Tag Archives: Richard Frese

Assess medical malpractice policies before acquiring physician groups

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.

Curtail ACA’s potential impact on self-insurance programs

The long-tail nature of professional liabilities and workers’ compensation claims make it difficult to gauge the effect that healthcare reform will have on self-insurance. A plan of action is needed though to help organizations value their self-insurance programs. Milliman’s Richard Frese recently authored an article in HFM magazine offering five strategies for lessening the impact of the Patient Protection and Affordable Care Act (ACA) on self-insureds.

Here is an excerpt:

Healthcare leaders will be better prepared to ensure that actuarial estimates will meet loss accruals and forecast needs by implementing these strategies.

Inform all parties of legislation updates and implementation. Although the components of the ACA have been determined, implementation has hit a few snags. Even with a strong effort to explain the proposed changes to the public, there have been multiple interpretations. Further clarification and revisions—and even repeal—are possible. Healthcare leaders should focus on keeping all parties—including the broker, actuary, auditor, third-party administrator, outside defense counsel, and captive management—involved in the self-insurance program apprised of any changes. In return, these parties also should communicate any changes with each other and with the organization’s senior leaders.

Gather opinions from various sources. Senior leaders of each provider organization may not share the same views as leaders of other organizations regarding how the ACA may affect their organization’s role and function. The leaders of each organization will want to ensure the organization’s service providers are on the same page and are working toward its goals and directions, particularly if strategic goals and directions have been revised because of the ACA. During these conversations, leaders also should share their interpretation of what is occurring in the industry.

Monitor loss activity. Healthcare leaders should work closely with risk managers, third-party administrators, and other claims personnel to track any changes in frequency and severity of reported claims. Service providers should be alerted immediately about any noticeable changes. It should be noted whether such changes are believed to be due to the ACA or a different cause, such as a change in claims handling. It will be critical to determine whether any loss change reflects an actual trend and is expected to continue or whether the change is related to a one-time event. Internal meetings also might be held more frequently to better monitor activity.

How can hospital and physician groups manage tail liability?

The creation of accountable care organizations (ACOs) is leading hospitals to acquire physicians rapidly. During the process hospitals should consider how a physician’s integration may increase tail liability related to medical malpractice insurance.

Richard Frese’s co-authored article “Managing tail liability” offers hospital and physician groups perspective on tail liability issues that may need to be reflected on the balance sheet.

Here are some specific tail liability considerations:

First, leaders should understand the level of tail liability exposure their physicians face, including exposure related to a physician’s specialty, FTE value, participation in outside activities (such as moonlighting), and prior insurance coverage. This consideration is particularly important when acquiring physicians and when preparing for a physician exit. For example, it is important to know whether the insurance program will provide coverage for prior acts or tail coverage when a physician leaves, and whether a physician will need to come into a program “clean,” with his or her tail liability covered by another organization.

Employed physicians usually are covered under occurrence-based medical malpractice policies. Some organizations may choose to cover employed physicians’ liability through a self-insured vehicle, such as a captive or risk-retention group, or through self-insured retention (a dollar amount that must be paid by the organization before the policy will cover a loss). Nonemployed physicians also may be offered such coverage through an insurance vehicle, but they must secure coverage on their own; the hospital itself cannot provide this insurance. In addition, some healthcare entities purchase commercial claims-made coverage for employed physicians, but will offer physicians the option to purchase occurrence coverage. This approach results in tail liability for the organization.

The article also details solutions that can help hospitals and physicians control these liability expenses:

Use a self-insurance vehicle. Self-insurance is an option, particularly when insurance prices are high during a hard market. Theoretically, an entity experiences savings through the profit, contingencies, and insurer’s expenses built into the rate. Self-insurance also allows an entity to maintain more control of the losses, because the carrier may not be involved until claims reach the excess layer. Pooled physicians might have the additional benefit of obtaining lower insurance rates. But there also is increased risk and variability with self-insurance, because cash flows may not be known up front as they are with commercial insurance. Administrative costs also may increase when claims previously monitored by an insurance company become the responsibility of the self-insured entity. Use of self-insurance also requires greater knowledge of underwriting, and actuarial estimates will be needed for funding future losses.

Consider combined limits between hospital and physicians. Programs that have separate limits for the hospital and physicians may find savings in having a single combined limit. This practice may not be feasible in some states with medical malpractice funds, depending on the rules, but for other states, there are clear advantages. First, programs that have single combined limits experience reduced legal expenses, because alignment of the hospital’s and physicians’ goals and incentives allows for joint defense of claims and reduced “gray boxes” of coverage. This approach also avoids internal situations where the hospital and the physicians blame each other for an incident, as well as situations where the hospital may be brought into a claim as a deep pocket. Combined limits also allow for more protection for physicians, because commercial coverage usually has lower limits.

Ryan Weber, of McGladrey, also contributed to this article.

Conversations with your actuary: Getting to the right number

Healthcare leaders understand their own organization’s insurance programs better than anyone else does. The challenge lies in effectively communicating a comprehensive description of the program to all parties, including the actuary, auditor, and broker. It is important for healthcare finance leaders to discuss with the actuary any changes to claims management, coverage or retention, financial reporting of losses, management goals, or other insurance or operational areas.

In this article, Richard Frese discusses the actuary’s role in providing and communicating independent estimates that can more accurately reflect the true exposure of an insurance program.

This article was published on hfma.org, the Healthcare Financial Management Association’s website.

Navigating the decisions of self-insurance financial reporting

Healthcare reform, mergers and acquisitions, expanding regulatory requirements, and downward pressure on reimbursement and margins create a challenging environment for healthcare management. Although self-insurance can help control total insurance expenses, staying up to date on the financial reporting requirements for this option can be difficult.

This article offers guidance on the key financial reporting issues for medical professional liability (MPL) self-insurance programs. Here is an excerpt:

The following practices will help in keeping on the right course toward full compliance in financial reporting.

Update the key parties whenever you make changes. Frequent conversations are beneficial. At minimum, you should have annual conversations with the actuary and auditor. If changes occur, in either the program or your loss experience, it is important that all parties understand all of the program changes that have been enacted by management, as soon as possible. Table 1 shows some common questions.

Create a checklist of requirements. The best way to stay “on top” of the requirements may be to use a single source that lists all of the requirements and indicates when each is due. In addition, it may make sense to determine who will complete each task and to have a strategy in place for efficiently completing the task.

Seek timely advice. Guidelines are best interpreted by experienced professionals who have the skills needed to understand the current practices and communicate any change from the past. Auditors and actuaries make every effort to update management on a timely basis of any changes that would affect the financial reporting of the entity’s liability, but you can help out by proactively asking for advice for any changes you find out about.

Request more frequent evaluations. When a program experiences adverse or favorable loss activity or undergoes multiple changes during a fiscal year, you can always ask for an interim actuarial study. You’ll need to determine your comfort level with the program’s current amount of activity, with the goal of reducing year-end “surprises.” Additional analysis may also be helpful during an audit.

Reprinted from the First Quarter 2013 issue of Physician Insurer Magazine, Physician Insurers Association of America.

Will ACOs increase medical malpractice claims?

Milliman’s Richard Frese has co-authored a new article on the financial reporting of medical malpractice self-insurance for the Healthcare Financial Management Association. Among other things, “Perspectives on Medical Malpractice Self-Insurance Financial Reporting” discusses how accountable care organizations (ACOs) may increase the frequency of medical malpractice claims.

Here is an excerpt:

Another trend that warrants monitoring is the emergence of accountable care organizations (ACOs) and the impact that such organizations will have on medical malpractice claims. Among the primary goals of ACOs is to improve integration of care, which should ultimately contribute to a reduction in medical malpractice risk. What remains to be seen is how independent healthcare entities forming ACOs will choose to manage medical malpractice risk (e.g., risk pools, captive insurance arrangements) and coordinate defense of medical malpractice claims. Some also argue that ACOs might increase the frequency of medical malpractice claims because patient expectations regarding quality of care will be heightened.

Read the entire article here.

Patrick Kitchen, of McGladrey LLP, contributed to this article.