A necessary cost of being a physician is professional liability insurance, which protects the provider from having to bear the full cost of legal defense in case a patient or other person files a malpractice suit. Professional liability insurance in the medical field is commonly referred to as malpractice insurance. Few physicians have the resources available to defend against a malpractice claim when legal services can cost tens of thousands of dollars and damages or settlements can be hundreds of thousands of dollars. When deciding on a malpractice insurance policy, there are two types to choose from: a claims-made policy or an occurrence-based policy.
An occurrence-based policy provides insurance against incidents that occurred during the term of the policy regardless of when the claim is made.
A claims-made policy covers the insured for any incidents that occur during the policy period, as long as the claim for the incident is also filed during the policy term. Neither of the policies will provide coverage for incidents that occur before the inception date of the policy (also known as the retroactive date).
Tail insurance refers to a policy that the insured can purchase when he discontinues his claims-made policy. The tail permits the insured to report claims for incidents that occurred during the time the policy was active (from the retroactive date to the policy expiration date) even though the policy has been terminated. Tail insurance is generally a onetime payment and the cost is based on a multiple of the mature premium, generally around 175 percent to 250 percent. If a physician decides to change employment, wants to continue practicing medicine, and requires a new malpractice policy, tail insurance will be required to continue coverage for all incidents that may have occurred under the old policy. Many claims-made policies offer “free” tail coverage for death, disability, or permanent retirement.
If the insured cancels his policy and moves to another insurance carrier, a prior acts (or “nose”) policy may also be purchased that functions similarly to tail coverage. Under this scenario, the new company takes the retroactive date from the old policy and endorses it onto the new policy. The price for prior acts coverage is often times similar to that of tail coverage, if not a little more.
Based on this information alone, it would seem that an occurrence-based policy is the best option. However, the two types of policies vary greatly in cost. Where a claims-made policy premium will start low and gradually build up over five years, the premiums for occurrence-based policies are priced at a mature level from day one. Even after hitting mature rates, a claims-made policy is almost always less expensive than an occurrence-based policy. For this reason, most physicians purchasing their own insurance will opt for claims-made policies, especially if they plan on staying in the same practice for the remainder of their career. Depending on how mature a policy is, and the specifics of the policy, the sum of all claims-made premiums along with the cost of tail insurance can approach the sum of all occurrence-based premiums over the same period. If it can be determined that a physician will be eligible for free tail coverage (i.e., he is covered by the same policy through retirement), claims-made insurance is usually the most cost beneficial. If a physician knows there is a high likelihood of changing employment and malpractice insurance, he may want to compare pricing of the two options including the cost of the tail coverage in his calculations. For example, a physician may want to consider an occurrence-based policy if he knows he is going to work at a location for a short time and will not be able to take coverage with him.
Most hospitals and facilities carry occurrence-based policies, so often when a physician is employed by a hospital system, he will be provided occurrence-based insurance. If a physician is considering hospital employment, either he will need to pay for tail or prior acts coverage or negotiate this as part of his new employment. If the physician decides to leave hospital employment at a later date, under an occurrence-based policy, he can do so without needing to purchase any tail coverage. For this reason, an occurrence-based policy can be appealing to a physician entering into an employment contract with a hospital system, knowing that if he leaves this employment and changes policies, there will be no need to purchase tail insurance.
Dixon Davis, MBA, MHSA, is the vice president of practice management for AAPC. Over the last 15 years, Dixon has held senior leadership positions in healthcare administration in a variety of settings including independent practices, integrated health systems, and independent physician associations (IPA). E-mail him here.