Category Archives: Liability

Reserve considerations

Pantely-SusanHealth actuaries have been estimating incurred but not paid (IBNP) claim liabilities for decades. As claim payments moved from manual to electronic methods, payments processing has become quicker. This has caused IBNP to decrease as a percentage of total incurred claims. However, it is still critical to estimate total incurred claims before all claims are paid in order to evaluate profitability and set future premiums.

Typically, the IBNP estimate is based on completion factors developed from historical payment patterns. This methodology, however, can be volatile for the most recent months, with minimal runout. For recent months, a per unit trend analysis is typically used (such as monthly cost per member, per employee, per hospital day, etc.).

In order to improve accuracy of IBNP claim estimates, additional information can be used to inform the trend analysis for the recent months. This includes:

Working days. Working days in a month varies based on when weekends and holidays fall, impacting the availability of care as well as the claim processing capability of carriers. The impact on incurred services varies by setting. Hospitals empty out over holiday periods and specialists may work fewer hours on holidays and weekends. Prescription drugs have a pattern as well that varies by weekday, weekend days, and holidays. However, Medicaid nursing homes may be paid on a monthly basis regardless of the number of days or holidays in the month.
Claim payment pattern indicators. Traditionally, these include claim inventory, preauthorization, real-time reports from hospitals on inpatient days and/or admissions, and reported high-dollar claims.
Tracking the flu season. Wall Street investors follow the flu season to see the impact on health insurers. Higher-than-typical numbers of flu cases will lead to increased claims and vice versa. Some organizations track the flu at more granular levels, such as regional flu counts for high-risk members.
Weather. Snow days, flooding, and other weather-related events should be measured. These events can have an effect on incurred claims similar to additional holidays, and also can produce a pent-up demand impact later.
One-time events. Items that may impact claim processing such as system conversion or the transition to ICD-10 have the potential to impact claim payment patterns. System conversions often create significant claim backlogs and the potential for overpayments until corrections work through the system edits.
Seasonality. The seasonal curve for typical commercial business keeps getting steeper, with larger deductibles and maximum out-of-pocket expenses. This impacts the timing of incurred claims and the resulting IBNP significantly throughout the year, but typically it’s most exaggerated at year-end and the first quarter. Some specialty blocks or employer groups exhibit clear seasonal patterns. Dental plans, Medicare Supplement, school groups, and other cohorts present very different claim costs by month.
Benefit changes and risk scores. January 1 can cause major changes for Medicare, business related to the Patient Protection and Affordable Care Act (ACA), and some large plans. Benefit changes may have significant impact on cost-sharing and seasonality as noted above. A review of the change in risk score or monthly premium can help determine if the risk profile of membership may also be materially different from the prior month. These items could influence incurred claims and resulting IBNP estimates in the first quarter.
Comparison of prior completion factors. More sophisticated organizations will look not only at averages but at percentiles. Completion factors falling into higher/lower percentiles relative to prior months should be reviewed with more scrutiny.
Staffing changes. Looking at the number of claim payers working per claim submitted may be a useful metric for smaller plans that adjudicate their own claims.
Large claimants. It is often useful to estimate hospital costs on a contract-by-contract basis, taking into consideration stop-loss provisions and other hospital-specific items. Some plans perform analytics to determine if there is backlog in some key facilities, increased claim denials that are due to new policies put into place, and any changes in the claim adjudication process that can throw off prior relationships between inventory and actual claim payment.

Reserving can sometimes feel more like art than science. Many of these factors can improve your estimates, but what is good for some blocks of business does not always improve the estimates for others. A successful valuation team will also incorporate frequent monitoring, communication between pricing and forecasting personnel, input from claim payment personnel, and evaluations of the reasons for deviations from the expected.

Medical professional liability’s slinky effect

The recent medical professional liability insurance market has seen healthy profits for nearly a decade, but has been stuck on the same straight path of lower rates and lower levels of written premium during that time. As MPL companies’ rates continue to slowly erode, the market dynamic is similar to the stop-and-go highway traffic pattern dubbed “the Slinky effect.” While no one in the industry believes the current situation can last forever, any visible change in the current soft market is still some years off. Milliman’s Chad Karls provides some perspective in this article.

This article was first published in Medical Liability Monitor.

How will Prop 46 and ACA affect medical professional liability?

The medical professional liability (MPL) industry experienced sustained profitability in 2013. Profits are likely to continue over the next several years. There are a few market uncertainties like healthcare reform and California’s Proposition 46 that will test insurers’ current business models though. In this article, Milliman consultants Richard Lord and Stephen Koca explain how these issues may affect the MPL industry moving forward.

This excerpt provides some perspective:

Physician shortage?
The huge influx of insured individuals, which is expected to top 30 million by the time ACA is fully implemented in 2016, could lead to a shortage of physicians, who may turn over some of their duties to nurse practitioners or physician assistants. Lacking the same expertise as a physician, these providers may fail to diagnose or misdiagnose some condition. On the other hand, they may form more personal relations with patients, and that has been shown to reduce the likelihood of a lawsuit.

Under collateral-source payment rules, the ACA may result in lower awards, since the cost of future medical care would no longer be included in awards, thereby limiting MPL insurers’ exposure to the cost to future health insurance payments in an award, or it might have only a negligible impact, depending on how it is administered and the courts’ decisions.

These scenarios are actually less than a handful of the dozens of possibilities that can arise from the ACA. Any one of the ACA’s provisions is unlikely to upend MPL insurers’ cost structure, but in tandem, the layers and layers of issues stated or implied in the ACA could tip costs in a direction that might prove difficult to absorb.

The ACA, however, is only one of the uncertainties facing MPL insurers.

The California question
In November, California voters will decide whether the state’s landmark statute, which caps non-economic MPL damages at $250,000, will remain intact, as written. Enacted nearly 40 years ago, California’s Medical Injury Compensation Reform Act (MICRA) has withstood a series of constitutional challenges, the last of which was in 1985.

…But MICRA is now being challenged in a ballot proposal [Proposition 46] that would raise the cap on non-economic damages to more than $1 million.

If enacted, the proposal would raise the cap on any claim that is outstanding as of January 1, 2015. MPL insurers and self-insured entities would see their liability increase for any unsettled claim on their books, as well as future claims. In all likelihood, claim severity would increase, but the frequency of claims would almost certainly rise if litigation were viewed as a more attractive means of compensation than it now is.

This development has far-ranging consequences, given the size of the California market, but it could also signal a change in sentiment if other states decide to follow California’s lead—since California has long been a state that’s a bellwether for social and economic change.

According to the National Conference of State Legislatures, 35 states have some type of cap on medical professional awards. How many states might again follow California’s lead and challenge reforms?

These two articles detail the influence that Proposition 46 will have on the future of MPL insurers and healthcare providers:

CA Proposition 46: The end of an era for noneconomic caps?
CA Proposition 46: Undoing tort reform?

First quarter financial results for medical professional liability specialty writers

Based on the collective financial results of 81 insurers specializing in medical professional liability (MPL) coverage, another good year appears to be in the offing for 2014, even as profit margins will likely decline relative to the levels seen in recent years. Pricing pressure continues to be fueled by increasing surplus levels and the desire to maintain exposures against increasing competition and the potential migration of physicians to self-insured employment settings. The largest remaining uncertainty lies in the likelihood that prior-year reserve releases can be sustained to the extent observed in recent years.

For more perspective download and read this article.

The article was originally published in the July 2014 issue of the Medical Liability Monitor.

Medical professional liability industry update

The year 2013 was once again a year of financial growth for the medical professional liability (MPL) insurance industry, despite a continued decline in profitability. While the industry’s operating ratio remains well below 100%, it has increased noticeably relative to 2011, driven by a decline in reserve releases, increased expenses, and diminished investment income.

Despite this decline in profitability, the MPL industry again returned a substantial portion of its income as dividends to policyholders. Surplus also grew moderately in 2013, providing the MPL industry with additional capital support. MPL writers continue to confront the risk associated with a possible increase in inflation and continue to face uncertainties stemming from healthcare reform.

To get a more detailed picture of the state of the MPL industry today, Milliman’s Chad Karls and Susan Forray have analyzed the financial results of a composite of 38 of the largest specialty writers of MPL coverage using statutory data. The consultants have compiled various financial metrics for the industry in this article.

Reprinted from the Second Quarter 2014 issue of Inside Medical Liability, Physician Insurers Association of America. Copyright, 2014.

A decade of profitability: 2013 year-end results for medical professional liability specialty writers

The medical professional liability (MPL) market has sustained favorable financial results again in 2013. This article reviews the 2013 results overall, attempts to glimpse what the year-end results might have in store, and works to detect changes in the current trends that continue to produce stellar financial results for the MPL segment of the insurance industry.

MPL specialty writers, as a whole, enjoyed yet another outstanding year financially. Though the continuation of these outstanding financial results is unsustainable long-term, there is still no clear indication from the year-end 2013 financial statement data that suggests these trends are subsiding.

This article was originally published in the April 2014 issue of the Medical Liability Monitor.