Medical Professional Liability

1. Medical Professional Liability Melissa L. Greiner PHICO Group, Inc. September 19, 2000

2. Medical Professional Liability • Changing patient expectations • Financial condition of hospitals • Ancillary coverages • Directors and Officers Liability • Employment Practices Liability

3. Changing Patient Expectations Trends in liability are the result of: • Improvements in medicine and technology • Advertisement • Effect of media • Lottery mentality

4. Financial Condition of Hospitals • Competition for patient business • Shift of surgical procedures to outpatient facilities • Mergers, acquisitions, divorces

5. Financial Condition of Hospitals (cont) • Increased costs of malpractice coverage • Balanced Budget Act of 1997 • Pressure from other 3rd party payers • All of the above are resulting in: DECREASED INCOME

6. Impact on Hospital Insurance • Medical malpractice coverage impacts more obvious • Souring financials may lead to more losses for ancillary coverages, even in non-profit sector • Directors and Officers Liability • Employment Practices Liability

7. Directors and Officers Covers claims for wrongful acts committed by corporate directors, officers, agents (physicians) for their corporate decisions i.e., for alleged breach of obligations to the organization or for their actions and decisions on behalf of the organization

8. Directors & Officers Duties • Duty of Diligence - managing assets • Duty of Loyalty - no personal gain or conflict of interest with organization • Duty of Obedience - in accordance with statutes and terms of charter

9. Directors & Officers Coverage • No two insurance companies use exact same rating formula • Potential variation in estimated premium between two organizations with same ownership, class of business and size • As many as 80 variations of the D&O form exist in today’s marketplace • Exposurebase varies as well

10. Directors & Officers Coverage • Exposure bases: • Assets, Revenues • Number of Ds and Os • Number of Employees • “Pure” Claims-Made • Defense costs within limits of liability

11. D&O Coverage Evolution • Specifically for non-profit D&O, previously did not have: • Entity coverage • Employment Practices cover • Duty to Defend provision • Recent study reports two-thirds of D&O insureds purchase EPLI endorsement * * Source: Tillinghast-Towers Perrin

12. Directors & Officers • Claimants may include: • Shareholders * • Employees * • Competitors • Customers • Government

13. Employment Practices Liability • Claimants may include: • Full-time and part-time employees • Leased and temporary workers • Former employees • Applicant for employment

14. Healthcare D&O / EPLI • How are coverages unique to the health care industry? • How do claimants differ in the health care industry? • How are allegations different in the health care industry?

15. Healthcare D&O / EPLI • Higher ratio of non-profit entities • D&O often written with staff privileges protection • Coverages generally written on a smaller scale • Lower Limits of Liability • Lower exposure counts

16. D&O Industry Needs Source: Tillinghast-Towers Perrin

17. D&O Industry Needs Source: Tillinghast-Towers Perrin

18. Healthcare D&O / EPLI • Wide exposure variance within healthcare continuum • Large hospitals with significant exposure and financial history • First-time purchasers in the form of newly formed practices, offices, clinics • Newer entrants to the D&O market present more underwriting challenges

19. Healthcare D&O / EPLI • Common Claimants: • Employees / Health Care Providers • Government • Competitors • Customers (patients) • Shareholders (if publicly traded provider)

20. Healthcare D&O / EPLI • Common Claim Allegations: • Employment Issues • Antitrust • Fraud and Abuse • Breach of contract • Libel, slander, defamation

21. Employment Issues • Largest source of claims in health care D&O • Various ways to offer EPLI coverage • implicitly covered in D&O • endorsed onto D&O policy as sublimit • offered as separate coverage with separate limits

22. Employment Issues • Mergers and acquisitions of hospitals, health plans and/or managed care could result in terminations or reassignment • As revenues shrink, facilities (and employees) are downsized • Credentialing physicians to determine privileges

23. Employment Practices Liability • Common Claim Allegations: • Wrongful termination or demotion • Harassment, coercion, discrimination • Negligent evaluation or reassignment • Wrongful refusal to employ qualified applicant • Negligent hiring practices

24. Antitrust Within the context of attempting to control or monopolize: • Hospital denies medical staff appointment • Competing hospitals decide to merge or share services / assets • Non-affiliated providers commit collusion to affect reimbursement fees

25. Fraud & Abuse • False claims and billings • Over-utilization of claims for medically unnecessary services • Illegal remuneration in return for referral of business • Fraud by institutions - submission of false cost reports

26. Industry Loss Ratios

27. Reserving Considerations • Health care organizations are at greatest risk of being sued • Length of tail in private sector unknown due to wide variability in risk exposure • Low frequency, high severity

28. Reserving Considerations • Severity in private, non profit sector is a BIG UNKNOWN • Rules out frequency/severity projection techniques • Traditional link-ratio methods appropriate for insurers with history • Change in exposure base or risk type presents challenges

29. Reserving Considerations • Projection methods (i.e. BF) may be more suitable • Actuary must know and understand: • Coverages • Exposures • Uniqueness of own product, relative to the industry • No cookbook formula!