Casualty Actuarial Society
2002 Seminar on Ratemaking
March 8, 2002
Medical Malpractice - Advanced Topics
Hospital Professional Liability Rating
Prepared by:
Richard S. Biondi, FCAS, MAAA
Milliman USA
Page 1

Hospitals vs. Physicians Rating
• Hospital rating more complex
• More judgment required
• Market more competitive for large risks
• Hospitals less profitable than physicians
Milliman USA Page 2

Largest Physician Writers
Largest Physician Insurers
Medical Liability Mutual Ins Co
Medical Protective Co
The Miix Grp of Co & Affiliated P/C
Doctors Company Group
Illinois State Med Interins Exch
Scpie Indemnity Co
Norcal Mutual Insurance Co
Picom Group
Physicians Reciprocal Insurers
2000
Earned
Premiums
2000
Incurred Loss
+ LAE
358,537
258,354
213,787
194,894
164,673
153,811
142,417
134,107
131,029
1,751,609
281,352
173,760
309,467
133,838
145,558
89,092
108,524
171,295
106,258
1,519,144
Loss+LAE
Ratio
78%
67%
145%
69%
88%
58%
76%
128%
81%
87%
Milliman USA Page 3

Largest Hospital Writers
St Paul Fire & Marine Insurance Co
Health Care Indemnity Inc
Continental Casualty Group
Pennsylvania Hospital Ins Co Grp
American International Group
Farmers Insurance Group
2000 2000
Earned Incurred Loss
Premiums + LAE
620,857
243,168
226,706
218,870
167,352
135,144
1,612,097
923,954
336,510
202,997
236,610
195,163
105,472
2,000,706
Loss+LAE
Ratio
148.8%
138.4%
89.5%
108.1%
116.6%
78.0%
124.1%
Milliman USA Page 4

Rating Methods for Hospitals
1. Alternative Exposure Bases/Classifications
2. Experience and Schedule Rating
Milliman USA Page 5

Hospital Exposure Base
Four most commonly used systems:
1. Conventional System
2. Refined Conventional System
3. HIF System
4. Diagnosis System
Milliman USA Page 6

Exposure Base: Conventional System
Three Step Process:
1. Facility classified as:
• Clinic, dispensary, infirmary
(out-patient only)
• Convalescent or nursing home
• Hospital NOC (not otherwise classified)
• Mental institution
• Miscellaneous (blood banks, wellness centers, etc.)
Milliman USA Page 7

Exposure Base: Conventional System
2. Further classification:
• For profit
• Not for profit
• Government
3. Given type of facility: 2 main exposure bases:
• Occupied beds - average number of occupied beds per year
• 100 outpatient visits (annual)
• 2000 outpatient visits = 1 occupied bed
Milliman USA Page 8

Exposure Base: Conventional System
4. Employed Physicians:
• Share hospital limits
• Discounted rates
Milliman USA Page 9

Refined System
• Refined bed classifications: (1) neo-natal,
(2) obstetrical, and (3) other
• Refined outpatient visits: (1) surgical visits,
(2) emergency room visits, and (3) all other
• More responsive to risk characteristics of individual hospitals
Milliman USA Page 10

HIF System
• 1986-87 - Large HPL insurers (Hospital Insurance
Forum) commissioned actuarial study to analyze alternative rating loss
• Recommended Exposure Base:
(1) Acute Care Occupied Beds
(2) Psychiatric Occupied Beds
(3) Extended Care Occupied Beds
(4) Births
(5) Inpatient Surgeries
(6) Outpatient Surgeries
(7) Emergency Room Visits
(8) Other Outpatient Visits
Milliman USA Page 11

Diagnosis System
• 1994, St. Paul develops significantly different HPL exposure based system
• Inpatient exposures rated on a discharge basis by diagnosis type (elimination of length of stay)
• Outpatient visits rated by type (emergency visits, surgical visits, and all other)
Milliman USA Page 12

Diagnosis System
• Type of Diagnosis:
– 19 major categories (International
Classification of Diseases, WHO)
– Eight Rating Categories
– Examples: Group contains infectious and parasitic disease, blood and blood forming organic disease, skin and subcutaneous tissue disease
• Conversion Factors
Milliman USA Page 13

Variables Not Measured by
Exposure Bases
• Patient Demographics - Age, Education,
Income
• Specialty Hospitals - e.g. Manhattan Eye &
Ear
• Outsourcing of Hospital Functions - e.g.
Emergency Room
Milliman USA Page 14

Experience Rating Plan
• Plan attempts to more accurately rate an individual insured by using insured’s own experience to the extent it is indicative of future experience
• Plan must balance experience and credibility
Milliman USA Page 15

Experience Rating Plan
Three step process:
1. An experience loss cost is developed using the actual loss experience of the insured
2. A premium is developed based on the manual rate, which is the experience of all insureds
3. The results of the first two steps are combined and any necessary adjustments are made
Milliman USA Page 16

Characteristics of a Hospital
Rating Plan
• Use mature limited losses
• Reflect Trend, Development, ILFs
• Recognize General Liability coverage, if applicable
• Adjust for Employed Physician’s Premium
• Credibility standard
• Schedule Credits/Debits
• Aggregate Limitation Factor
Milliman USA Page 17

Employed Physician’s
Premium (EPP)
• EPP computed using current rates for each rating class and territory.
• Give credit for EPP losses already included in loss experience.
• Give discount to reflect lower cost of insuring a hospital employee relative to a self-employed doctor.
• Add EPP to both manual rate and experience loss cost.
Milliman USA Page 18

Credibility Standard
• Dependent on hospitals’ size and length of experience period
• Typical Formula: Credibility = N / (
N
+ 500) where N: bed equivalents for all experience period years combined
= Occupied beds +
Outpatient Visits
2,000
Milliman USA Page 19

Schedule Rating
• Credits or debits for (1) known characteristics of risk not reflected in the experience or rate, or (2) changes in the nature of the risk since the end of the experience period
• Usually subject to maximum credit/debit of 25%
Milliman USA Page 20

Examples of items used for
Schedule Rating
• Compliance/non-compliance with insurance company loss prevention recommendations
• Existence or lack of continuing education programs for staff
• Accreditation or lack of accreditation by Joint
Commission on Accreditation of Hospitals or
American Osteopathic Association
• Existence or lack of effective patient incident reports and analysis system
Milliman USA Page 21

Aggregate Limitation Factor (ALF)
• Factor to reflect expected amounts of loss that would exceed aggregate policy limit on an annual basis
• Function of annual expected loss and selected aggregate limit
• Calculated using simulation technique
Milliman USA Page 22

ALF Simulation Procedure
• Calculate ultimate loss based on recent experience (limited)
• Severity: 1. Select distribution (lognormal) and use limited expected value functions to estimate parameters.
2. Calculate limited average severity and trend to policy effective period.
• Frequency: 1. Calculate expected number of claims based on ultimate loss and average severity.
2. Select distribution (negative binomial) and solve for parameters.
• Simulate policy year number of claims and severity to calculate losses.
• Calculate ratio of limited to unlimited loss = ALF.
• Repeat until convergence.
• Adjust for ALAE
Milliman USA Page 23

Nursing Homes
• Once rated as class of hospitals
• Free standing vs. part of hospital
• Rate per resident was 5% - 10% of acute care hospital bed rate
• Today much higher: 50% + relative to acute care hospital bed rate
• Biggest increases in Florida, Texas,
Southern US
Milliman USA Page 24

Nursing Homes
• Nursing Home Classes:
– Skilled Nursing Care
– Intermediate Care
– Residential Care
– Independent Living
Milliman USA Page 25