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Directors and officers liability insurance, which helps hospitals and health care systems defend against antitrust allegations, is likely to become increasingly essential to institutions involved in mergers, joint ventures and other activities designed to reduce costs in a post-health-care-reform world, experts say.
Even before the passage of the Patient Protection and Affordable Care Act last year, health care system consolidation had begun, spurred by cuts in Medicare and Medicaid reimbursements and from commercial insurers under pressure by employers to rein in escalating health care benefit costs, they say.
For example, when Pittsburgh-based West Penn Allegheny Health System Inc. filed an antitrust suit in 2009 charging the University of Pittsburgh Medical Center with conspiring with the region's dominant insurer to reduce competition in the Pittsburgh market, the action very likely triggered coverage under UPMC's D&O policy, according to experts.
The suit, filed in U.S. District Court in Pittsburgh, came after a 2006 complaint that West Penn Allegheny filed with the U.S. Justice Department seeking an investigation of the relationship between UPMC and Pittsburgh-based Highmark Inc.
UMPC did not respond to an inquiry from Business Insurance regarding its D&O coverage.
Any time the words “antitrust” or “unfair competition” appear in a lawsuit filed against a hospital or health care system, D&O liability coverage generally comes into play to provide a defense and, in some cases, to pay settlement costs, experts say.
“In the strictest sense, it's something that would come from government alleging violation of fair competition laws,” such as the Sherman Antitrust Act, said Mark Karlson, a Hartford, Conn.-based managing director at FINPRO, Marsh Inc.'s financial and professional liability practice.
But antitrust coverage under a D&O policy also could come into play in certain acquisition situations, according to Holly Meidl, Marsh USA's national health care practice leader based in Nashville, Tenn.
“You may see a hospital being acquired, and the board doesn't want to see the hospital go into a larger system. The board might ask the state attorney general to come in and put pressure on, unwinding it. So it may not be a full-on antitrust allegation, but it starts the investigative process,” she said.
Ms. Meidl and other D&O coverage experts predict antitrust litigation will increase in response to the passage of PPACA as hospitals and other medical providers collaborate to form accountable care organizations that will become eligible for bonus payments under the Medicare Shared Savings Program.
While consumer advocates fear that such consolidation could create incentives for doctors and hospitals to scrimp on necessary care, the Justice Department and the Federal Trade Commission have pledged to intervene in mergers and collaborations that appear to have a dampening effect on competition in a given market.
“In response to PPACA, consolidation is expected to increase. Health care providers will be looking for efficiencies and synergies. We're already seeing consolidation, with doctor groups being absorbed by hospitals,” said Bertrand Spunberg, senior vp in Hiscox USA's management liability group, based in New York. “The DOJ and the FTC will be working closely together...and the DOJ has applied renewed vigor to targeting any potentially anti-competitive behaviors.”
“This is a growing area that is going to bring with it increased risks that the D&O policy may potentially be tapped for,” said Ms. Meidl.
Scott Kantrowitz, vp of the private and nonprofit management liability group at ACE USA in New York, said that since the passage of the health care reform law, “for each and every hospital we work with, the single most important thing they ask about is antitrust coverage.”
“Most, if not all, of the hospitals had concerns about regulatory oversight even before the passage of PPACA,” he said, but those concerns are being heightened in response to “ambiguity on how the regulators will address antitrust exposures.” Since the passage of PPACA, “hospitals are in the news every day,” he said. As a result, “more and more risk managers and executives of health care systems have concerns about the coverage that's in place. There is more thought going into the purchase of D&O coverage.”
In some cases, hospitals and health care systems are increasing the aggregate limits of coverage they buy; in other cases, they are building separate “towers” of coverage for D&O, employment practices and fiduciary liability when purchased as part of a package policy, coverage experts say.
While the majority of claims against private and nonprofit health care systems historically have involved employment practices issues, such as discrimination, retaliation or wage-and-hour suits, the cost of settling such disputes is considerably less than that of resolving a D&O antitrust violation, according to Mr. Kantrowitz.
“An antitrust claim could be a limit loss,” he said, meaning it could erode all of a health care system's D&O coverage.
Deneen Schmitt, Pittsburgh-based senior vp at Willis Executive Risks, a division of Willis North America, said “the antitrust issue has always been a significant exposure for health care companies. Typically when we get one of these antitrust claims, they're large from a defense-cost standpoint,” especially when the Justice Department gets involved. “We've had some big ones over the years.”
Fortunately, it's a buyer's market when it comes to private and nonprofit hospital D&O coverage, she said.
For years, there were only a couple of significant insurers in the space, but when American International Group Inc. was bailed out by the U.S. government, many of the underwriters who were working at National Union Insurance Co., an AIG unit that provided hospital D&O coverage, left to join other insurers. As a result, more insurers are able to provide D&O coverage to nonprofit and private-company business, several brokers said.
Because of this intense competition, today's private and nonprofit hospital D&O policies are much broader than they were in the past, with antitrust coverage almost always included, according to Ms. Schmitt.
“Ten years ago, you'd typically get it at a sublimit, not the full policy limit (for antitrust), and it would be subject to a higher retention and coinsurance. What we're finding now, with all the competition, you can typically get antitrust coverage within full policy limits—not sublimited anymore—and retentions are lower than they used to be, and on occasion you can even get a policy without any coinsurance.”
Despite the market's softness, though, “there are a couple of pitfalls” that private and nonprofit hospital D&O insurance buyers should beware of, especially when securing excess coverage, according to Martha Jacobs, senior vp in Aon Corp.'s financial services group in Pittsburgh.
“Excess policies usually follow the primary form when they're providing supplemental coverage,” she said. However, “any coverage that is sublimited in the primary policy they may not follow. So you have to be careful with excess-policy language if coverage is referred to as sublimited coverage.”