The creation of accountable care organizations (ACOs) is leading hospitals to acquire physicians rapidly. During the process hospitals should consider how a physician’s integration may increase tail liability related to medical malpractice insurance.
Richard Frese’s co-authored article “Managing tail liability” offers hospital and physician groups perspective on tail liability issues that may need to be reflected on the balance sheet.
Here are some specific tail liability considerations:
First, leaders should understand the level of tail liability exposure their physicians face, including exposure related to a physician’s specialty, FTE value, participation in outside activities (such as moonlighting), and prior insurance coverage. This consideration is particularly important when acquiring physicians and when preparing for a physician exit. For example, it is important to know whether the insurance program will provide coverage for prior acts or tail coverage when a physician leaves, and whether a physician will need to come into a program “clean,” with his or her tail liability covered by another organization.
Employed physicians usually are covered under occurrence-based medical malpractice policies. Some organizations may choose to cover employed physicians’ liability through a self-insured vehicle, such as a captive or risk-retention group, or through self-insured retention (a dollar amount that must be paid by the organization before the policy will cover a loss). Nonemployed physicians also may be offered such coverage through an insurance vehicle, but they must secure coverage on their own; the hospital itself cannot provide this insurance. In addition, some healthcare entities purchase commercial claims-made coverage for employed physicians, but will offer physicians the option to purchase occurrence coverage. This approach results in tail liability for the organization.
The article also details solutions that can help hospitals and physicians control these liability expenses:
Use a self-insurance vehicle. Self-insurance is an option, particularly when insurance prices are high during a hard market. Theoretically, an entity experiences savings through the profit, contingencies, and insurer’s expenses built into the rate. Self-insurance also allows an entity to maintain more control of the losses, because the carrier may not be involved until claims reach the excess layer. Pooled physicians might have the additional benefit of obtaining lower insurance rates. But there also is increased risk and variability with self-insurance, because cash flows may not be known up front as they are with commercial insurance. Administrative costs also may increase when claims previously monitored by an insurance company become the responsibility of the self-insured entity. Use of self-insurance also requires greater knowledge of underwriting, and actuarial estimates will be needed for funding future losses.
Consider combined limits between hospital and physicians. Programs that have separate limits for the hospital and physicians may find savings in having a single combined limit. This practice may not be feasible in some states with medical malpractice funds, depending on the rules, but for other states, there are clear advantages. First, programs that have single combined limits experience reduced legal expenses, because alignment of the hospital’s and physicians’ goals and incentives allows for joint defense of claims and reduced “gray boxes” of coverage. This approach also avoids internal situations where the hospital and the physicians blame each other for an incident, as well as situations where the hospital may be brought into a claim as a deep pocket. Combined limits also allow for more protection for physicians, because commercial coverage usually has lower limits.
Ryan Weber, of McGladrey, also contributed to this article.