Last year, in the context of an already hardening insurance market, the effects of the COVID-19 pandemic left many medical practices in need of premium assistance, and insurers stepped up to provide it through credits, classification changes and deferred payments.
This year, we have seen most of those measures phase out and a return to the previous trajectory. While not all medical practices are quite fully recovered, most are getting there, and insurance carriers are responding accordingly. Deferred payments are coming due, and when policy renewal notices arrive, most include rate increases.
The many disruptions caused by COVID-19 make it difficult to predict what 2022 will bring, but for the foreseeable future, insurance in the medical field has entered a hard market, particularly for Medical Malpractice Insurance — MedMal for short, or Medical Professional Liability Insurance, as it’s more formally known.
With the broad trends in the industry moving in a negative direction and the risk of new exposures such as the extensive adoption of telemedicine and the long-term effects of COVID-19 yet to be determined, insurers will remain conservative until more information is available.
MedMal B.C. — Before COVID
To gain a better sense of where Medical Malpractice Insurance may be going, let’s look at where we’ve been.
Based on totals in the National Practitioner Data Bank (NPDB), paid medical malpractice claims in the United States were almost commonplace from 1992 through 2003, averaging around 14,000 per year. It was no coincidence that Medical Malpractice Insurance carriers during that period reported a net underwriting loss every year but two.
Beginning with 2003, the number of paid medical malpractice claims in the U.S. gradually declined until 2016, when it settled into a four-year plateau of around 8,000 per year. Improved risk management, advances in preventive medicine, consolidation leading to greater collaboration, tort reform making it more difficult to bring cases to court — all contributed to the decline. Not surprisingly, Medical Malpractice Insurance carriers reported underwriting profits for a nine-year stretch during that period, until a 2015 return to the red, where it has remained through the present. (See chart: HCL Industry Cycle.)
Following the same cyclical industry pattern as prior decades, the extended period of underwriting profitability from the mid 2000s onward led to increased competition and corresponding reduction in collected premiums. But for the past few years, the market has started to harden and medical practices have found themselves facing rising rates, decreased availability of coverage, reduced coverage limits, and heightened underwriter scrutiny and selectivity.
What happened? Why, with claims at a plateau, has Medical Malpractice Insurance become more expensive and harder to procure?
One answer: Escalating levels of loss severity. In 2003, the year when the steady decline in claims began, the average claim was about $275,000 per defendant, based on NPDB figures. By 2019, that average was up to about $420,000. (See chart: Countrywide loss trends.)
Many factors contribute to rising malpractice claim severity. In addition to social inflation, real inflation — specifically the rising cost of healthcare — plays a role as well: as healthcare costs go up, damages go up.
The Outlook Entering 2021
Here’s the outlook on Medical Malpractice Insurance as outlined in Alera Group’s Property & Casualty 2021 Market Outlook whitepaper, released in December 2020:
► After a decade of soft-market conditions, medical malpractice is returning to hard-market conditions. Net operating income declined some 63% while the combined ratio deteriorated from 102.3% in 2018 to 113.3% in 2019, resulting in AM Best giving the Medical Malpractice segment a “Negative Outlook.”
► A “Negative Outlook” from the largest financial rating agency in the industry, combined with industry losses and other influencing factors, will demand insurers employ higher pricing and tougher underwriting, and re-evaluate risks and a geographic claims climate in which underwriters will be willing to employ their capital.
► Pricing will necessarily continue to rise to cover ever-increasing loss costs and loss severity, and to compensate for lower industry-wide premiums resulting from the consolidation of physician groups and hospital employment of physicians.
► The trends for underwriting and risk selectivity as well as capacity are unfavorable to the insurance buyer. Underwriting results have deteriorated since 2019, and the prospects of profitability in 2021 are not encouraging due to:
- Unknowns related to COVID-19
- Litigation-driven loss severity trends
- Reductions in loss reserves set aside to pay future claims
- Inadequate rates
- Unfavorable judicial climates in some jurisdictions
- Reductions in earned premiums.
To get the entire Property & Casualty 2021 Market Outlook whitepaper, click the link below.
What You Can Do
Here are five ways to mitigate the effects of the hard market for Medical Malpractice Insurance:
- Make sure you’re with the right carrier. Each insurance company has different underwriting rules, and rates can vary dramatically based on medical specialty and county of practice. Work with an agent or broker with access to all carriers in the marketplace to ensure a comprehensive review of available coverage.
- Ensure all applicable discounts are in effect. Discounts are often available based on factors such as membership in an accountable care organization (ACO), specialty association, use of electronic medical records (EMRs) and other qualifications. A qualified broker will be able to provide a policy analysis to make sure that any discounts for which you’re eligible are being applied.
- Complete risk management activities. Carriers often require risk management courses or assessments to qualify for discounts. These are helpful in reducing risk, as well as in earning CME credits. Don’t hesitate to ask your agent or broker if you need assistance in preparing for and completing the activities.
- Optimize coverage for your situation. No two practices are exactly alike, so no two insurance programs should be identical. Work with an agent or broker who specializes in healthcare entities to make sure your policy is custom-designed for your practice. Consider whether it should have:
- Shared or separate limits for your corporation and allied providers;
- Individual or full-time equivalency (FTE) rating;
- Part-time coverage or specialty changes.
5. Understand the true cost of insurance. While seeing the bigger picture alone won’t save you money, understanding the complexities of your insurance program will enable you to make informed decisions. For example, calculating pure premium based on your organization’s loss history and comparing that to the premium you are paying, strategically approaching tail coverage using a combination of occurrence and claims-made policy forms, being able to identify gaps in coverage – this is what empowers you to get the best possible coverage at the lowest cost.
Here’s one more step, though it’s not directly tied to Medical Malpractice Insurance: Register for Alera Group’s April 28 webinar, Cyber Security: What to Do Before and After a Breach. The ever-rising number of data breaches and the expansion of telemedicine make the likelihood of a cyber intrusion greater than ever. Take part in our webinar to learn how to build a cyber-security strategy that will help you protect your practice.
About the Author
Jason P. Shah, M.D.
Managing Partner, Alera Group HPL Division
Jason P. Shah, M.D., is a Managing Partner and Partner Advisory Board member of Alera Group. Jason has a diverse background in medicine, information technology and business development. Since co-founding Flagship Healthcare in 2007 (now Alera Group’s Healthcare Professional Liability Division), Jason utilizes his physician background and insurance expertise to develop insurance programs as well as consult on risk matters for healthcare practices around the country. Jason studied Computer Engineering at the University of Illinois at Chicago and later completed his MD from the UIC College of Medicine.
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