Medical Professional Liability
Melissa L. Greiner
PHICO Group, Inc.
September 19, 2000
Medical Professional Liability
Changing patient expectations
 Financial condition of hospitals
 Ancillary coverages

– Directors and Officers Liability
– Employment Practices Liability
Changing Patient Expectations
Trends in liability are the result of:
 Improvements in medicine and
technology
 Advertisement
 Effect of media
 Lottery mentality
Financial Condition of
Hospitals
Competition for patient business
 Shift of surgical procedures to
outpatient facilities
 Mergers, acquisitions, divorces

Financial Condition of
Hospitals (cont)
Increased costs of malpractice coverage
 Balanced Budget Act of 1997
 Pressure from other 3rd party payers
 All of the above are resulting in:

DECREASED INCOME
Impact on Hospital Insurance
Medical malpractice coverage impacts
more obvious
 Souring financials may lead to more
losses for ancillary coverages, even in
non-profit sector

– Directors and Officers Liability
– Employment Practices Liability
Directors and Officers
Covers claims for wrongful acts
committed by corporate directors,
officers, agents (physicians) for their
corporate decisions
i.e., for alleged breach of obligations to
the organization or for their actions and
decisions on behalf of the organization
Directors & Officers Duties
Duty of Diligence - managing assets
 Duty of Loyalty - no personal gain or
conflict of interest with organization
 Duty of Obedience - in accordance with
statutes and terms of charter

Directors & Officers Coverage

No two insurance companies use exact
same rating formula
– Potential variation in estimated premium
between two organizations with same
ownership, class of business and size
As many as 80 variations of the D&O
form exist in today’s marketplace
 Exposure base varies as well

Directors & Officers Coverage

Exposure bases:
– Assets, Revenues
– Number of Ds and Os
– Number of Employees
“Pure” Claims-Made
 Defense costs within limits of liability

D&O Coverage Evolution

Specifically for non-profit D&O,
previously did not have:
– Entity coverage
– Employment Practices cover
– Duty to Defend provision

Recent study reports two-thirds of D&O
insureds purchase EPLI endorsement *
* Source: Tillinghast-Towers Perrin
Directors & Officers

Claimants may include:
– Shareholders *
– Employees *
– Competitors
– Customers
– Government
Employment Practices Liability

Claimants may include:
– Full-time and part-time employees
– Leased and temporary workers
– Former employees
– Applicant for employment
Healthcare D&O / EPLI
How are coverages unique to the health
care industry?
 How do claimants differ in the health
care industry?
 How are allegations different in the
health care industry?

Healthcare D&O / EPLI
Higher ratio of non-profit entities
 D&O often written with staff privileges
protection
 Coverages generally written on a
smaller scale

– Lower Limits of Liability
– Lower exposure counts
D&O Industry Needs
High Technology
Health Care
Nondurable Goods Mftg
Durable Goods Mftg
Utilities
0
20
40
60
$ Millions
Median Limits
Source: Tillinghast-Towers Perrin
80
D&O Industry Needs
High Technology
Health Care
Nondurable Goods Mftg
Durable Goods Mftg
Utilities
0
100
200
300
$ Thousands
Median Premium
Source: Tillinghast-Towers Perrin
400
Healthcare D&O / EPLI

Wide exposure variance within
healthcare continuum
– Large hospitals with significant exposure
and financial history
– First-time purchasers in the form of newly
formed practices, offices, clinics

Newer entrants to the D&O market
present more underwriting challenges
Healthcare D&O / EPLI

Common Claimants:
– Employees / Health Care Providers
– Government
– Competitors
– Customers (patients)
– Shareholders (if publicly traded provider)
Healthcare D&O / EPLI

Common Claim Allegations:
– Employment Issues
– Antitrust
– Fraud and Abuse
– Breach of contract
– Libel, slander, defamation
Employment Issues
Largest source of claims in health care
D&O
 Various ways to offer EPLI coverage

– implicitly covered in D&O
– endorsed onto D&O policy as sublimit
– offered as separate coverage with separate
limits
Employment Issues
Mergers and acquisitions of hospitals,
health plans and/or managed care
could result in terminations or
reassignment
 As revenues shrink, facilities (and
employees) are downsized
 Credentialing physicians to determine
privileges

Employment Practices Liability

Common Claim Allegations:
– Wrongful termination or demotion
– Harassment, coercion, discrimination
– Negligent evaluation or reassignment
– Wrongful refusal to employ qualified
applicant
– Negligent hiring practices
Antitrust
Within the context of attempting to
control or monopolize:
 Hospital denies medical staff
appointment
 Competing hospitals decide to merge or
share services / assets
 Non-affiliated providers commit
collusion to affect reimbursement fees
Fraud & Abuse
False claims and billings
 Over-utilization of claims for medically
unnecessary services
 Illegal remuneration in return for
referral of business
 Fraud by institutions - submission of
false cost reports

Industry Loss Ratios
Direct Loss & LAE
Ratio
Schedule P - Other Liability Claims-Made
80%
70%
60%
50%
40%
30%
20%
10%
0%
PHICO
Industry
1995
1996
1997
Year
1998
1999
Reserving Considerations
Health care organizations are at
greatest risk of being sued
 Length of tail in private sector unknown
due to wide variability in risk exposure
 Low frequency, high severity

Reserving Considerations

Severity in private, non profit sector is a
BIG UNKNOWN
– Rules out frequency/severity projection
techniques
Traditional link-ratio methods
appropriate for insurers with history
 Change in exposure base or risk type
presents challenges

Reserving Considerations
Projection methods (i.e. BF) may be
more suitable
 Actuary must know and understand:

– Coverages
– Exposures
– Uniqueness of own product, relative to the
industry

No cookbook formula!