Health care reform law creates uncertainty for E&S market

Health care providers have only just begun adapting their excess and surplus lines insurance strategies to accommodate the federal health care reform law, as it remains uncertain whether elements of the law will have a pronounced effect on the marketplace.

Several tenets of the Patient Protection and Affordable Care Act designed to give health care providers incentives to migrate toward results-based delivery and payment models, as well as to modernize their medical records and provide greater transparency on medical costs, have been implemented in part or in full since the beginning of 2011.

Though intended to enhance the quality and efficiency of medical care delivery, experts in the excess/surplus liability and health care risk management fields say many of the health care reform law's provisions have beset health care providers with a wave of new compliance responsibilities and administrative costs.

The result, they say, has been a sharp uptick during the past 12 months in the number of consolidations and joint ventures entered into among hospital groups, physicians' practices and other medical care providers.

“Most of the movement that we've seen in the past year or so has really been a function of the ACA law,” said Robert Allen, senior vice president of medical professional liability at London-based Torus Insurance Holdings Ltd. “At this point, all eyes are on the ACA and making sure we get future underwriting done correctly.”

More than 290 mergers and acquisitions have been recorded in the health care services industry since the first half of this year, representing a 9.3% increase over totals recorded through the first two quarters of 2011, according to a quarterly study by Norwalk, Conn.-based Irving Levin Associates Inc.

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A key driver of that rush of consolidation, experts said, is the health care reform law's strong support for the development of accountable care organizations — arrangements in which hospital groups and other medical facilities band together with niche medical professionals, individual doctors and other smaller provider groups under a central contractual agreement to manage health care delivery for employer groups or individual consumers, and are reimbursed based on the quality and cost-effectiveness of their treatments.

Additionally, insurance experts noted that providers — primarily hospitals — have become much more aggressive in their hiring of physicians in recent months, as they position themselves for the next stages of the health care reform law's implementation in 2013 and 2014.

In either case, excess and surplus lines liability experts said liability insurers in the health care market are growing increasingly wary of the potential legal and financial ramifications of incorporating physicians and other smaller providers into insurance portfolios maintained by hospitals and other facilities.

“As you start bringing in different types of independent practices into the hospital's risk profile, there's a due diligence process that needs to be done by the purchasing facility relative to the standards of practice for these independent entities,” said Bradley Cox, Boston-based vice president of health care at Lexington Insurance Co. “Risk managers have got to make sure they have consistency on those standards, and underwriters have to make sure that the risk management programs that had been the norm at the facility level are integrated throughout the physician practices that are being rolled in.”

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Looming compliance costs and requirements promulgated under the reform law, particularly a set of stricter electronic health records management regulations, also have contributed to the rise in consolidation, experts said. The law includes new rules designed to standardize electronic billing and medical records management throughout the health care industry, with the goal of reducing administrative costs and medical errors.

“A lot of (physicians) might not want to take on the administrative components, and instead want to pass that on to the larger entity,” said Kathryn Meyers, the Chicago-based health care practice director for Aon Risk Solutions. “So we're adding doctors into the mix at a very fast pace, and it may or may not change the makeup of the facility program.”

Though they concede the EHR rules are necessary in order to modernize the industry on the whole, some insurers and brokers in the health care liability market said the dramatic rise in providers utilizing electronic records — especially if combined with reform provisions that call for a freer exchange of information between providers within an ACO — would likely inflict significant damage to a provider's loss experience on primary and excess cyber protection policies.

“It's safe to say that the more people you have handling data, the more likely it is that you're going to have a breach,” said John Geisbush, a Phoenix-based managing director at Marsh Inc., adding that insurers' heightened sensitivity to cyber risk could manifest in the marketplace in the form of upticks in the amount of risk retention health care providers are asked to shoulder, or in the form of rate firming for excess cyber insurance limits. “I suspect that underwriters are going to be more and more interested in how their policyholders' systems are set up and what kinds of things they're doing to eliminate the possibility of a breach.”

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For all of the excess/surplus market's uncertainty regarding hospitals, health care systems and integrated delivery systems, purchasing conditions have demonstrated only modest signs of firming, if any at all, experts say. Year-over-year growth in pricing, deductibles and limits for excess medical professional liability and general liability has been limited, while terms and conditions for most existing policies have remained largely unchanged.

Experts noted that while the number of ACOs has grown substantially since the beginning of 2011, few insurers have responded with liability coverage products specifically designed to address the unique exposures generated by accountable care-based delivery and payment models.

Last week, Zug, Switzerland-based Allied World Assurance Co. Holdings A.G. released a policy form designed specifically for ACOs. In March, Willis Group Holdings P.L.C. and Simsbury, Conn.-based Ironshore Inc. launched their own ACO-tailored coverage product.

Frank Castro, Willis' Los Angeles-based national health care practice leader said: “We found that the traditional solutions simply weren't adequate to meet the needs of specifically, statutorily driven ACOs like the Medicare Shared Savings model and the Pioneer ACO model,” Mr. Castro said.

Still, some experts questioned the necessity of such products, at least without any considerable loss history.

“That's one thing we haven't done — go out and say we're going to bolt together all of these coverages and call it a new ACO product — because I don't think it necessarily is a new product,” said Lexington's Mr. Cox. “Candidly, I don't think the clients have a consistency of view as far as what their coverage gaps are.”