Toxic Tail: Strategies for Managing
Old Exposures When Purchasing
New Practices
Cayman Captive Forum
ASHRM/IMAC Reciprocal Session
2:00pm – 2:55pm
December 4, 2013
Disclosure
We have no potential conflicts of interest to disclose


Mary Anne Hilliard, Children’s National, Washington DC
Larry Smith, MedStar Health
Disclosure
I would like to disclose the following relationship(s):
Mike Poe, Towers Watson
Actuary
I have agreed to present the material in a fair and
unbiased manner.
Introduction of Speakers/Panel & Topics

Introductions:
 Mary Anne Hilliard, Children’s National, Washington DC
 Larry Smith, MedStar Health
 Mike Poe, Towers Watson

Topics:
 What are the risk financing options?
 What are the risks and issues around “prior acts”
exposures?
 How do we address or manage these?
Background



Health care reform has and will continue to require
alignment with physicians:
 Bundled payments
 Quality
 Patient care delivery model – medical home
 Increase in employment
 Strong affiliations where employment not allowed
The issues and costs of the “prior acts coverage” for
physicians can be significant
Issues arise because of the predominance of claims
made coverage
Increase in Physician Employment
2013 Aon Benchmark

Non-University hospital systems are increasingly employing physicians, and
employing surgeons faster than other specialties. Hospitalists are the fastest
growing specialty at community hospitals.
Surgeons per
100 Acute Care Beds
Average Distribution of Specialties
(Non University)
16
Anesthesiology
14
12
Pediatrics
10
General Surgery
8
All Other Surgeons
6
4
Em ergency Medicine
2
OB/GYN Surgery
0
2006
2007
2008
2009
2010
Physicians (Non-Surgeons)
per 100 Acute Care Beds
Internal Med / Fam
Practice / Hospitalist
Other Non-Surgical
Specialties
60
50
40
30
20
10
0
2006
2007
2008
2009
2010
2013 Aon Benchmark Study
Employed Physicians and Cost Savings

Our study found that a majority of hospitals systems self-insure the primary
layer of coverage for their employed physicians.

Bringing the physicians into the risk financing program does appear to have
cost savings compared to leaving them in the commercial market due to
joint defense and reducing frictional costs.
Employed Physician Loss Rates
How Employed Physicians are Insured for
Primary Layer Coverage
$20,000
$18,000
$16,000
3%
Em ployed Physician
$14,000
Self-insured
24%
$12,000
Com m ercially Insured
$10,000
Class 1 Com m ercial
Prem ium (40%
Discount)
$8,000
Com bination of selfinsurance and com m ecial
coverage
$6,000
Class 1 Com m ercial
Prem ium (Manual)
$4,000
$2,000
$0
2007
2008
2009
Accident Year
2010
2013 Aon Benchmark Study
73%
To Be
Updated
Employed Physicians Claims Made
Considerations – Prior Acts and Tail Coverage

The overwhelming majority of programs provide claims made coverage for employed
physicians

Rarely do hospital systems provide prior Acts coverage to employed physicians, however,
a majority are providing Tail coverage.

Potential exists to have multiple arrangements with physicians as these benefits are
typically negotiated. Can be administratively burdensome and lead to underfunding if
promised benefits are not accurately tracked.
Provide Prior Acts Coverage to
Employed Physicians?
Provide Tail Liability Coverage to
Employed Physicians?
10%
Yes, in m any or all
instances
7%
29%
4%
Yes, in m any or all
instances
Yes, but only in
selected instances
Yes, but only in
selected instances
Never
Never
64%
86%
2013Benchmark
Aon Benchmark
2013 Aon 2013 Aon
StudyStudy
What are the Risk Financing Options?

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
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The hospital assumes the prior acts exposure in their
captive or self insurance program
Physician buys a tail policy from the current commercial
insurer
Hospital funds the purchase of the “prior acts” for the
physician
Hospital partners with commercial insurer to provide
“prior acts coverage” for the physician upon employment
In addressing each of the options, our panel will focus on the
issues of Exposures, Risk Management, Claims, and
Financing
A LT E R N AT I V E # 1
What Are The Exposures, Risk Management,
Claims, Financing Issues And Implications
When The Health Care System Assumes The
Prior Acts Exposure In Its Captive Or Self
Insurance Program?
Panel Discussion
ALTERNATIVE # 1
Exposures:
 We often have an understanding of the risks and exposures when the
physicians have had a strong association with the hospital
 majority of physicians’ practice at your hospital
 credentialing history
 claims experience where physician and hospital named in the same
suit
 Medical malpractice may be the main focus of evaluation – but what
about the other exposures of the professional corporation and its
employees?
 Current coverage form and status of current insurer
 Potential from compensable events which have not been reported
 How do we address the exposures of physicians with whom we have
not had a strong affiliation?
ALTERNATIVE # 1
Risk Management Implications:
 What pre-employment strategies do we initiate to better understand
the exposures? Risk management assessment of the practice?
 Is there a hospital policy on the assumption of prior acts?
 Are we treating all physicians the same?
 Is there an underwriting application and process in place?
 Are CMS and other quality indicators and practice patterns
considered?
 What is the interphase between risk management and the
credentials process?
 Use of independent underwriters
 Orientation to hospitals’ risk management program
ALTERNATIVE # 1


Underwriting and risk evaluation process should include the following:

Application

Interface with credentials process and quality indicators

Complete loss history

Complete practice history (i.e., location of previous practice activities)

Specialty (are you really going to insure an OB tail?)

Rating plan/actuarial input
Goal is to minimize chance of large claims reported after tail inception date

Highlights need for full and complete reporting to the previous carrier

Review incident/PCE reports to confirm notice provided

More complicated if carrier has a “demand” trigger

If so, gain understanding of incidents/PCEs for which no demand has
been received
ALTERNATIVE # 1
Claims Management Implications:
 Thorough review of all past claims
 Consent to settle as an employee vs. prior insurer
 Is the physician’s consent to settle even required?
 Joint defense of claims
 Do you have sufficient systems and claims professionals to
handle the claims?
ALTERNATIVE # 1


How are “prior acts” claims going to be managed?
 What if they arise from acts outside your hospital system?
What limits of liability for prior acts will the system provide?
 $1M/$3M or full program limits?
ALTERNATIVE # 1
Costs and Risk Financing Implications:
 Prior acts coverage can be very expensive regardless of who pays
for it
 150%–250% of mature claims-made premium
 Many physicians cannot afford or haven’t planned for this cost
 How does this cost factor into the “Fair Market Value” of the
transaction?
 Business case for employing physicians vs. cost
 If you pay for “Prior Acts,” do you also provide “Tail” when physician
leaves?
 1099 – revenue recognition of the value of prior acts for the
physician?
ALTERNATIVE # 1


This is third party business:
 Is it diminimis?
 Taxes, Excise, UBIT, Self Procurement
 Conduct of insurance business in violation of state laws?
 Can I use a trust?
 Do I need a front?
 Doing business on shore for an off-shore captive
 Allocation between “third party” vs. “my party” business
Potential difference between tail coverage factors for commercial
carriers versus true cost
 If rigorous reporting to prior carrier, true cost may be closer to
110%-150% of the respective annual mature claims-made
premium
ALTERNATIVE # 1

Captives probably are most cost effective alternative & have
the greatest flexibility
 Proper review and analysis has yielded success for a
number of programs
 Rigorous reporting to prior carrier
 Lower overhead
 Risk margin
 Investment income
 You are in control
 Key is understanding and mitigating risk before assuming it
A LT E R N AT I V E # 2
The Physician Buys Own “Prior Acts”
Coverage From Current Insurer.
Sounds Easy And Issues Go Away?
Panel Discussion
ALTERNATIVE # 2
Risk Management Implications:
 We still need to conduct our due diligence of the physician
and practice to include an assessment of exposures, risk
management practices, and claims for us to understand the
risk we are assuming on a going forward basis
 We need to underwrite the exposures we are adding to our
program
 We need to orient the physician to our risk management and
claims protocol, risk financing programs, allocation of costs,
and other requirements
ALTERNATIVE # 2
Claims Management Implications:


Transfers tail liability risk to commercial market
 Physician comes into self-insurance program clean
What are the limits purchased and who is the carrier?
 Does the hospital system weigh in?
 Are there exposures to the hospital if the physician is
under-insured for his tail liability?
 Financial strength of the commercial insurer/RRG?
A LT E R N AT I V E # 3
Health Care System Funds The
“Prior Acts” For The Physician
Panel Discussion
ALTERNATIVE # 3
Risk Management Implications:



We still need to conduct our due diligence in understanding the
exposures, and risk management issues and have a good
understanding of the claims
But under this alternative:
 Loss of control of “prior acts” claims – no joint defense
 Need to issue a 1099
 “Fair market value” of the transaction needs to be considered
What are the contractual obligation of either party if the physician
leaves?
 Any pay back provision?
 Do you provide “tail” coverage for the employment period?
ALTERNATIVE # 3
Risk Financing Implications:


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Pros:
 Loan serves as “Golden Handcuffs” during term of the loan
 Simple to administer
Cons:
 Greatest up-front cost for the health care system of any option
 Can reduce the amount of money available to purchase assets and fund salary
(Tail cost part of fair market value)
 Physician is “free” to leave the health care system at end of 5 years with no tail
liability
Employment agreement must address:
 Pre-employment tail liability arrangement
 Insurance coverage during employment
 Post employment insurance consequences
 Fair market value issues
 Personal income tax issues for the physician
ALTERNATIVE # 3



What are the limits purchased and who is the carrier:
 Does the hospital system weigh in?
Financing the tail premium is a major factor in the
employment deal
 Significant expense for the health care system
 Impact on fair market value for the practice
 Impact on the physician’s income from the transaction
There is a one-time cost for the health care system, but future
risk exposure is minimal
ALTERNATIVE # 3
Claims Management Implications:
 Pros:
 Transfers tail liability risk to commercial market
 Physician comes into self-insurance program clean
A LT E R N AT I V E # 4

Health Care System Partners With A
Commercial Insurer To Provide “Prior
Acts” Coverage For The Physician
Upon Employment
Panel Discussion
ALTERNATIVE # 4
Risk Financing Implications:



Commercial Options:
 Current insurer of the physician
 Your current insurance partners
 Other commercial stand-alone programs: Alterra, Lloyd’s,
Med Pro, One Beacon, Ironshore, Cooperative of American
Physician RRG, and others
 Portfolio transfers for programs if large physician group is
involved
Other flexible arrangements and partnerships with a
commercial insurer
Who is paying the bill?
ALTERNATIVE # 4

Pros:



No upfront tail cost
No tail cost at time of transaction, therefore increases potential portion of
“sale price” physician can realize as income
Cons:





Portion of first 4 years premium for the $1M claims-made policy is
imputed income to physician.
Complicated to administer
Complicated to understand
Do we need to establish a reserve on the financials of the captive to
account for the “new” employment related tail liability we would be
accruing?
How does a health care system deal with the tail liability when a
physician leaves employment? Remember a portion of it is the health
care system’s tail exposure by that time.
ALTERNATIVE # 4
Claims Management Implications:

Control of claims/joint defense

Flexibility to change insurers (reinsurers)

Denial of coverage?

Pros:


Commercial carrier responsible for physician’s “prior-acts” coverage and claimshandling
Cons:

First $1M of coverage is being provided by commercial company for pure premium –
health care system gets no benefit from positive claims experience

First $1M of each health care system employment related claim not within our control

Very complicated to administer (first $1M=commercial coverage; remainder of health
care system’s SIR, then excess)

Difficult to allocate insurance related responsibility for any large claim (i.e., physician
and health care systems named in claim – who pays what could be contested)

Do you need approval from excess carriers?
Conclusion
“Please utilize outside legal and tax counsel, run it by your
auditor, and work closely with your broker and actuary.”