Market at a turning point as consolidation continues
How’s this for a play on words?: Agents and brokers who specialize in selling medical professional liability (MPL) insurance may have to start focusing on selling professional liability insurance to medical practitioners.
This observation is more than semantic jiu-jitsu, as consolidation among healthcare providers has contributed to a decline in premium and profitability for MPL coverage since the mid-2000s. At the same time, healthcare practices face growing exposure to other types of professional liability, especially for cyber security and the handling of sensitive personal information.
“Changing healthcare delivery systems require insurance carriers to be flexible and understand complex healthcare market needs,” says Caroline Clouser, executive vice president of Chubb Healthcare. “Carriers must continue to refine and enhance coverage to provide a multiline approach that helps protect against coverage gaps and cover a wider variety of risks.”
The delivery of healthcare in the United States is being transformed as physicians and other medical professionals increasingly opt to work as hospital employees or partners in large practices that often self-insure or utilize captives for medical liability coverage.
According to the American Medical Association (AMA), 51% of physicians owned their own practices in 2014, down slightly from 53% in 2012 and well below the figure for 1983, when 76% of physicians owned their practices. At the same time, the percentage of physicians employed by hospitals or practices owned wholly or in part by hospitals rose from 29% in 2012 to 33% in 2014.
That trend leads to a relative decline in the number of independent practices purchasing traditional medical professional liability (MPL) coverage.
As a result, consulting actuaries at Milliman, Inc., project that direct written premium for MPL insurance will fall for the 10th straight year in 2016, from a peak of $6.7 billion in 2006 to $4.8 billion in 2016. Net income has seen an even steeper decline, from $1.8 billion in 2006 to an estimated $643 million in 2016.
“The market is very soft,” says Rob Francis, COO of The Doctors Company, Napa, California, the nation’s largest physician-owned MPL insurer. “This arises from a decrease in premium over the past 10-12 years and a long decline in claims frequency, which is down 50% – 60% since 2004.
“There is intense competition for the largest accounts because of consolidation in healthcare,” Francis says. “It’s been going on for decades, but it accelerated with the Affordable Care Act (ACA). Carriers believe they need to write larger accounts to remain relevant.”
Francis cites three product trends he sees emerging from soft market conditions:
An expansion of liability coverage for administrative acts, such as billing errors, plus coverage for the costs of medical board examinations
Some basic cyber and data security coverage included in packages for smaller healthcare practices
In rare cases, the substitution of occurrence-based coverage for the claims-based coverage typical for the line
“The current market is still very competitive,” adds Gregg Hanson, president and CEO of Coverys, a Boston-based MPL carrier and risk management company. Hanson attributes the competitiveness of the MPL to several factors cited by other sources for this article, including consolidation in the healthcare sector, the increasing role of alternative risk financing, and the effects of tort reform.
Regarding the last, numerous states imposed caps on payments for emotional damages in the wake of heavy claims and near-crisis conditions in medical malpractice in the first five years of the 21st century. In some states, however, those caps have been overturned by courts, which have held that legislative restrictions on jury awards are unconstitutional under their respective state constitutions.
There are signs that the MPL market could start to harden, as combined ratios creep toward 100 following a steady reduction of reserve redundancies in the line.
“The market has not stabilized, but we are not anticipating profound changes,” says Hanson. “We believe there will still be alterations in pricing, but in reasonable increments.”
“The professional liability marketplace is as stable as any commercial insurance marketplace today,” says Chris Randall, president and CEO of Ultra Risk Advisors, Bellevue, Washington.
“There is an adequate supply of capital, and the products are meeting the demand in the market,” he adds. “It is difficult, if not impossible, to predict the timing of cycle changes. Our best guess is that we will see a cycle shift before 2020.
“About all that anyone can do to prepare is to be aligned with partners that have strong capital positions.”
Allied health practitioners
Concurrent with the consolidation of healthcare practices has been a growing reliance on non-physicians such as physician’s assistants, nurse practitioners, and other professionals to deliver care. According to the U.S. Bureau of Labor Statistics (BLS), “healthcare support” positions are projected to be the fastest growing occupational category over the next five years, followed in second place by “healthcare practitioners.”
In all, 12 of the top 20 fastest growing occupations are in healthcare. The two highest paying occupations among them—reflecting a high level of training and professional liability—are nurse practitioners and physician’s assistants, projected to grow by 35% and 30% by the year 2020, respectively.
“Many more allied health professionals are being added to an account,” says Francis. “Premium will have to reflect that over time. It’s not quite reflecting it yet.”
Along the same line, Randall adds that “outpatient facilities are expanding in number and size as patients are moved more quickly out of hospitals. Home health care is experiencing a great deal of growth.”
Adding allied health professionals to the chain of care expands nominal exposures for medical liability exponentially, according to Francis.
A practice that relies almost exclusively on physicians might have a certain number of “patient contacts” a year, he says, which include exams, prescriptions, referrals, and other actions that require professional certification. That number can grow substantially as physician’s assistants and nurse practitioners are added to the cycle of care, creating more opportunities for malpractice claims.
The actual exposure for MPL claims does not grow proportionally with the increase in visits as physician’s assistants and nurse practitioners typically handle cases that are less acute, freeing physicians to focus on more serious cases, Francis adds.
The ACA question
One big question mark hangs over MPL insurance and healthcare in general: How might healthcare change now that Republicans have won control of the White House and Congress after vowing to “repeal and replace” the ACA?
Sources for this article acknowledged the importance of the question but were reluctant to comment on a political topic whose impact on MPL insurance is largely indirect.
“Our position is that any changes in the ACA should be driven by the American public, through their elected officials,” says Hanson, expressing sentiments shared by other sources. We will adapt to any changes to the law, as we did to the introduction of the program.”
“Agents and brokers should continue to maintain specialization around the healthcare industry and provide a holistic approach to the changing needs of this particular industry.”
Executive Vice President
According to Francis, the ACA has increased the number of persons being treated by healthcare professionals, and many of these healthcare professionals desire relief from tort liability for pursuing “value-based care” prescribed in the act for Medicare recipients.
Francis adds that the act has also increased the administrative and record-keeping burden on healthcare providers, which has implications for professional liability and is another factor driving the consolidation of practices.
Given the consolidation within the healthcare sector, one way for MPL agents, brokers, and carriers to grow is to expand liability protection to administrative and operational functions within healthcare organizations.
“Cyber liability coverage is a huge product offering for healthcare right now,” says Hanson. Clouser and Randall both agree.
“Cyber liability coverage continues to emerge as healthcare organizations are now viewing this as a critical coverage,” says Clouser. “The healthcare industry is a leading target of data crime, due to the wealth of information stored in a patient’s medical record.”
“Healthcare is number one in terms of cyber exposures,” Randall says. “As such, it should be a leader in the global expansion of risk management and insurance-related products for cyber risk. If you are not expanding your knowledge base and sales capacity in this area, I suggest you get started now.”
Randall also sees a growing exposure for “telemedicine,” where care relies on judgments by remote practitioners who review images and test results or monitor treatment, including surgeries, through networked communications.
“Telemedicine is growing rapidly, and products will need to respond with more expansive coverage territories and venue considerations,” he says. “Legal resolutions for poor medical outcomes may be resolved largely as they are today,” he adds, “but it may be more challenging to round up the parties involved and assign expectations and responsibilities.”
Beyond that, MPL insurers need to look down the road to the application of genetic research to medical care. “It might not be leading edge today, but it should be on our radar for future product development,” Randall says.
“The pace of change is faster than many people realize, and commercial insurance has been a slow adapter,” he adds. “It is happening every day in many industries, and both medicine and insurance are ripe for some of the more dramatic changes in the coming years.”
To survive and thrive in this challenging market, Clouser says that “agents and brokers should continue to maintain specialization around the healthcare industry and provide a holistic approach to the changing needs of this particular industry.”
For more information:
The Doctors Company
Ultra Risk Advisors
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.