Medical Professional Liability Ratemaking Hospitals / Self-Insurance March 12, 2004

1. Medical Professional Liability RatemakingHospitals / Self-InsuranceMarch 12, 2004

2. Today’s Objectives • Coverage Issues for Hospital Professional Liability (HPL) • Approach to Pricing or Establishing Funding Levels for Hospitals • Observations Regarding Recent Tort Reform Initiatives in PA and FL • Q&A Milliman USA

3. Coverage Issues for Hospital Risks • Retentions have increased significantly in recent years ($10M per claim is not unusual). • The cost of commercial excess insurance has also increased significantly, despite the higher retentions. • If a hospital purchases ongoing claims-made coverage, it still needs to book a liability on its financial statements for the unfunded tail. • For competitive reasons, many hospitals are starting to open their captives to offer coverage to physicians. Milliman USA

4. Data Needed for HPL Rating Model • Historical and projected exposures • Historical loss data, limited to some per-claim limit (e.g., $500,000). • Loss development factors (at selected limit) • Increased limits factors • Industry loss cost information • Trend factors • Discount factor • Expense assumptions Milliman USA

5. HPL Exposure Data • Traditional inpatient exposure base is occupied bed counts, which can be calculated as (# patient days ÷ 365). • Rates vary for Acute Care, Psychiatric, Neonatal, Nursing Homes, etc. • Outpatient exposure is measured by numbers of visits × selected differentials • ER and Outpatient Surgical visits are considered higher risk than “Other” visits. Milliman USA

6. Estimating Historical Ultimate Limited Losses • Loss development • Frequency × severity • B-F using expected loss = industry loss cost × historical exposure • Experience Mod = compare actual losses to (expected loss × expected % reported). Multiply projected expected losses by selected Mod. Milliman USA

7. Projecting Ultimate Limited Losses • Divide historical ultimate limited losses by historical exposures • Trend the resulting limited pure premiums to the projection period • Select an ultimate limited pure premium for the projection period • May involve credibility weighting the indications based on the hospital experience vs. broader insurance industry experience • Multiply by the projected exposures to estimate the projected limited losses Milliman USA

8. Projecting Ultimate Total Limits Losses • Multiply selected limited loss estimate by an increased limits factor • Review historical losses in the excess layer for consistency with selected ILF’s • General Liability losses are sometimes included as a multiplicative factor (e.g., 1.10) • Adjust to reflect other coverage issues (e.g., aggregate limits). Milliman USA

9. Additional Issues to Consider for Self-Insureds • Many self-insureds fund at a higher confidence level than the actuarial best estimate (e.g., 75%) • Need to select frequency (e.g., Poisson) and severity (e.g., lognormal) distributions • Many self-insureds fund at a discounted level. • Need to select a payment pattern and discount rate. Milliman USA

10. Hypothetical Distribution of HPL Loss & ALAECumulative Distribution of Aggregate Losses -- $10 Million Per Claim Limit Milliman USA

11. Observations Regarding PA Tort Reform • Elimination of Joint & Several liability • Could be a big issue for hospitals if < 60% liable • Some say the law violates “single subject rule” • Certificate of Merit • May reduce claim frequency, increase severity • Collateral Source Offsets • Elimination of Venue Shopping • 7 Year Statute of Repose • No primary layer impact until Mcare is eliminated. • Patient Safety Initiatives • Requires written notification to a patient affected by a serious event Milliman USA

12. Observations Regarding FL Tort Reform • $500,000 per physician cap on non-economic damages ($1 million aggregate for all claimants) • Exceptions for death, permanent vegetative state, or other defined catastrophic injury ($1M per doctor) • $150,000 / $300,000 cap for ER physicians • $750,000 per hospital cap ($1.5 million aggregate) • Exceptions for death, permanent vegetative state, or other defined catastrophic injury ($1M per hospital) • D&T estimated a 7.8% “presumed factor” • Caps = 5.3%; Bad Faith Provisions = 2.5% • Rates are still increasing in FL, but increases are 7.8% lower than they would otherwise have been. Milliman USA

13. Questions? Milliman USA