Which direction are malpractice rates headed and why?

Bill Fleming

Malpractice costs have been relatively stable in recent years, but the healthcare industry is changing. Consolidation among hospitals, health plans and provider groups has left insurers fighting for fewer customers, while juries have handed out some increasingly large malpractice verdicts.

Bill Fleming, MBA, is the chief operating officer for The Doctors Company and oversees all claims, underwriting and risk management for the nation’s largest physician-owned medical malpractice insurer.

Medical Economics spoke with Fleming about how these changes in healthcare are going to affect malpractice premiums. The transcript below has been edited for length and clarity.

Medical Economics: What impact has consolidation had on malpractices rates and why?

Bill Fleming: A lot of the consolidation in healthcare, whether it’s payers, practices or hospitals, has been more about pulling organizations together and less about integrating them. We insure physician practices from one to thousands of physicians in a single practice and sometimes the roll up is a larger group of doctors and sometimes it’s actually more like an enterprise or organization, so it’s really quite variable.

In terms of the effect on medical liability coverage, I’ll take it two ways. One, there is this sort of traditional business view that if you are a larger organization, you have more leverage over those organizations that provide services to you. If you are a fleet buyer of cars, that’s different than if you or I go out and buy a car. There’s that pressure, and I think some of the stagnation in rates has been about that.

Two, it’s also about enterprises that want to get into the medical liability world for the first time. If you want to build premium volume quickly, that part of the market is the part where you can grow faster. There’s an old saying in insurance of don’t let the aroma of the premium overcome the stench of the losses. The premiums come now, the losses come later, and in our business they come years later.

ME: Are you seeing as healthcare organizations get larger an interest in self-insuring?

BF: When we were in our 20s, we bought an auto policy with the lowest possible deductible because that’s all we could afford if we had a loss. But as our personal balance sheet grows, you increase your deductible because you can lower your premium and you can afford that once-in-a-while claim. Same thing happens in liability insurance in healthcare.

So there has been some movement toward self-insurance over the last 15 years. Moderating against that is the lower than historical trends in medical liability-the cost isn’t going up at a marked rate every year, so there is less of an incentive relative to say prior decades to self-insure. I think that era maybe is starting to come to a close.

I would guess over the next five or certainly 10 years that we would see more healthcare organizations choosing to take more of their own risk and having less of a need to protect their balance sheet by buying insurance at least down to a level they have today or over the last five or eight years.

ME: For the smaller practice, is there any drawback to that? Will it mean less choices on the market? How will it impact them, if at all?

BF: It has a couple of impacts. From a carrier perspective, you can have the same number of companies chasing a smaller market. That creates a competitive pressure and if you are the buyer, that pressure could benefit you at least in the near term. In the long term, that could mean and probably will mean that some of the smaller carriers need to find a home with a larger organization, because it’s a little bit difficult to lay off insurance risk onto an organization that is smaller than the customer.

There is a level of financial protection that you need that if your insurance company is smaller than you are, there is a mismatch there. We have not seen that constraint in terms of fewer companies in the market yet, but over time, that certainly could come.

ME: If consolidation in healthcare continues, what’s going to happen to the malpractice insurance market? Will it result in fewer insurers?

BF: In the long term, that would likely be the case and traditional business theory in a market where there are fewer customers or customers choosing to get their services in a different way, typically the companies serving that market are going to roll up. We saw some of that from 2005 to 2012-13 and there’s been a bit of a pause there.

As we sit here today, we have companies with plenty of balance sheet, but a shrinking income statement if you will. Their revenue year over year is flat to shrinking because the physicians and book of business have chosen to self-insure or joined a healthcare organization that is self-insured or is taking on more risks themselves and laying out more on their insurance company.

ME: Are all specialties seeing the same price trends across the market?

BF: Generally, that is the case. The tide has changed for all specialties, but there are a couple of outliers, but I think most of them, the decrease in the number of claims has been fairly even. But I don’t think there is a particular specialty that has benefitted more or less. There are certainly specialties that the market is still developing.

The movement toward hospitalists, where you have internists or OBs or critical care specialist, who is on site and available at the hospital rather than the traditional admitting physician who follows own patient into the hospital. Those specialties are still in the development phase, so I think the risk there are becoming more understood over time.

Same thing with advanced practice nurses. That’s an area the industry has been watching, because PAs, NPs and nurse midwives, nurse anesthetists, as they take on more responsibility and relieve some of the pressure from the doctor shortage, the question is, will the liability exposure of the nurse practitioner start to look more like the doctor that they work with rather than the traditional nurse practitioner from a decade ago?

ME: There have been some reports that plaintiff attorneys have somewhat shifted from going after malpractice cases to focus more on going after pharmaceutical companies. Have you seen that at all?

BF: That is certainly a narrative that we hear and it is intuitive. I haven’t really seen any data to support that, but I don’t think it’s something you can really get data around. The law firms are a business too and are going to look for the opportunities where they are more likely to get a return. As an organization, we for example, we tout our mission as advance protect and reward the practice of good medicine.

Part of that mission is protect, and where a claim doesn’t have merit, it’s our intent to defend it even if it costs more to defend it than might be paid to resolve it. That kind of approach makes sense for us and our customers but does make it more difficult for a plaintiff firm to recover some cases as they have had that experience over and over. Perhaps greener pastures, like pharma litigation, product liability that kind of thing, are more appealing.

ME: Is there any one big change that could lead to price increases for doctors, whether it’s a major insurer leaving the business or some other event?

BF: If you look at history, a change of capacity is what usually drives a market shift. Back in 2002-2003, when St. Paul fire and Marine pulled out of the line, that was part of an era when the market stiffened up and prices went up. But behind that, the move by that particular company was a change in losses. Seeing some of that in the last couple of years, if you look at some of the public companies in our space and at their analysts calls and their public filings, there is a concern that the loss picture is becoming worse or more severe, and higher losses tend to take capital out of the industry, which can result in higher prices.

I think there have been some larger companies, ours included, who have said that the combined ratios that we currently see, even though we are a member-owned organization, we are mission focused, but can’t pursue your mission long term if there is no margin. If you are not around, you can’t deliver on your mission.

And so companies like ours have been taking increases in prices where it is necessary, whether it’s part of the market because of size of group or type of group or by venue. Some states, where we see rates that are flat, there is not a need for a rate increase, but we see a lot of markets where there is a need for a rate increase and we’re implementing those.

Part of our strategy and goal there is to not be disruptive. But if we don’t raise rates a little bit when it’s necessary, that builds up pressure that eventually results in a large increase, which is very disruptive from a customer perspective. Our hope and expectation is that a small increase is more tolerable over time than a single large increase that is disruptive to a budget.

There is a term-frequency of severity-that is an issue the industry is watching, where you see large verdicts in some places. There are some counties around the country where a very large seven or eight-figure verdict is not surprising. We know where those places are. It’s not pleasant for the defendant and maybe not economically sustainable, but it’s not a surprise.

But we’re seeing, as an industry, more large verdicts in places that have never had one like that. It’s introduced a sort of randomness to large verdicts. That’s a challenge for the industry, a challenge for smaller companies that aren’t accustomed to that size of a loss and maybe don’t have the backstops in place to cover up to the level of verdict they are seeing. We are not seeing it have an overall statistical effect on losses, it’s just one $10 million verdict for example, but it is a trend we are watching. The question is, is it a trend of social inflation that’s going to be seen more broadly over the next few years?

ME: With EHRs being blamed for some medical mistakes, does the industry account for that? Does the industry look at data as to which EHRs might be connected to more medical mistakes?

BF: We have not seen an error you can attribute straight to the EHR where it caused the error, but it can perpetuate it. The copy-and-paste function in the EHR, if you copy it forward, the next physician that comes on shift might have the wrong information that is easily copied, but is now leading them astray. There are certainly new risks that come from EHRs.

We’ve studied this some as we look at closed claims. It’s usually a tool of humans rendering care. We haven’t seen so much the EHR itself cause an error, but can sometimes perpetuate them or put doctors and nurses in a place that’s more difficult to render care that they want to deliver. 

ME: Ultimately, what do you see happening with rates in the next few years?

BF: I think we will see single digit rate increases most places over the next several years to get the industry to a place where the rates are more at a sustainable level. Some of the combined ratio we see in the industry today are not compatible with life, if you will. I think the industry needs to find a way to take reasonable increases that can be absorbed into practices and health systems rather than continue to defer the need to a time when you have no choice but to take a very large increase that’s disruptive not just to the marketplace, but to practices all over the country.

My forecast is you’ll see increases where it is necessary and there are various hurdles to that. One is market place adoption, one is regulatory-regulators have their own needs and pressures that they have on them, and we have to work with them to get a rate that keeps their market stable and keeps coverage available.