Many hospitals and health systems are paying for prior acts malpractice insurance as a way of attracting physicians, but how are they absorbing that expense once they've committed to it?
This article appears in the October issue of HealthLeaders magazine.
Healthcare leaders know that to keep pace with the impending changes in the industry—such as the influx of newly insured Medicaid patients that the Patient Protection and Affordable Care Act is projected to bring into the system and the movement toward population health management—they must have the right people in the right places in their clinical settings.
Yet building the best possible medical workforce is a major challenge, and healthcare executives are concerned about shortages. In the HealthLeaders Media Industry Survey 2013: Strategic Imperatives for an Evolving Industry, 76% of respondents cited physician shortages as a threat to their organization.
As provider institutions compete with each other to hire physicians, offering to pay for tail coverage—insurance against malpractice lawsuits that may emerge from the physician's previous employment—is one method of drawing talent. By committing to pay for this considerable expense, hospitals make it easier financially for a doctor to leave his or her current employer and more appealing for a physicians group to sell its practice.
Vic Arnold, managing director at Chicago-based Huron Consulting Group, says covering the tail as part of the compensation package when acquiring a medical practice gives a hospital a "competitive advantage" over other potential employers.
"On all these acquisitions, the deals are so transaction oriented, but you have to take a step back and think about what would be something that would be attractive to this particular physicians group. If a hospital includes tail coverage, it's a transaction cost that the group doesn't have to bear and can help overcome some of the acquisition postdeal issues," Arnold says.
"What the hospital is doing is buying an insurance policy that covers the professional liability risk," Arnold adds, noting that prior legal issues are factored into the cost of the coverage and that policies for some specialties—such as gynecology, obstetrics, and orthopedics—potentially can be more costly than for others because of the higher likelihood of a lawsuit.
"For example, in OB-GYN, it is not uncommon for physicians to have at least one suit or settlement in the past, so it's not unusual for the tail coverage to be somewhere in the range of $100,000 or more," he says.
Hospitals generally keep the tail coverage for five years, Arnold says. "What the new employer is doing is making sure they don't take a catastrophic hit."
Once the hospital has committed to paying the tail, it has to determine the best way to cover the cost. Hospitals without a captive (in-house) insurance company typically purchase the coverage from the physician's existing commercial carrier, if they can. These hospitals can often negotiate with the insurer to bring down the rate.
"If you don't have a captive, sit down with the insurance company and walk them through what you are thinking," says Arnold. "They are going to want to work with you because it is incremental business."
The majority of hospitals, however, are now self-insured, and the numbers are trending up. According to the Hospital and Physician Professional Liability Benchmark Analysis released in October 2012 by the American Society for Healthcare Risk Management and Aon Risk Solutions, nearly 80% of U.S. hospitals are self-insured, up from 73% the previous year.
Some self-insured health systems are designing programs within their own captive as a strategy for providing tail coverage to newly hired physicians and are achieving meaningful savings on the cost of the insurance.
"Physician employment is becoming more and more popular, and physicians are looking to join large organizations like hospitals. The problem is one of the deterrents is the fact that they have this chain around their necks for past liabilities," says Charles Kolodkin, executive director for enterprise risk and insurance at Cleveland Clinic, an 11-hospital health system with 2012 net patient service revenue of about $6 billion.
In 2006, Cleveland Clinic decided to cover tail policies through its captive as a way of trimming costs and liberating physicians who could not afford the expense.
"We determined we could bring physicians on in a much lower-cost way," Kolodkin says. "We use our captive to provide prior act coverage. We do it at a pure loss cost. We don't have a profit margin built into it, and we don't have administrative overhead. Our prices are anywhere from one-quarter to one-half of the usual cost of a tail."
For example, Cleveland Clinic now spends less than half on the tail policy when onboarding a primary care physician as compared to when it was purchasing the coverage through a traditional insurer.
"We may charge somewhere in the neighborhood of $15,000 for a premium for prior acts where the tail premium might have been $35,000 to $50,000 through a commercial carrier," says Kolodkin. "We're their new employer, and we're going to insure physicians anyway for all their coverage once they are an employee, but now, separately, we are also going to insure their prior acts."
Cleveland Clinic has seen solid results since starting the program. "We have 172 physicians insured, representing $4.2 million in premiums. … The cost of tail coverage had it been purchased from commercial carriers is estimated to be approximately $9.2 million," Kolodkin reports.
"The premiums we have been taking in for the past seven years have been extremely adequate," he adds. "The actual claims are still under $1 million, at about $900,000. Our loss ratio has been … a real positive."
Overall, Cleveland Clinic has been more than pleased with the results, Kolodkin says. "We've considered it to be exceedingly successful. It's been successful beyond our initial expectations. When we first started it, we hoped to break even, and also to use it as a way to remove that barrier for physicians who wanted to go to an employed model. Our experience in this program continues to be outstanding."
Leaders at Annapolis, Md.–based Anne Arundel Medical Center, which operates a 380-bed hospital with 2012 operating revenue of $575 million, have learned that physicians in their market expect to have the tail covered when joining the staff and say most physicians with good legal histories will not consider employment without it as part of the deal.
"From the physicians' perspective, it's a given that we are going to assume the liability, and they really don't care how we do it," says Stephen Clarke, vice president for physicians services.
Anne Arundel protects itself with a contract caveat around the tail coverage, Clarke notes. "If the doctor leaves in a short time, they would have to reimburse us for the cost of the tail."
Bob Reilly, the system's chief financial officer, says before making an employment offer, Anne Arundel analyzes each physician's claims history and, based on risk, decides whether to cover the physician through its captive, continue to cover the physician through the existing commercial carrier, or not to cover the tail at all for those with a less-than-stellar malpractice track record.
"In the initial hiring phase or employment phase, there is certainly a background check of claims. If a doc has a high number of claims in the past, there is a lot more scrutiny of that physician as to whether or not to bring them on. It may also change the arrangement of the tail where we may say the doctor has to pay his or her own tail," he says.
Anne Arundel also considers the standard level of risk for each specialty when deciding how to cover the tail.
"For certain specialties, such as obstetrics, we make the decision to leave them with their own carrier and see how things go over time before we decide to bring them into our own captive," says Clarke. "For low-cost tails like primary care, we pay it and are done with it.
"We know how much more risk we are assuming based on underwriting and actuarial tables, and often we issue a certificate of insurance [through our captive], and they are off and running," he adds. "We've very deliberately managed the process, and we've been fortunate in terms of our claims experience and our ability to deal with claims that do arise."
Anne Arundel is yielding significant savings thanks to its strategy of covering many tail policies through its captive. "As a general rule, we are saving somewhere between 15% and 20%," Reilly estimates.
Additionally, the health system saves money because it operates an offshore captive located on Grand Cayman, which reduces many of the associated expenses.
"On the administrative side, the regulatory requirements and funding requirements for an offshore captive are initially less to establish the company," Reilly says. "The legal work is less, and the exposure to taxes is less. Quite a few organizations are now self-insuring offshore. … [T]he logistics on the whole work very well."
Because mitigating risk is the objective when it comes to tail coverage, Anne Arundel purchases reinsurance from Lloyd's of London to protect itself even further from the possibility of the steep financial loss that could result from a malpractice lawsuit.
"We reinsure and cap our risk on an annual basis so that if we have a major claim, we won't have to pay out of pocket … We lay off some of the high-dollar risk to a greater insurance population," Reilly says. "Lloyd's of London has the ability to provide insurance on a consistent basis and not have to raise premiums or drop clients because of big claims. The London market has proven to be a little more stable because of the enormity of the insurance base and the history of the way they do business."
Regardless of how hospitals and health systems ultimately decide to pay for the tail, making the offer to cover the expense is a smart way to start off on good terms with physicians, says Arnold.
"You have to look at this transaction as a long-term relationship and think about what is good for both parties," he says. "Ideas like using tail coverage as a negotiating tool are good. If physicians think they are working for someone who cares about them, it's a lot better than just getting a paycheck."
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This article appears in the October issue of HealthLeaders magazine.
Rene Letourneau is a contributing writer at HealthLeaders Media.