|Medical Professional Liability
||Flat to slight decrease
||Flat to slight decrease
|Managed Care E&O Liability
|Medical Stop Loss Liability
||Flat to slight decrease
||Flat to slight decrease
Medical Professional Liability
For the first half of 2017, Medical Professional Liability (MPL) continued to be one of the most profitable lines of business in the property/casualty marketplace. However, concern about weakening financial performance, continued soft market pricing, diminishing reserve redundancies, low interest rates, and other challenges impacted MPL premium. Generally, we observed slight premium decreases to flat renewals during this period. An increase in the severity of MPL claims has continued into 2017 and we anticipate similar increases for the remainder of the year as claims settle. According to the March 2017 Conning Report, the forecast for 2017 is that declining premium will cause the combined ratio to continue to rise.
Claims inflation, the effect of batch claims, challenges to tort reform, increasing coordination by plaintiff attorneys in a shrinking client market, oversupply of insurance capacity, and a reduction in the availability of reserve releases are factors that continue to challenge underwriters.
Rates continued to fall, slightly, for many underwriters as evidenced by declining premium volume in the industry as a whole. In many cases, carriers were compelled to lower their rates to maintain market share to stay competitive with carriers writing business at those rates for lower levels.
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, the number of independent healthcare professionals has declined from approximately 62 percent nationally to approximately 33 percent from 2008 to 2016, while there has been a commensurate increase of hospital employed physicians during the same timeframe. Healthcare reform accelerated physician employment that has been underway these past few years. Whatever reversals may occur with healthcare reform, either in the short- or long-term, likely will not reverse the trend in physician employment since uncertainty in the marketplace does not promote independent physician practices.
During the first half of 2017, the 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 the MPL underwriting teams.
We have also seen underwriters in both London and Bermuda, such as Hiscox, announce their decision to exit the healthcare marketplace, noting they cannot continue to support inadequate rates underwritten by competitors.
Cyber Privacy and Network Security
Cyber-attacks continued to make headlines across industry sectors with the healthcare industry a prime target from a customer privacy perspective. In the first half of 2017, we continued to see a marked increase in extortion incidents in which malicious code (ransomware) impacted healthcare organizations’ computer systems. The ransomware attacks have the impact of significantly hampering healthcare providers’ ability to timely access patient histories, drug histories, surgical schedules, and other critical clinical information. These delays may create a greater likelihood of negative patient outcomes.
Managed Care E&O
Managed Care Organization (MCO) E&O continues to grow as an area of exposure as healthcare systems and large physician groups grow in complexity and expand their service offerings. 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.
On a macro level, carriers are concerned with the uncertainty of the repeal and/or replacement of the Affordable Care Act (ACA), continued consolidation of managed care entities and increased competition created by new entrants into the managed care marketplace. Carriers are closely monitoring changes to the ACA, as the new administration begins its efforts to repeal and replace the Act. Changes in the funding and structure of the ACA may have a material impact on the managed care market. Carriers anticipate that 2017 will yield further consolidation of managed care entities. One would expect rates to be adversely effected by the foregoing; however, new sources of capacity threaten to further depress rates.
Underwriters are 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 denied care
- Allegations of miscalculation of medical expense ratios
- Releases of protected health information, personally identifiable information, and payment card information
Capacity from insurers that typically specialize in MCO E&O continues largely unchanged from 2016 in the first half of 2017. The rates have remained fairly 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.).
Medical Stop Loss: Health Reinsurance, Employer Risk & Provider Risk
In 2017, the medical stop loss and reinsurance market continued to be driven by data quality. The high standard and detailed data often returns a competitive, but disciplined market while poor data results in a tough market. Additionally, ripple effects from the ACA are still evident, as the industry continues to place an ongoing emphasis on value based care. These type of market conditions present the insurance and reinsurance industry with both challenges and opportunities for innovation.
A major challenge is adapting to the ever-changing healthcare landscape and finding underwriters who have adapted with it, especially for provider risk. The current Administration’s vocal commitment to repealing and replacing the ACA signifies potential for even greater changes in the industry in the months to come.
Ongoing trends and updates to note in regards to the medical market in general and the Provider Stop Loss and Employer Stop Loss markets are:
- Exchange Lives
- As of March 2017, there are 10.3 million consumers in the United States with effectuated (paid premiums and an active policy) coverage.
- Major markets, such as Aetna and Anthem, have announced that they will be pulling out of the exchange market, citing the 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
- With many of the Accountable Care Organizations (ACOs) in the final year of their upside-only risk contract (MSSP Track 1), they will begin the shifting into the MSSP’s two-sided risk options.
- 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 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.
- Medicaid Accountable Care Organizations
- Many states have taken interest and to date, ten states have implemented Medicaid ACOs to align provider and payer incentives with the goal of managing costs and delivering quality care to beneficiaries and at least twelve more 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. Integro has seen success in achieving consistent savings through surety bonds over letter of credit pricing for Medicare ACOs and would expect to see similar results for Medicaid ACOs as they continue to emerge across the U.S.
- Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
- MACRA 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 4 categories; and Advance Alternative Payment Models (AMPs), which 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.
- Specialty Pharmacy
- Costs related to pharmaceuticals continue to increase year over year and cause financial challenges for health systems. (Re)Insurers continue to be impacted by multi-million dollar pharmaceutical claims.
- High-cost orphan drugs are driving costs, as well as6 drugs developed to treat conditions such as Hepatitis C that are in high demand and are utilized at a high frequency. This can cause serious financial concerns.
- Since the ACA passed, there has been significant interest in self-funding. We continue to see many fully insured plans contemplate and successfully transition to self-funded plans.
- The 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.
As Federal and State governments focus on reducing healthcare costs, there has been greater emphasis on False Claims Act enforcement (FCA). Whistle-blower actions, moreover, are on the rise as they (often current or former employees) seek a share in recoveries obtained. While not limited to the healthcare industry, it has been the largest target of government and private actions with $2.5 billion recovered in 2016. Billing claims from large employers and other commercial payers, moreover, is an increasing exposure as they contract directly with healthcare providers.
Responding to FCA and other billing investigations can result in significant costs to organizations for outside auditors, specialty advisors and defense counsel. Traditional coverage in Healthcare D&O forms, however, provides low sublimits and restrictive coverage terms that can leave the majority of exposure uninsured.
Recently, new products and markets have been introduced that provide higher limits, expanded coverage and offer services to help lower the costs of regulatory and billing claims. Key features include:
- Expanded definition of “claim” to include investigations and self-disclosure
- Coverage for fines/penalties in addition to investigate and defense costs
- Choice of counsel
- No sublimits
- Prior Acts coverage from 3-6 years
- Compliance surveys and gap analysis of compliance program
The use of Internet-connected devices and “smart” medical devices in healthcare organizations continues to increase, which causes concern that the users are vulnerable to hackers. There has been some litigation claiming cybersecurity risks for pacemakers and other implantable devices and that activity suggests a potentially growing area of claims.
Virtual care is replacing traditional notions that a medical diagnosis can only be produced in a person-to-person visit. In both developed and emerging nations, new entrants are pioneering pathways that erase healthcare boundaries and enable care anywhere.
Consumers are receptive to this type of care, particularly those in emerging markets where access to quality care is a prevailing concern. For example, according to PriceWaterhouseCoopers’ recent study that surveyed over 24,000 consumers in 29 territories, emerging countries are more inclined than developed markets in owning or using wearable devices, which can be used by consumers to manage their health and wellness.
Where urgent needs prevail, health solutions offered by new entrants can root more quickly especially in less regulated environments like those in emerging countries.
The persistent softness of the market continues to present challenges to medical professional liability insurers, despite record profits and low loss ratios. In order to remain competitive, markets are compelled to decrease rates and premiums. While there is an abundance of capacity in the marketplace, 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. The upward trend to date, however, is actuarially manageable, unlike the last years of the 1990s that 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
Certain states that do not have protective tort reform laws, especially caps on non-economic damages, are the most unfavorable malpractice environments from an underwriting perspective. Claim professionals deem the states of New York, New Jersey, Pennsylvania, Florida and Illinois to be among the most difficult venues in which to litigate malpractice cases due to their lack of tort reform laws.
The Republican control of Congress and the majority of state legislatures after the 2016 election may offer some opportunity for federal and state malpractice reform laws to be enacted as President Trump called for medical liability reform in his address to Congress on February 28, 2017.
The national environment for medical malpractice protection remains favorable. Claim frequency remains low in comparison to the past, but there is an increase in the severity of claims and settlements. Healthcare systems focus on risk management and patient safety over the last two decades is having a favorable impact and needs to continue as health care delivery and reimbursement changes dramatically in the next five years.
While the traditional medical professional liability, Managed Care E&O, and Medical Stop Loss coverage areas remain stable, the emerging risks areas are evolving and present real concerns for healthcare organizations. Consumers are also demanding a healthcare experience that mirrors the convenience and transparency of their banking, retail, transportation and other purchasing experiences. Healthcare organizations will need to evolve with these changing demands from their customers and the insurance carriers and brokers will need to provide cutting edge solutions to these developing risks.