- Medical Professional Liability
- Managed Care Organization E&O
- Medical Stop Loss
|Medical Professional Liability
||Flat to tightening
||Flat to slight decrease
|Managed Care E&O Liability
|Medical Stop Loss Liability
||Flat to tightening
||Flat to slight decrease
Medical Professional Liability
As we look back over 2017, we can say that it produced dramatic changes, as efforts were underway on Capitol Hill to “repeal and replace” the Accountable Care Act (ACA). While the attempt was unsuccessful, as the year ended there were a number of other highlights that will have an impact on healthcare in America, including:
- Health system mergers, such as the one between Ascension Health and Providence St. Joseph Health; and Advocate Health and Aurora Health, creating “mega-healthcare systems”
- Hospitals’ continuing employment of physicians
- Ongoing influx of private-equity backed acquisitions of physician and surgeon practices
- Changing landscape of health plans, including CVS’ intent to acquire Aetna; United Healthcare and Optum; and Humana’s acquisition of Kindred
- Anticipating disruptive technology, such as Amazon; CVS’ purchase of Aetna; Walgreens’ collaboration with New York Presbyterian; and Walmart’s ambitious goal to become the number one health care insurance provider in America
With these changes as well as others influencing point-of-care service in the U.S., underwriters and brokers in the healthcare sector are “re-thinking” the most cost effective and efficient models to avoid liability and protect assets.
The medical professional liability (MPL) sector began to change for the first time in over a decade, as aggregate industry results became unprofitable. Many insurance and reinsurance carriers noted that combined ratios increased to over 100 percent in 2016 and 2017. Impacting these results were multiple large verdicts, with over 30 in 2017 exceeding $10 million, many of which were in traditionally more conservative venues, including:
- A $61.6 million judgment in Rhode Island was awarded to a patient who sued two doctors and a hospital for taking him off blood-thinning drugs, a decision that led to severe blood clots in his legs and lungs and required the amputation of his right leg. The September verdict was the largest medical malpractice or personal injury award in the state’s history.
- In March, an Arkansas jury awarded $46.5 million to the family of an infant who suffered brain damage, finding that doctors at a hospital were negligent by failing to undertake procedures to prevent the infant’s skin condition from worsening.
- Following a bench trial, a Pennsylvania federal judge ruled in April that the federal government must pay $41.6 million to a couple after finding that a doctor at a federally funded health clinic negligently used forceps to deliver the couple’s baby, which caused permanent brain damage.
The increase in the severity of MPL claims continued throughout 2017. We anticipate similar increases in 2018 as medical inflation outpaces the consumer price index, and the cost of hiring medical experts (by plaintiff attorneys’) continues to rise.
During 2017, we generally observed flat renewals, and in some cases premium reductions, due to competition. For accounts renewing in October and later, underwriters in the U.S., London, and Bermuda were unwilling to offer decreases to many clients for the first time. They indicated their willingness to walk away from accounts if the client was unwilling to bind a flat or, at times, increased renewal proposal. This position might indicate that a hard market is developing.
Additional factors that continue to challenge underwriters include:
- Claims inflation
- Batch claims
- Tort reform
- Coordination by plaintiff attorneys
- Shrinking client market
- Oversupply of insurance capacity
- Reduction in the availability of reserve releases
Medical professional liability insurers continue to face declining market share because of the ongoing acquisition of physicians and physician practices by hospitals and health systems. In addition, many newly trained physicians are opting to join larger health systems rather than enter into independent practice. According to the Conning Report (March 2017), the number of independent healthcare professionals has declined from approximately 62 percent nationally to approximately 33 percent from 2008 to 2016.
At the same time, there has been a commensurate increase of hospital-employed physicians over the same span. Healthcare reform accelerated physician employment that has been underway the past few years. Whatever reversals may occur with healthcare reform, they will likely not reverse the trend in physician employment since uncertainty in the marketplace does not promote independent physician practices.
Market and Provider Consolidation
Merger and acquisition activity announced in 2016 culminated in Sompo’s acquisition of Endurance in March 2017; Liberty’s acquisition of Ironshore in May 2017; and Fairfax Holding’s acquisition of Allied World Assurance in July 2017. These strategic transactions are intended to complement the acquiring carrier platforms and should not have an impact on MPL underwriting teams.
According to the year-end Conning Report, “MPL insurers are engaging in M&A activity as a means of attaining growth in an environment where organic growth potential is limited from shrinkage in the exposure base.”
According to a report published by the American Hospital Association, mergers can lead to efficiencies. Its study, Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis, found that mergers resulted in a 2.5 percent reduction in annual operating expenses at the acquired hospital, could drive quality improvements from clinical protocols, and could expand the scope of services.
During the second half of the year, the merger activity focused on health systems, such as Ascension Health’s announced merger with Providence St. Joseph; HCA’s acquisition of a number of hospitals from CHS and Tenet; Advocate Health Care’s merger with Aurora Health Care; and Catholic Healthcare Initiatives’ merger with Dignity Health.
These announcements change the healthcare landscape dramatically by creating “Mega-Healthcare Systems,” which create challenges for insurance and reinsurance carriers that reduce competition and client bases.
U.S. Change in Tax Law and Impact on Bermuda-Placed Business
We are monitoring the impact of the change in the U.S. tax law that the House and Senate passed, and that President Trump signed in December 2017, on coverages that clients place with Bermuda insurance and reinsurance companies. According to Meyer Shields of Keefe, Bruyette & Woods, and reported in the Insurance Insider (December 22, 2017): “From a financial perspective, we think lower domestic U.S. tax rates will roughly offset taxes associated with intracompany cessions (particularly excise taxes and taxes applied to presumably profitable ceding commissions) that we think will largely disappear under the new tax regime, which is why our Bermudian EPS estimates aren’t changing much. On the other hand, we think there’s something of a strategic downside to the Bermudians, for two reasons. First, they are losing the pricing advantage embedded in tax rates that had been lower than those anticipated for domestic carriers. Second (and probably less significant), the shrinking difference between U.S. and Bermudian tax rates means an incrementally smaller opportunity for tax arbitrage that should incrementally reduce demand for reinsurance.”
Cyber Privacy and Network Security
Cyber attacks continued to make headlines across industry sectors and the healthcare industry was a prime target. WannaCry made headlines around the world, and severely impacted the UK’s National Health Service. While currently being blamed on North Korea, insurers are not denying coverage based on war exclusions. Ransomware attacks can significantly hamper healthcare providers’ ability to access patient histories, drug histories, surgical schedules, and other critical clinical information in a timely manner. These delays may create a greater likelihood of negative patient outcomes and loss of patient revenue.
Along with ransomware, wire fund transfer fraud via social engineering is also reaching epidemic proportions. While this coverage can be provided via a crime or cyber policy, in most circumstances, it is substantially sub-limited in both policies, although excess capacity is beginning to appear. Through mid-December 2017, the Identity Theft Resource Center (ITRC) has identified 373 data breaches in healthcare organizations involving a known loss of personal identifiable information (PII).
The Office of Civil Rights (OCR) breach portal lists a total of 2,211 healthcare-related breaches since its inception in December 2015, with the makeup of the breaches as follows:
As of October 31, OCR has now received 171,161 HIPAA complaints relating to such breaches. Civil penalties were imposed in 52 cases, for a total of $72,929,182 in civil penalties. Penalties have been as large as $5.5 million.
Despite this activity, there is competition for risks with good security maturity and loss histories.
Managed Care Organization E&O
Managed Care Organization (MCO) E&O continues to grow as an area of exposure. Considerable activity persists with health systems formulating Accountable Care Organizations, creating their own insurance companies to write health benefits, and participating in contracts with insurance companies in which providers assume expanded responsibility for disease management, enrollee tracking and management, and advisory services to outside practices.
Although the creation of smaller MCOs by hospital health plans has allowed insurers to diversify their books to include a portfolio of smaller accounts, underwriters are concerned about the increasing complexity of healthcare organizations. At times, the complexity makes it difficult to identify and quantify the potential risks of plan design, case management and general population health.
On a macro level, carriers are concerned with the uncertainty of the repeal and/or replacement of the ACA and continued consolidation of managed care entities. They are closely monitoring changes to the ACA. Changes in the funding and structure of the ACA may have a material impact on the managed care market.
Underwriters are increasingly concerned about current or future claims alleging:
- Design and/or administration of cost control systems (incentives, quotas, etc.)
- Down coding (insufficient revenue to providers) and allegations of deliberate slow reimbursement
- Civil rights actions from patients who are denied care
- Allegations of miscalculation of medical expense ratios
- Releases of protected health information, personally identifiable information, and payment card information
The marketplace for managed care E&O coverages remains competitive. Many healthcare accounts place this coverage in their captives, but on smaller accounts that insure these coverages we are seeing the following trends:
- Total number of markets writing this coverage is fewer.
- Rates have remained static unless: (1) the insured has adverse claims development; and (2) there is a material change in exposure (e.g., number of enrollees, type of services provided etc.).
- Underwriters do not seem to have any mandatory rate increases unless warranted due to changes in exposure or claims experience on the horizon for this type of coverage. However, carriers will seek rate and premium increases comparable with an increase in exposure.
- Retentions (SIRs) will depend on the type and size of the organization, but we expect there will not be significant deviations from the past year.
- Market appetite in this space remains unchanged and underwriters will continue to entertain everything from small managed care contracting vehicles on up to the large national health plans.
Medical Stop Loss: Health Reinsurance, Employer Risk & Provider Risk
In 2017, the medical stop loss and reinsurance market continued to see upward pressures on rates driven by the rising costs of specialty drugs and increased frequency of high cost ($1+ million) claims. Such pressures can be countered by high-quality data and willingness to adapt. High standards and detailed data often return a competitive, but disciplined market, while poor data results in a tough market. Additionally, the established and growing use of captives in this business leads to a wider access of markets willing and able to accurately price the risk.
Government regulations remain an important consideration moving into 2018. Despite the current administration’s unsuccessful attempts at repealing the Affordable Care Act in 2017, the legislation is expected to face some serious challenges in 2018 as lawmakers in opposition are expected to use all their available powers to weaken the bill. The ability to adapt in this ever-changing healthcare landscape and find underwriters who have adapted with it is essential.
Mergers and acquisitions of clients was a distinct challenge in 2017, as new leadership brought new risk management strategies different than the ones that had suited clients in prior years. The uncertainty of renewal in many cases created a need for greater client management and a push to win new accounts.
These types of market conditions present the insurance and reinsurance industry with both challenges and opportunities for innovation.
A few on-going trends and updates to note in regards to the medical market in general and the Provider Stop Loss and Employer Stop Loss markets are as follows.
- Market Entrances and Exits
- On October 15, Tokio Marine acquired American International Group’s (AIG) medical stop loss and organ transplant business. The deal is expected to boost the value of Tokio Marine HCC’s medical stop loss business to more than $1.3 billion in premium
- In late 2017, Munich Re announced that they were exiting the Medical Reinsurance business and would not be binding or updating any of their outstanding Medical Excess of Loss Reinsurance accounts.
- Exchange Lives
- The 2017-2018 open enrollment period saw 8.82 million plan selections, indicating strong interest from consumers in getting or remaining covered. But 2018 is posed to be a challenging year for the market as opponents of the ACA attempt to remove several pillars of the law, specifically the repeal of the individual mandate and elimination of the cost-sharing reductions. Such actions would likely cause some of the original enrollees to forgo final coverage selection and depress enrollment numbers.
- Major markets—Aetna, Anthem, Blue Cross Blue Shield, and Humana—have announced that they will be pulling out of the exchange market in 2018, citing large losses and the growing uncertainty surrounding the future of the ACA under the new Administration.
- A number of major markets have had extremely poor experience with newly insureds, which has resulted in higher rates and large losses. With more data of the newly insured population becoming readily available, there is a push to better understand how to most efficiently and effectively serve this market segment.
- Medicare Shared Savings Program (MSSP) and Next Generation ACOs
- The total number of MSSP ACOs increased from 480 at the beginning of 2017 to 561 in January of 2018. Similarly, the total number of assigned beneficiaries increased from 9.0 million to 10.5 million.
- With many ACOs in the final year of their upside-only risk contract (MSSP Track 1) in 2017, they will begin the shifting into the MSSP’s two-sided risk options effective 2018.
- To ease this transition to Track 2 or 3, the Centers for Medicare & Medicaid Services (CMS) introduced Track 1+. Based on Track 1, this intermediary model tests a payment design that incorporates more limited downside risk compared to Tracks 2 and 3 (as well as elements of Track 3) to help ACOs better coordinate care. Furthermore, Track 1+ ACOs will be eligible to participate in Advanced Alternative Payment Models (APMs) under the Quality Payment Program created by MACRA.
- The introduction of the Track 1+ model combined with the shift of many ACOs to two-sided risk contracts has increased the percent of ACOs in risk-based tracks from 9 percent in January 2017 to 18 percent in 2018.
- The Next Generation ACO Model is an initiative for ACOs that are experienced in coordinating care for populations of patients. It will allow these provider groups to assume higher levels of financial risk and reward than are available under the MSSP.
- In 2017, we found it difficult to find markets that were willing to price ACOs moving from Track 1 to Track 1+ or higher in 2018 due to their unfamiliarity with the risk. Our hope is that as more performance years of results are published by CMS, markets will feel more comfortable effectively pricing ACOs. Additionally, increased use of captives by ACOs will provide better market access.
- Medicaid Accountable Care Organizations
- Ten states have implemented Medicaid ACOs to align provider and payer incentives with the goal of managing costs and delivering quality care to beneficiaries. At least thirteen more states are actively pursuing them.
- These ACOs, similar to their Medicare counterparts, will focus on value-based payment structures, measuring quality improvement and analyzing data.
- Medicaid ACOs will also be required to provide financial guarantees, such as a letter of credit or surety bond. Consistent savings have been available through surety bonds over letter of credit pricing for Medicare ACOs and similar results are expected for Medicaid ACOs as they continue to emerge across the U.S.
- Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
- This Act creates a new Quality Payment Program to reward physicians for providing higher quality care to Medicare beneficiaries by implementing two payment tracks: Merit-Based Incentive Payment Systems (MIPS) where providers are evaluated on their performance in four categories; and Advance Alternative Payment Models (AMPs), that are designed for providers who have experience coordinating care. Risks and rewards are accepted by the provider with the promise of meeting quality measures. These two tracks will begin in 2019.
- The first year of performance measuring began in 2017 and results will determine the payments to providers in 2019.
- Specialty Pharmacy
- Costs related to pharmaceuticals continue to increase year over year and cause financial challenges for health systems. Reinsurers continue to be impacted by multi-million dollar pharmaceutical claims.
- Both high-cost orphan drugs and drugs developed to treat conditions like Hepatitis C are driving costs up due to their heavy use and high demand. Additionally, high-cost drug claims often require more time for the reinsurer to review, which can lead to delayed claim payments.
- Since the ACA passed there has been significant growth in self-funding. We have and continue to see many fully insured plans contemplate and successfully transition to self-funded plans.
- Benefits of self-funding include more control over the plan document, less regulation, and flexibility to choose providers and networks that best fit the plan. Additionally, the ACA implemented the removal of limits, making Medical Stop Loss insurance a tailored solution for protecting those plans that elect to self-fund.
- The number of claims exceeding $1 million more than doubled in the past five years, and now, although less than 2 percent of stop loss claimants produce costs over $1 million, those claimants account for 18.5 percent of the total stop loss payments. These higher associated claims costs are expected to somewhat slow revenue growth in the stop loss market; however, the risk-mitigation, customization, and regulatory savings aspects of the market will continue to make it an attractive segment of health insurance.
The epidemic of opioid misuse and abuse is having a profound economic impact on individuals, employers, and other groups that sponsor health insurance plans, as well as on the care delivery system. Costs associated with opioid abuse have increased dramatically in recent years, including drug abuse treatment services and lost productivity. In just five years, claims charged to insurance companies to treat opioid dependence or abuse grew from $72 million to $722 million — an increase of almost 1,000 percent.
Advances in technology, the current physician shortage and the dramatic increase in the number of patients seeking care under the ACA, have led a growing number of healthcare facilities to expand their use of telemedicine to deliver services to patients in hospitals as well as in remote locations. Over half of all U.S. hospitals now use some form of telemedicine to treat patients.
Last year, a study by The Journal of the American Medical Association (JAMA) found that nearly one-third of women in academic medical faculties reported having experienced workplace sexual harassment. In that report, women also perceived and experienced more gender bias than men. According to Becker’s Healthcare Review (6 December 2017), at least 3,085 employees at general medical and surgical hospitals filed claims of sexual harassment with the U.S. Equal Employment Opportunity Commission (EEOC) between fiscal years 1995 and 2016.
According to EEOC data obtained by BuzzFeed News, 170,000 sexual harassment claims were filed during this twenty-one period. Roughly 83 percent of the claims were filed by women, while 15 percent were filed by men. Two percent of individuals filing complaints did not specify a gender.
The major concerns raised by this data are the lack of sexual harassment and diversity training and sexual harassment policies in the industry.
Hospitals may be places of healing, but they also have become the scene of an increasing number of violent incidents. Such incidents not only put patients at risk but also medical professionals, who are often the targets of attacks, harassment, intimidation and other disruptive behavior. The incidence rate for violence and other injuries in the healthcare and social assistance sector in 2012 was over three times greater than the rate for all private industries.
The Complexity of Sepsis Related Claims
Healthcare-acquired infections (HAIs) cost the U.S. healthcare system billions of dollars each year and lead to the loss of tens of thousands of lives. At any given time, about 1 in 25 hospital patients has at least one such infection, according to the Centers for Disease Control and Prevention. Healthcare-acquired infections also come with a financial price of up to $9.8 billion a year, according to research published in 2013 in JAMA Internal Medicine.
Bad Bugs and Pandemic Infections
Growing concern about Ebola and other infectious diseases has forced healthcare facilities to review their current practices and consider the impact that a potential nationwide pandemic would have on their organizations and the communities they serve. The ability to deliver care with minimum disruption and safeguard the health of workers and patients will depend on planning and preparation measures that organizations undertake today. Organizations should consider a number of critical steps as they prepare for the potential pandemic.
The softness of the market over the past decade seems to be taking a slight turn toward tightening. While there is an abundance of capacity, the recent consolidation activity of medical professional liability carriers is likely to continue in order to sustain market share and create underwriting efficiencies.
Claim severity must continue to be carefully observed since the trend has been upward in recent years as evaluated by a number of carriers, such as Zurich, Berkley, C.N.A., and the Aon/ASHRM report; however, the upward trend to date is actuarially manageable, unlike the last years of the 1990s, which drove the last malpractice crisis. While there are fewer malpractice cases filed, they are more expensive to defend, thereby driving up legal and related expense for carriers and self-insured entities.
While the traditional medical professional liability, Managed Care E&O, and Medical Stop Loss coverage areas remain stable, emerging risks are evolving and present real concerns for healthcare organizations that require a proactive risk management approach. Consumers are also demanding a healthcare experience that mirrors the convenience and transparency of their banking, retail, transportation and other purchasing experiences. Healthcare organizations need to evolve with these changing demands from their customers while insurance carriers and brokers must provide cutting edge solutions to address these developing risks.