What You Can Do About Malpractice Insurance

Author(s): 
By David E. Marcinko, MBA, CFP
Although results remain uncertain, the market trend is irreversible. A mixed model or transitional reimbursement system represents the best or perhaps the worst of both payment options and is a major administrative challenge for the healthcare provider. Services may be classified as a profit or debit depending on the payer arrangement and all care must be performed with equal concern for quality, medical necessity and appropriateness. Gatekeepers manage the capitated care, control referrals and provide care for at-risk patients for reimbursement with the ultimate payer intent of a 50/50 provider mix of primary care and specialists. A preliminary evaluation of these four reimbursement methodologies suggests the level of malpractice risk and associated litigation is decreasing as the volume of capitated managed care increases. What You Should Know About RRGs And PGs The introduction of the Liability Risk Retention Act (LRRA) in 1986 turned a hard market for malpractice insurance soft as the Act expanded the definition of liability and preempted state regulations that restricted small groups from underwriting for commercial insurance buyers engaged in similar or related business activities. The LRRA permitted the formation of Risk Retention Groups (RRGs) and Purchasing Groups (PGs) to qualify as insurance companies and retain certain layers of risk while transferring higher layers to reinsurers. In essence, the LRRA flipped the insurance industry upside down and returned the decision-making process and control back to the consumer. The fundamental difference between RRGs and PGs is that RRGs retain risks and PGs do not. In enacting the LRRA, Congress provided two ways for insurance buyers to obtain liability coverage. These included becoming owners of their own liability insurance company (RRG) or becoming members of a PG that purchased insurance from a commercial carrier, usually at a substantial discount. There are no group size requirements for either RRGs or PGs. PGs can evolve into RRGs if growth, profitability and actuarial data are favorable. The advantages include: • tailor made coverage; • favorite premium rates; • better policy terms; • ownership of the loss experience; • segregation of loss data; • reward for good experiences; • risk management and loss prevention programs; and • long term commitments from insurers. Addressing Increasing Mergers And Acquisitions As the healthcare delivery system is transformed by consolidations, mergers and acquisitions, so goes the liability need of the individual, group or institutional provider. Traditional insurance solutions are no longer suitable as hospitals are combined into larger systems and large systems are merged into even larger organizations with ownership of, or in partnership with, physician practices and alternative treatment centers. Risk factors and pricing models of the past become inappropriate for contemporary providers who function within a more corporate structure. As these larger organizations develop, their malpractice insurance needs change and so must the companies that supply those needs. Larger groups can afford to take on attrition or frequency risks internal to their own capital base and organization structure. As systems grow, groups become increasingly interested in risk layering, reinsurance and loss sensitive pricing options. Larger systems can institute and provide their own internal risk prevention, quality monitoring and incident management processes. Medical malpractice premium pricing ceases to be a one-dimensional market, even in the same geographic community or specialty provider class. Regulatory management and capitated reimbursement price controls are thus redefining the industry at all levels. Liability pricing and pricing flexibility are no exception. In fact, according to a 2001 Physicians & Surgeons Update, “claims trends in the medical liability market have remained essentially unchanged” for five years running and no rate change is anticipated for the coming year with all physician and surgeon liability policies extended to 12-month terms. Moreover, frequency, severity and average indemnity payments are not necessarily reflective of the entire medical liability industry or specialty underwriters. The significance of risk-based, capitated reimbursement systems in the stability of the current professional liability market is not identifiable from current data, but believed to be a factor.

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