What You Can Do About Malpractice Insurance
- Volume 16 - Issue 12 - December 2003
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Professional malpractice liability insurance protection is a major fixed operational expense in any at-risk medical practice. In most practices, liability insurance costs often represent one of the largest single line item expenses, often falling second only to staff payroll expenses.
To contain these liability overhead expense costs, the physician-executive should understand the dynamics of the insurance industry selling process, which is generally sold through one of three agency avenues:
• direct insurance agents serving as employees of a single insurance company;
• captive insurance agents representing only one insurance company; or
• independent insurance agents representing multiple insurance companies.
The first two agents have little incentive to promote any company other than the one they represent. The latter agent type brings a different set of complexities to the arena.
For example, they often receive bonuses, incentives or are held to production quotas as a requirement of employment. Commission structures are the most important incentives at work on the selling side of the process since different companies pay varying percentages of total premium dollars sold. This can work against the doctor because the agent has an incentive to sell the highest priced product in order to earn the greatest commission.
Upon request, however, a reputable insurance brokerage house will provide a detailed market comparison in writing that demonstrates the major options available to the practitioner. This is because, in contrast to agents, an insurance broker is an independent contractor who examines the malpractice needs of the client and then shops for coverage to best fill those needs. Moreover, group insurance purchasing usually nets a better deal than a practitioner could negotiate individually. Thus, if capitated medicine, as demonstrated by many managed care organizations (MCOs), continues, the potential for reduced operational costs through lower medical malpractice premiums could be significant.
This is the major thrust of the Capitation Liability Theory (CLT). Moreover, it suggests that a fixed rate reimbursement system reduces malpractice incidents due to a reduction in the total number of patient-physician encounters and the acuity of those encounters, particularly for invasive procedures such as surgery and for procedural specialists. Consequently, some providers may be paying too much for professional liability protection while others pay too little.
What Goes Into Setting Liability Premiums
Most liability insurance companies, their associated underwriters and actuarial advisors tend to focus on economic factors such as income/loss ratios, market forces and trend analysis as a basis for a continuing line of insurance coverage. That said, carriers have considerable latitude in how they function as a business, whom they insure, how they align their members, in what manner they allocate reserves and how they manage cost/income factors and determine market variations for the purpose of setting premium levels. While underwriters and actuaries may strive to make the premium pricing process a scientific discipline, the process is still a decidedly heuristic one.
As the liability premium pricing process arrives at the bottom line of corporate fiscal responsibility, the stability of the individual company and national market forces determine premium structure on a comprehensive basis. Managed care entities may be national in scope, but the delivery of healthcare services is a local business. The potential negative effect of national pooling on individual premium pricing is significant. Unfortunately, liability underwriters are reluctant and even secretive about sharing confidential experience data. These professionals are skilled at data collection, information management, manipulation and trend analysis to justify and defend their own charges.
Challenging such cost projections and making a case for premium reductions is not easy but can be addressed with adequate knowledge, information and constant persistence. With this in mind, let’s take a closer look at the CLT.