Medical Professional Liability

Medical Professional Medical Professional LiabilityLiability

Melissa L. GreinerMelissa L. Greiner

PHICO Group, Inc.PHICO Group, Inc.September 19, 2000September 19, 2000

Medical Professional Medical Professional LiabilityLiability

Changing patient expectationsChanging patient expectations Financial condition of hospitalsFinancial condition of hospitals Ancillary coveragesAncillary coverages

– Directors and Officers LiabilityDirectors and Officers Liability– Employment Practices LiabilityEmployment Practices Liability

Changing Patient Changing Patient ExpectationsExpectations

Trends in liability are the result of:Trends in liability are the result of: Improvements in medicine and Improvements in medicine and

technologytechnology AdvertisementAdvertisement Effect of mediaEffect of media Lottery mentalityLottery mentality

Financial Condition of Financial Condition of HospitalsHospitals

Competition for patient businessCompetition for patient business Shift of surgical procedures to Shift of surgical procedures to

outpatient facilitiesoutpatient facilities Mergers, acquisitions, divorcesMergers, acquisitions, divorces

Financial Condition of Financial Condition of Hospitals (cont)Hospitals (cont)

Increased costs of malpractice Increased costs of malpractice coveragecoverage

Balanced Budget Act of 1997Balanced Budget Act of 1997 Pressure from other 3rd party Pressure from other 3rd party

payerspayers All of the above are resulting in:All of the above are resulting in:

DECREASED INCOMEDECREASED INCOME

Impact on Hospital Impact on Hospital InsuranceInsurance

Medical malpractice coverage Medical malpractice coverage impacts more obviousimpacts more obvious

Souring financials may lead to Souring financials may lead to more losses for more losses for ancillaryancillary coverages, even in non-profit coverages, even in non-profit sectorsector– Directors and Officers LiabilityDirectors and Officers Liability– Employment Practices LiabilityEmployment Practices Liability

Directors and OfficersDirectors and Officers

Covers claims for Covers claims for wrongful actswrongful acts committed by corporate directors, committed by corporate directors, officers, agents (physicians) for their officers, agents (physicians) for their corporate decisionscorporate decisions

i.e., for alleged breach of obligations to i.e., for alleged breach of obligations to the organization or for their actions the organization or for their actions and decisions on behalf of the and decisions on behalf of the organizationorganization

Directors & Officers DutiesDirectors & Officers Duties

Duty of Diligence - managing Duty of Diligence - managing assetsassets

Duty of Loyalty - no personal gain Duty of Loyalty - no personal gain or conflict of interest with or conflict of interest with organizationorganization

Duty of Obedience - in accordance Duty of Obedience - in accordance with statutes and terms of charterwith statutes and terms of charter

Directors & Officers Directors & Officers CoverageCoverage

No two insurance companies use No two insurance companies use exact same exact same ratingrating formula formula– Potential variation in estimated Potential variation in estimated

premium between two organizations premium between two organizations with same ownership, class of business with same ownership, class of business and sizeand size

As many as 80 variations of the D&O As many as 80 variations of the D&O formform exist in today’s marketplace exist in today’s marketplace

ExposureExposure base varies as wellbase varies as well

Directors & Officers Directors & Officers CoverageCoverage

Exposure bases:Exposure bases:– Assets, RevenuesAssets, Revenues– Number of Ds and OsNumber of Ds and Os– Number of EmployeesNumber of Employees

““Pure” Claims-MadePure” Claims-Made Defense costs within limits of Defense costs within limits of

liabilityliability

D&O Coverage EvolutionD&O Coverage Evolution

Specifically for non-profit D&O, Specifically for non-profit D&O, previously did not have:previously did not have:– Entity coverageEntity coverage– Employment Practices coverEmployment Practices cover– Duty to Defend provisionDuty to Defend provision

Recent study reports two-thirds of Recent study reports two-thirds of D&O insureds purchase EPLI D&O insureds purchase EPLI endorsement *endorsement *

* Source: Tillinghast-Towers Perrin

Directors & OfficersDirectors & Officers

Claimants may include:Claimants may include:– Shareholders *Shareholders *– Employees *Employees *– CompetitorsCompetitors– CustomersCustomers– GovernmentGovernment

Employment Practices Employment Practices LiabilityLiability

Claimants may include:Claimants may include:– Full-time and part-time employeesFull-time and part-time employees– Leased and temporary workersLeased and temporary workers– Former employeesFormer employees– Applicant for employmentApplicant for employment

Healthcare D&O / EPLIHealthcare D&O / EPLI

How are coverages unique to the How are coverages unique to the health care industry?health care industry?

How do claimants differ in the How do claimants differ in the health care industry?health care industry?

How are allegations different in the How are allegations different in the health care industry?health care industry?


Higher ratio of non-profit entitiesHigher ratio of non-profit entities D&O often written with staff D&O often written with staff

privileges protectionprivileges protection Coverages generally written on a Coverages generally written on a

smaller scalesmaller scale– Lower Limits of LiabilityLower Limits of Liability– Lower exposure countsLower exposure counts

D&O Industry NeedsD&O Industry Needs

0 20 40 60 80

$ Millions

Utilities

Durable Goods Mftg

Nondurable Goods Mftg

Health Care

High Technology

Median Limits

Source: Tillinghast-Towers Perrin

D&O Industry NeedsD&O Industry Needs

0 100 200 300 400

$ Thousands

Utilities

Durable Goods Mftg

Nondurable Goods Mftg

Health Care

High Technology

Median Premium

Source: Tillinghast-Towers Perrin


Wide exposure variance within Wide exposure variance within healthcare continuumhealthcare continuum– Large hospitals with significant exposure Large hospitals with significant exposure

and financial historyand financial history– First-time purchasers in the form of First-time purchasers in the form of

newly formed practices, offices, clinicsnewly formed practices, offices, clinics Newer entrants to the D&O market Newer entrants to the D&O market

present more underwriting present more underwriting challengeschallenges


Common Claimants:Common Claimants:– Employees / Health Care ProvidersEmployees / Health Care Providers– GovernmentGovernment– CompetitorsCompetitors– Customers (patients)Customers (patients)– Shareholders (if publicly traded Shareholders (if publicly traded

provider)provider)


Common Claim Allegations:Common Claim Allegations:– Employment IssuesEmployment Issues– AntitrustAntitrust– Fraud and AbuseFraud and Abuse– Breach of contractBreach of contract– Libel, slander, defamationLibel, slander, defamation

Employment IssuesEmployment Issues

Largest source of claims in health Largest source of claims in health care D&Ocare D&O

Various ways to offer EPLI Various ways to offer EPLI coveragecoverage– implicitly covered in D&Oimplicitly covered in D&O– endorsed onto D&O policy as sublimitendorsed onto D&O policy as sublimit– offered as separate coverage with offered as separate coverage with

separate limitsseparate limits

Employment IssuesEmployment Issues

Mergers and acquisitions of Mergers and acquisitions of hospitals, health plans and/or hospitals, health plans and/or managed care could result in managed care could result in terminations or reassignmentterminations or reassignment

As revenues shrink, facilities (and As revenues shrink, facilities (and employees) are downsizedemployees) are downsized

Credentialing physicians to Credentialing physicians to determine privilegesdetermine privileges

Employment Practices Employment Practices LiabilityLiability

Common Claim Allegations:Common Claim Allegations:– Wrongful termination or demotionWrongful termination or demotion– Harassment, coercion, discriminationHarassment, coercion, discrimination– Negligent evaluation or reassignmentNegligent evaluation or reassignment– Wrongful refusal to employ qualified Wrongful refusal to employ qualified

applicantapplicant– Negligent hiring practicesNegligent hiring practices

AntitrustAntitrust

Within the context of attempting to Within the context of attempting to control or monopolize:control or monopolize:

Hospital denies medical staff Hospital denies medical staff appointmentappointment

Competing hospitals decide to merge Competing hospitals decide to merge or share services / assetsor share services / assets

Non-affiliated providers commit Non-affiliated providers commit collusion to affect reimbursement feescollusion to affect reimbursement fees

Fraud & AbuseFraud & Abuse

False claims and billingsFalse claims and billings Over-utilization of claims for Over-utilization of claims for

medically unnecessary servicesmedically unnecessary services Illegal remuneration in return for Illegal remuneration in return for

referral of businessreferral of business Fraud by institutions - submission Fraud by institutions - submission

of false cost reportsof false cost reports

Industry Loss RatiosIndustry Loss Ratios

0%10%20%30%40%50%60%70%80%

Dir

ect

Loss

& L

AE

Rati

o

1995 1996 1997 1998 1999

Year

Schedule P - Other Liability Claims-Made

PHICOIndustry

Reserving ConsiderationsReserving Considerations

Health care organizations are at Health care organizations are at greatest risk of being suedgreatest risk of being sued

Length of tail in private sector Length of tail in private sector unknown due to wide variability in unknown due to wide variability in risk exposurerisk exposure

Low frequency, high severityLow frequency, high severity


Severity in private, non profit Severity in private, non profit sector is a BIG UNKNOWNsector is a BIG UNKNOWN– Rules out frequency/severity Rules out frequency/severity

projection techniquesprojection techniques Traditional link-ratio methods Traditional link-ratio methods

appropriate for insurers with historyappropriate for insurers with history Change in exposure base or risk Change in exposure base or risk

type presents challengestype presents challenges


Projection methods (i.e. BF) may be Projection methods (i.e. BF) may be more suitablemore suitable

Actuary must know and understand:Actuary must know and understand:– CoveragesCoverages– ExposuresExposures– Uniqueness of own product, relative to Uniqueness of own product, relative to

the industrythe industry No cookbook formula!No cookbook formula!

Medical Professional Liability

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