is committed to the health care
field. Out of A.M. Best’s top 20 medical malpractice insurers for 1998,
only 7 were autonomously committed to this class of business, and only 3
remain viable markets as of this date. Excess and surplus line insurers
who had little or no experience in the health care field began to write
this class a number of years ago, and the poor claims experience has provided
them with a rude awakening.
- Use your other lines of coverage as leverage. If your workers compensation
or property insurance is profitable, offer these lines to your professional
liability insurer.
- Lobby for tort reform in your state in hopes that a Joint Underwriting
Association (JUA) may help. The ultimate tort reform would be, of course,
a cap on non-economic damages.
- If yours is a large account, consider Integrated Products and/or combining
property, directors and officers liability, and other lines of insurance.
Examples of such approaches (that may or may not be available) are AIG’s
MedElite or ERC’s Hercules.
- If yours is a large for-profit company, consider a loss-sensitive rating
plan, such as a retrospectively rated program. Also consider a finite risk
structure where aggregates could be funded over time.
- If yours is a national organization, consider higher retentions in litigious
areas and lower retentions in better locations.
- A commutation program may be the answer for larger accounts also. Under
such an arrangement, the client actually decides when to commute the losses
at the time they occur. These programs are advantageous in terms of dealing
with uncertainty, and yet predictability of losses.
- Make sure you use your state surveys (Statement of Deficiency Reports)
as part of the underwriting submission if they will help present a favorable
picture (i.e., there are no repeat findings or tags).
Conclusion
The current professional liability market for long-term health care providers
is a difficult one. These challenges require professional risk managers, underwriters
and brokers to provide, “risk solutions”. The key is to stay tuned into alternative
approaches and to be creative. Sooner or later the cycle will turn.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.