Self-insuring sees increased incentive following increased malpractice claim severity.
Consolidation in healthcare continues to fuel the trend toward self-insuring against medical liability, a strategy that has long been popular among some large institutions as a way to maintain more control over the costs of malpractice claims. Though some organizations saw a sound financial path with self-insuring, the stabilization of premiums over the past decade diminished some of the incentive and prevented the strategy from becoming a major threat to traditional insurers.
That appears to be changing due to the rise in severity-the average cost of a medical malpractice claim. Verdicts over $25 million are becoming more common. Such large verdicts have been a known risk in certain counties across the country, but they are occurring much more commonly in venues around the nation where such awards were not expected.
If this loss picture continues, the higher losses will take capital out of the industry and could result in higher prices for coverage. This, in turn, can make self-insurance more appealing to some healthcare organizations than it has been in the past decade. Over the next five or 10 years, we will see a greater number of healthcare organizations assuming more of their own risk and buying less insurance from traditional malpractice insurers.
A change in capacity is typically the driver of a market shift. When a large insurance company pulled out of the medical malpractice business in 2002 due to worsening losses, the market reacted with increased rates to, belatedly, match the increasing exposure. In today’s market, the increase in severity over several years has not been matched with increases in prices. This has some referring to the current market as an “income statement-driven price correction.” That is, insurers are collecting less premium than they are paying in claims and expenses, some markedly so. As insurers move to correct this imbalance, it increases the likelihood of more organizations to self-insure. Paradoxically, the organizations with more advanced patient safety and risk management programs can be the first to move away from the commercial market, because commercial rates tend to reflect average risk in a given community.
The pressures will be especially perilous for smaller insurance companies already threatened by the risk of a large payout. A single $10 million verdict may not threaten a company's viability, but a series of such verdicts could, and the insurance industry is closely watching this trend. Smaller companies typically purchase reinsurance against large losses, but reinsurers also look to maintain their financial viability and are raising rates on primary insurers, increasing their costs. If the large verdicts turn into a form of social inflation that continues for years, smaller insurance companies will be looking for survival strategies.
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Some smaller carriers will seek the security of becoming part of larger organizations, echoing what we are seeing with smaller healthcare organizations consolidating with larger ones that can offer all the benefits of size and market strength.
In The Doctors Company’s recent acquisition of Hospitals Insurance Company (HIC), a New York State admitted and licensed insurance company, and FOJP Service Corporation, provider of third-party comprehensive insurance and risk management advisory services to HIC-insured hospitals, the biggest driver was having a platform to serve healthcare organizations that choose some level of self-insurance. HIC and FOJP were formed by a consortium of large New York City area hospitals during the New York medical malpractice insurance crisis in the 1970s and 1980s. The hospital systems' have maintained their ability to reap the benefits of their self-insured programs now managed by a trusted partner and have also extracted the “trapped capital” by selling their ownership stake.
Healthcare organizations can expect to see premium rate increases nationwide over the next several years as the industry seeks a sustainable level of financial performance. The challenge for traditional insurers is to find a way to introduce moderate rate increases that can be absorbed into physician practices and health systems without being inordinately disruptive. The alternative is to continue putting off manageable small rate increases until a point at which the insurer is forced to implement very large rate increases. This would break the budget for smaller physician practices and health systems, pushing them perhaps to consolidate with larger organizations, which may then self-insure.
The evolving roles of healthcare professionals may also affect potential price increases in the coming years. The insurance industry is watching the growing number of advanced practice providers such as physician assistants and nurse practitioners to determine if they reduce overall risk by taking on more responsibility and lessening some of the risks associated with the physician shortage, increase risk, or mirror the risk profile of the physicians with whom they practice.
The trend toward increasing severity and the need for increases in premiums over the next several years is likely to cause a resurgence in self-insurance by large healthcare institutions, and contribute to continued consolidation of smaller practices into large healthcare organizations. And medical professional liability insurers will need to adapt with growth strategies that leverage their core strengths to serve new markets.
Bill Fleming is the Chief Operating Officer for The Doctors Company. Named COO in January 2017, Fleming is responsible for all claims, underwriting, patient safety and risk management, sales, and marketing for the nation’s largest physician-owned medical malpractice insurer. He is responsible for the company’s strategic business units, Healthcare Risk Advisors, TDC Specialty Underwriters, and Medical Advantage Group.