Hospitals and health systems seeking to acquire physician groups can increase their negotiating power, and reduce overall claims costs, and more. However, these organization need to vet a physician group’s medical malpractice coverage thoroughly to better understand the financial implications involved with its acquisition.
In their article “Medical malpractice insurance: A key concern when acquiring physician groups,” Milliman’s Richard Frese and Andy Hoffman discuss the importance of assessing a physician group’s insurance policy. The following excerpt provides perspective on some coverage costs that hospitals should examine before executing an acquisition.
Several key costs must be estimated to provide management with the best information to make an appropriate decision. A critical cost that should be estimated is the unpaid claims liability—i.e., the amount the group is responsible for in the incidents that occurred up to a certain date. Medical malpractice is a long-tailed line of business, has losses that can vary drastically from year to year, and can have significant lags between the occurrence and reporting of claims. These factors can make the estimation of unpaid claim liability difficult.
In addition to estimating unpaid claim liability, which is essential, hospitals and health systems can benefit from other estimations that are less frequently performed. For example, to demonstrate the benefits of acquisition, the insurance costs can be estimated for the hospital and physician groups separately and combined. The projected future losses for the physician group can be estimated as a basis for comparing commercial insurance rates to determine whether it makes sense to retain the costs or purchase commercial coverage.
Considered together, the cost differences, benefits, and risk factors can help hospital and health system leaders decide whether acquiring a physician group makes sense. Failure to account for a physician group’s losses, especially if the group has had adverse loss experience, can be financially disastrous. However, by carefully planning for costs and undertaking proper risk management and consolidation efforts, an acquiring organization can ensure that a physician practice acquisition will be beneficial to all parties involved.