Long-Term Health Care Professional Liability ... Where Are We Now?

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.