GROWTH OF MANAGED CARE ALTERS THE MARKET FOR MEDICAL MALPRACTICE

Suits against managed care companies rise;
captives become more dominant

The managed health care industry in the United States has received a good deal of publicity recently, not all of it positive. There is no question that, in these cost-conscious days, the business world has benefited at the bottom line because of the savings brought about by managed care. Moreover, everybody seems to be getting into the act, either starting up managed care facilities or purchasing existing facilities.

But, there are downsides. Some have criticized the managed care movement, saying that quality health care suffers in the quest for cost controls. And, they are letting their dissatisfaction be known in the courts.

Dramatic changes in the health care system are shaking up the entire concept of medical malpractice coverage and ultimately are increasing the risk of liability exposure by tens of millions of dollars, according to a new study of the nation's top medical malpractice writers by Conning & Company, an asset management firm specializing in the insurance industry.

As the health care system moves from fee-for-service to managed care, the way in which medical malpractice policies are now written has changed. Instead of one doctor with one policy, it may be 1,000 doctors with one policy--which means a vastly increased risk of exposure. In reaction, a new type of underwriting is evolving--managed care liability, a new take on traditional medical malpractice.

Conning's study, "From Medical Malpractice to Managed Care Liability--Fifty Ways to Meet the Future," points to a number of factors influencing change: Competition among both the multi-line insurers and the specialists has become extremely heated as the points of sale continue to diminish. This in large part is due to a shrinking of the customer base as managed care companies acquire hospitals and physician practices regionally and nationally.

The study also found that while health care costs are down significantly, the number of malpractice claims is rising. But more important, vicarious liability claims--in which the managed care company was being sued--are becoming more frequent than claims against individual physicians.

"We found that because HMOs dominate the health care scene, there has been a shift in consumer attitudes about health care delivery. And, because providers are integrating at a record pace, the consumer no longer views the physician as the ultimate health care decision maker," says Nancy Carini, assistant vice president at Conning & Co. and author of the study. "Now consumers are going after managed care companies."

The recent legal decision in Texas, allowing a consumer to seek damages from a managed care company, is another example of potential risk exposure for medical malpractice writers. The Conning study forecasts a continued erosion of ERISA, the legislation that has protected managed care companies from liability, thus exposing insurers to potentially greater losses.

"The managed care market is shifting so rapidly these days and managed care is playing an ever-increasing role in the health care industry that it is only natural that new liability exposures are appearing," says Bruce W. Dmytrow, vice president of CNA HealthPro. "But the insurance industry is becoming more savvy about the managed care industry. It is recognizing that there are no standards there in writing managed care liability because one facility is different from another. You have to examine the objectives of each facility, how it coordinates health care, whether it actually delivers health care, etc. Nevertheless, the managed care industry is an important niche for the insurance industry and one which is bound to grow."

Two confluent factors now in progress ultimately could spell disaster for medical malpractice writers, notes Carini. Predatory pricing among malpractice writers may increase their exposure down the line. With the predicted growth of vicarious liability suits and the eventual erosion of ERISA protection, insurers need to understand these potential risks and act cautiously.

The study also points to the growth of captive insurers, such as Health Care Indemnity, the captive for Columbia/HCA and the nation's third largest medical malpractice writer, and their aggressive approach to seizing market share. Essentially, notes Carini, these captives have a lot to gain in the marketplace because once the managed care company takes control of a provider, the provider's insurer is cast aside and replaced with that captive.

"From Medical Malpractice to Managed Care Liability--Fifty Ways to Meet the Future" (154pp) is available from Conning & Company for $495. It contains detailed information about the financial performance of medical malpractice writers, strategic approaches used by individual medical malpractice insurers, a discussion of ways in which writers can survive in this changing marketplace and the results of a survey of medical malpractice top management. *