Medical professional liability: The other insurance market affected by health reform
The Patient Protection and Affordable Care Act (PPACA) of 2010 introduced changes to the healthcare delivery system that may have far-reaching effects on the medical professional liability (MPL) insurance market. While the PPACA could be overturned this summer by the Supreme Court, certain issues will continue to have a significant influence on both buyers and providers of MPL insurance regardless of the Supreme Court outcome.
A key element of the PPACA is the introduction of accountable care organizations (ACOs). An ACO has a formal legal structure that groups together healthcare providers, including primary care physicians, specialists, nurses,1 and hospitals, to provide integrated and complete care to patients.2 The ACO is held financially accountable for a predetermined budget for all healthcare costs for covered participants, so there is strong incentive to coordinate care and eliminate waste to achieve savings. If the ACO achieves certain overall performance goals, the savings are also shared among the healthcare providers. The expectation is that integrating care will improve the overall quality of care while facilitating the reduction of unnecessary expenditures; this should lead to favorable outcomes for both patients and healthcare providers.3 The ACO concept is being pursued both as part of Medicare and by certain commercial insurers.4
Given the momentum already gathering behind accountable care in some provider organizations, and the consensus regarding the role of better care coordination in improving healthcare efficiency,5 it seems possible that the accountable care movement would continue even without the PPACA in place. What does this mean for the MPL insurers? While better outcomes are expected for healthcare providers, the emergence—and likely persistence—of the ACO model will present challenges to MPL writers.
The challenge of accountability
First, ACOs could increase the exposure to professional liability claims. One of the stated goals of ACOs involves increased efforts to integrate services along the continuum of care with the goal of improving efficiency and quality of care, which could lead to a higher standard of care for providers. With likely changes in the care provided to patients by coordinated providers, MPL writers would need to consider resulting changes in claim frequency and severity when pricing insurance coverage; they would need to evaluate the net effect of opposing influences. For example, coordinated care should decrease medical errors while expectations of higher standards of care could increase claim frequency. Also, it is not clear whether coordinated care would lead healthcare providers to eliminate a greater proportion of catastrophic mistakes (reducing expected average claim severity) or to a reduction in “smaller” medical errors (increasing expected average claim severity).
The nature of MPL for ACOs will also likely be different from MPL in the past. As ACOs attempt to control costs, procedures determined to be “non-critical” will be reduced or eliminated. To the extent that this leads to fewer diagnostic tests, there could be increased exposure to liability claims that would be due to new failures to diagnose.6 Separately, there could be a shift between the indemnity and expense components of MPL claims; this could depend on whether ACO management is dominated by hospitals, physicians, or even insurers. Physicians typically support vigorous defense against liability claims in order to avoid a “record” of malpractice. If, however, decisions to settle claims are made at a corporate level by ACO management with less input from the physician, there could be greater efforts to settle claims early in order to manage costs. Early settlements that eliminate lengthy court battles could dramatically reduce the amount spent on defense costs. The integrated operations of ACOs, however, could also lead to coordinated defense efforts that are more successful in reducing the indemnity portion of liability claims.
As efforts to control costs spur the formation of ACOs and other consolidation activity (i.e., merger/acquisition) in the healthcare provider community, niche writers could be squeezed out of the insurance market. Carriers that focus solely on physician professional liability coverage will struggle as more individual physicians and physician groups are rolled into larger health systems and participate in the health systems’ insurance programs. Writers that focus on a single state may also have difficulty competing if consolidation of healthcare providers leads to more regional or countrywide health systems that require carriers with multi-state capabilities.
In addition, as health systems expand and cost containment efforts continue, there will likely be a greater comfort and willingness by care providers to retain more professional liability exposure. Primary MPL writers will find greater competition for premium dollars as the use of deductibles grows and self-insured retentions increase. Excess carriers and reinsurers, however, could find new opportunities as ACOs and other health systems explore the use of captives and other self-insurance mechanisms.
PCORI adds complexity
Another element of the PPACA that will influence the MPL market is the creation of the Patient-Centered Outcomes Research Institute (PCORI), which is focused on comparative effectiveness research. PCORI will concentrate on identifying the most effective medical treatments and preventive medicine7 and this will likely further encourage research already done by other organizations. As care providers (and patients) receive better evidence-based information, MPL writers will hope that improved patient care will result in lower frequency of liability claims.
It is unclear, however, if PCORI’s efforts and similar efforts undertaken by other organizations will be entirely favorable to the MPL market. If physicians rely on research developed by PCORI to the exclusion of other possible treatments, liability claims could arise that would be due to errors of omission. To the extent research indicates that the course of action prescribed by a physician is not the most effective, there would be an additional risk of liability claims. On the other hand, focus on evidence-based research could provide support in the defense against liability claims.
There are efforts underway to repeal PCORI, independent of the Supreme Court decision, but this is unlikely to have a major impact on the trend for better research on care effectiveness.
A state-by-state issue
The PPACA could have a more direct influence on the MPL in states that explore alternatives to tort reform. Section 10607 of the PPACA earmarked $50 million for grants to explore the potential impact of alternatives to caps on damages.8 Caps are the most common type of reform but are often criticized for neither changing the incentives of care providers nor differentiating between good and bad care by providers. Suggested alternatives include health courts, early offer plans, and disclosure/apology programs.9
Health courts would utilize specialized judges to decide cases based on input from court-appointed neutral experts. Together with preset timelines and schedules for compensation, this should both facilitate the legal process and lead to more consistent decisions. While health courts would not reduce the number of MPL claims, they should reduce the uncertainty related to claim severity for MPL carriers.
Early offer plans would allow defendants to pay for the economic damages within a short period (e.g., 90 or 180 days) from the time the suit is filed, which would help reduce costly court battles. This would provide prompt compensation to injured patients, who in exchange would agree to forego the pursuit of non-economic damages. This approach would address the majority of MPL claims that reflect medical errors but do not involve misconduct by the care provider.10 For those patients who do not accept the early settlement offer, the burden of proof would be higher (e.g., gross negligence), so patients would be discouraged from going to court except in cases of true misconduct. Similar to health courts, early offer plans would not necessarily reduce claim frequency, but they should improve the speed of claim resolution. Also, by reducing the frequency with which non-economic damages are sought, MPL claim severities and the corresponding uncertainty should be reduced.
Unlike health courts and early offer plans, medical error disclosure and physician apology programs do not require changes to the legal system, and they could impact both frequency and severity of MPL claims. Health systems have observed that disclosure of the error combined with an apology from the treating physician and hospital have reduced patients’ inclinations to pursue liability claims.11 Also, while disclosure/apology programs will not eliminate all claims, there appears to be positive correlation between apologies and smaller plaintiff awards. MPL writers would be wise to work with healthcare providers to coordinate disclosure/apology strategies in an effort to reduce frequency and severity of liability claims.
The MPL insurance market faces a number of issues that have emerged in recent years and intensified, and that are due to recent healthcare reform, but these challenges could be opportunities. Improved coordination of care offers the potential for fewer medical errors but also the expectation of a higher standard of care. Increased use of evidence-based medicine could further improve patient care while providing support in the defense of care providers.
If these changes in delivery can help healthcare providers to increase the efficiency of care, and if alternatives to tort reform can reduce the cost of claims once an error occurs, the MPL landscape could look very different in the near future.
1Jones, P. (April 2011). The nurse's role in accountable care. Milliman Healthcare Reform Briefing Paper. Retrieved May 22, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/nurses-role-accountable-care.pdf.
2Parke, R. & Fitch, K. (October 13, 2009). Accountable care organizations: The new provider model? Milliman Insight. Retrieved May 22, 2012, from http://insight.milliman.com/article.php?cntid=6056.
3Blumen, H. & Nemiccolo, L. (June 25, 2009). The convergence of healthcare quality and efficiency. Milliman Insight. Retrieved May 22, 2012, from http://insight.milliman.com/article.php?cntid=6061.
4Boyarsky, V. et al. (April 2011). ACOs beyond Medicare. Milliman Healthcare Reform Briefing Paper. Retrieved May 22, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/acos-beyond-medicare.pdf.
5Kipp, R. & Mattie, L. (July 2010). Controlling healthcare costs the old, new way. Milliman Healthcare Reform Briefing Paper. Retrieved May 22, 2012, from http://publications.milliman.com/publications/healthreform/pdfs/controlling-healthcare-cost-old-new.pdf.
6Karls, C. (April 11, 2011). New impetus to reform medical professional liability. BNA's Health Care Policy Report. Retrieved May 22, 2012, from http://publications.milliman.com/publications/pc-published/pdfs/new-impetus-reform-medical.pdf.
7Kliff, S. (January 18, 2012). PCORI: Funny acronym, serious work. Washington Post. Retrieved May 22, 2012, from http://www.washingtonpost.com/blogs/ezra-klein/post/pcori-funny-acronym-serious-work/2012/01/18/gIQAhSxk8P_blog.html.
10Video: "Professor Jeffrey O'Connell explains early offers medical malpractice plan." Retrieved May 16, 2012, from http://www.youtube.com/watch?v=QE3rC1DJlxA.
Medical professional liability trends