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Health reform law may lead to tightening of medical professional liability market

Posted On: Nov. 3, 2013 12:00 AM CST

Health reform law may lead to tightening of medical professional liability market

The medical professional liability insurance market has remained soft for nearly a decade as insurers continue to post strong results due to positive claims experience despite a shrinking number of buyers.

However, changes in the health care delivery system as a result of continued industry consolidation and the federal health care reform law could lead to some market tightening, medical malpractice insurance experts warn.

In the meantime, new entrants to the medical malpractice insurance market are helping to fuel competition (see story, page 18).

“It's an unusually long, soft market phase,” said Henry Witmer, an assistant vice president of property/casualty ratings at Oldwick, N.J.-based A.M. Best Co. Inc. and co-author of a May special report, “Medical Professional Liability Writers Prosper, Despite Softening Market.”

“Frequency has been precipitously declining. Together with flat severity, the companies have been generating profits. So they've been decreasing rates and issuing fairly substantial dividends to their policyholders. This can either be in the form of a check sent to the insureds or a discount on their renewal premium,” Mr. Witmer said.

Indeed, the medical professional liability sector's underwriting and operating results outpaced the property/casualty composite, according to the Best report.

“In the aggregate, this sector continues to be flush with liquidity and has produced positive operating cash flow and steady increases in surplus year over year,” the report said.


At the same time, most medical professional liability insurers are enhancing member services, including risk management, continuing education programs and aggressive legal defenses against nonmeritorious lawsuits, all of which are helping to keep claims costs in check, the report said.

Today's soft medical malpractice market stands in strong contrast to the late 1990s, when a spike in claims triggered the last hard market.

“We had a liability spike lead to the 2002 and 2003 hard market,” said Rob Francis, chief operating officer of The Doctors Co. in Napa, Calif., which was formed in 1976 after enactment of medical malpractice reforms in California, and is now the second-largest medical professional liability underwriter in the country.

“But in 2004, the number of claims started to decline, falling by an average of 40% across the country in just a couple of months,” he said. The decline in claims was “partly due to improvements in patient safety, but the single biggest thing was the passage of a number of state tort reforms,” Mr. Francis said.

According to Best, 42 states have enacted medical malpractice reforms.

One of the most notable was the passage of a constitutional amendment in Texas, which reduced the frequency of med mal claims 60% to 70%, Mr. Francis said.

“Even states like California that had tort reform in place since 1976 saw declines,” he said. “With that frequency change, everything got better.”


However, given that medical malpractice is a long-tail line of liability coverage, it took several years before buyers benefited from improved claims experience, Mr. Francis said.

“The industry was still charging rates based on loss projections of the prior years. It took five or six years to build that frequency trend into the rate structure,” he said.

At the same time that claims experience was improving for insurers, though, the number of buyers was dwindling due to industry consolidation. Hospitals began buying up doctors' practices, making doctors members of their staffs, while hospitals merged. As a result of the reduction in the number of medical malpractice insurance buyers, direct premiums written in this market sector has been declining steadily for the past several years, according to Best and the National Association of Insurance Commissioners (see chart).

“One of the things that's keeping pricing down is concern about losing market share,” said Dana Switzer, senior vice president and unit manager of health care at Lockton Cos. L.L.C. in Kansas City, Mo. “In past decades, medical malpractice carriers fought for market share because they wanted investment income. Now they're fighting for survival. Insurers are losing market share on the hospital side because of the M&A activity.”

Ms. Switzer said even though hospitals are becoming larger and gaining additional medical staff as a result of this consolidation, “the exposure doesn't increase exponentially after a merger or acquisition. They might add another $5 million or $15 million at the top, but those top layers are very inexpensively priced.”


Commercial insurers also have been losing premium to the alternative market as more hospitals and large medical groups opt to self-insure or form captives, experts said.

“If you go back to when the market was hard at the early part of this century, clients were forced to take on higher retentions before transferring risk to the commercial market,” said John Geisbush, managing director and national health care placement leader at Marsh Inc. in Phoenix. “A lot of our clients have captives in various venues. Cayman is one of the more significant domiciles.”

Because these providers and hospitals were taking on more risk themselves, “there was more focus on clinical risk management and improving quality,” which has helped to improve claims experience across the medical sector, Mr. Geisbush said.

But the positive claims environment for insurers and self-insured medical providers could change if the number of patients receiving care increases as a result of the Patient Protection and Affordable Care Act, Mr. Geisbush said.

“Premiums may increase if the number of patients increases. It's all rated on the number of visits or occupied beds,” he said.

“When you've got 32 million more patients in the system, you're bound to have more exposure to loss,” Mr. Francis said., adding that he also is concerned that the increased transparency required by PPACA, such as reporting “never events” for which the Centers for Medicare and Medicaid Services has said it will no longer compensate providers. “Any time you have knowledge of adverse events, it is likely to increase litigation,” he said.


Another concern, Mr. Francis said, is that the increased use of “bundled payments will create some of the problems that managed care created in the 1990s” when many health maintenance organizations that were paid on a capitated basis were accused of withholding care to maintain profitability.

Caroline Clouser, executive vice president at Ace Medical Risk Group, a division of Ace USA in Jersey City, N.J., said hospitals' increased exposure to cyber liability risks already is increasing, which could drive up med mal pricing.

“Hospitals collect and maintain personal and financial data as well as health care records,” she said. If a breach occurs and patients sue, “this may be covered by professional liability under the definition of hospital professional services.”