FPA and MedPartners Bankruptcies Raise New Concerns Over Claims-Made Malpractice Insurance
By Richard "Rick" Mortimer, Jr. - HealthCare Professionals' Insurance Services
Published in Cost & Quality Quarterly Journal - June 1999
Physicians employed by managed health care organizations that are struggling to survive financially are at risk of losing more than just their jobs. They may lose their entire life's savings!
Many health care industry observers are predicting that the recent bankruptcies of FPA Management, Inc. and MedPartners Provider Network, Inc. of California are just the beginning of an overdue shakeout of managed care organizations. Fearful of losing market shares, MCO administrators have been reluctant to increase their benefit plan premiums. Instead, many are struggling to earn a profit by reducing overhead expenses and cutting back on plan benefits and some say patient services. Spurred by mounting complaints from patients and physicians alike, regulators and legislators throughout the country are closely monitoring all health care plans and stepping in to take control of those organizations on the brink of financial failure. The storm flags have been hoisted and physicians employed by MCOs are urged to take heed.
California's Governor Gray Davis is expected to take responsibility for regulating the 116 MCOs in California away from the State's Department of Corporations. Patients' rights groups and lawmakers, argue that while the DOC or the Department of Insurance may be able to monitor financial operations, neither have the medical expertise required to adequately supervise MCOs. Advocates of change are encouraging Davis to create a new commission that will have an advisory panel composed of members representing doctors, insurers, patients and regulators.
Because MCOs typically assume responsibility for protecting their employed physicians against malpractice claims, one of the most critical questions facing those employed by bankrupt MCOs is how well they will be protected. Despite the determined efforts of lawmakers to protect the interests of MCO patients and physicians alike, it is a bit na´ve to believe that regulators or bankruptcy trustees will be able to provide any assurances adequate funds will be available to settle malpractice claims. If there isn't enough money to pay malpractice insurance premiums or fund self-insured plans, injured patients will find the compensation bag empty. Their only source of recovery will be their treating physicians' personal assets.
Before the malpractice insurance crisis of 1975-76 and the introduction of the "claims-made" policy form, physicians had little to worry about after they paid their malpractice insurance premiums. They had the security of knowing their "occurrence" policies would protect against claims filed long after their policies had expired by patients they treated while their policies were in effect. Unfortunately, insurance actuaries had not anticipated the spiraling increases in frequency and severity of claims that in the early 1970s began to drown underwriters in pools of red ink. The crisis developed when carriers reacted by either withdrawing their policies from the marketplace or increasing their premiums beyond affordability.
Physicians throughout the country solved the availability crisis by forming their own "not for profit" insurance companies, disparagingly referred to by the commercial carriers they replaced as "bedpan mutuals". The physician owned companies forestalled the affordability issue by only offering claims-made policies. Unlike the occurrence form which requires carriers to charge enough premium in each policy year to pay for all claims incurred during the year regardless of when reported, premiums for claims-made policies are conceptually computed on a pay as you go basis. Underwriters need only collect enough premiums to pay claims that are reported during the policy period. Typically, the premium for a first year claims-made policy will only be about 20% of the premium required for an occurrence policy. That's the good news!
The bad news comes in bits and pieces. Remember, claims-made policies are designed to provide protection against claims that arise out of services performed by the insured after a specified date, commonly referred to as the "retroactive date", and that are asserted prior to a policy's expiration date. The first bit of bad news is that premiums automatically increase incrementally each additional year following the retroactive date. Five to seven years after the retroactive date the rates "mature" and the premium charged will only be marginally less than that that of an occurrence policy.
The second piece of bad news comes when claims-made coverage is either involuntarily not renewed with the same carrier or is dropped altogether. To assure no gap in protection occurs between a policyholder's original retroactive date and the effective date of the replacement carrier's policy, a claims-made insured generally has two choices. By regulatory fiat, underwriters must offer their insured the right to purchase an endorsement or separate policy that extends the amount of time allowed to report claims after the policy's termination date. Therefore, the policyholder may elect to purchase "tail" coverage from the retiring carrier, or buy "prior acts" coverage from the new carrier. When policyholders are forced to change carriers, they must weigh the cost of purchasing tail coverage against prior acts. Regardless of the choice, their insurance costs typically increase significantly. Such unexpected increases can have a devastating effect upon MCOs already strained financially. The greatest insult occurs when the MCO must be liquidated and there isn't enough money to pay for tail coverage or supplement its self-insured fund to pay claims reported in the future.
Physicians are urged to find out as much as they can about the type of malpractice funding mechanism that their employers have in place. Those employed by organizations that are self-insured or have large deductibles bear the greatest risk of losing their personal wealth if their MCOs declare bankruptcy. There is also a significant risk when MCOs do not set aside funds to pay for tail protection in the event they get into financial trouble or are forced to change insurance carriers and cannot find a carrier willing to provide prior acts coverage. Although most underwriters are willing to allow their policyholders to pre-fund the tail premium, MCOs paying matured premiums and otherwise strapped for cash seldom take advantage of the option.
Physicians need to check the terms of their employment agreement to determine who is responsible for obtaining and paying the premium for tail coverage upon termination of their contract. Even physicians who were previously employed by a currently troubled MCO should check their agreements. Examples of types of commonly found arrangements follow.
Many MCOs address the tail issue by agreeing to keep terminated physicians covered under their existing plan for claims that may arise out of services rendered during the periods of their employment. Whether insured or self-insured, this type of agreement is fine as long as the MCOs are able to perpetuate their funding mechanisms. It doesn't take much imagination to understand who will bear the burden when a defunct MCO cannot pay the premium for, or otherwise fund, tail protection for its physicians.
Typically, insured MCOs make arrangements with their carriers to provide tail coverage for their terminated physicians. Depending upon the reason for termination, the MCO may pay all or only a part of the premium. Under this type of arrangement, if the MCO is bankrupt, the physicians' exposure is limited to payment of the MCO's share of the premium and applicable deductible.
Some MCOs assume no obligation for providing or paying for tail protection for terminated physicians. Although the arrangements discussed above may appear to be more attractive during initial employment contract negotiations, physicians may find some comfort in knowing what to expect and being able to plan accordingly.
The American Medical Association's publication "Medical Professional Liability Insurance: The Informed Physician's Guide to Coverage Decisions" provides suggestions for questions which physicians should ask about malpractice protection provided by someone else.
- What type of malpractice protection is provided?
- Is it insured or self-insured? If insured, by what carrier? If self-insured, is the plan financially sound?
- Is coverage occurrence or claims-made?
- Is coverage provided for me personally, or will I be covered on a slot basis?
- Will it cover me if I attend to patients outside the entity?
- Can my present malpractice coverage be continued, or will I be required to change?
- If I change, can the same retroactive date be carried through to the new program?
- What are the limits per claim? What is the annual aggregate? Do the limits apply to me individually or are they shared?
- Are there any deductibles? How much? Who is responsible for paying the deductible?
- If my contract is terminated, what protection will I have for claims filed after I leave?
- If tail coverage must be purchased, who will pay the premium? How much will it be?
- What are the terms of the tail coverage? Limits? Deductibles?
- If the entity becomes insolvent, can I buy a tail policy from the entity's carrier?
These are but a few of the many critical questions that should be asked before agreeing to accept coverage under any insurance plan provided by an MCO or similar organization. Ironically, most of them would not be necessary if the doctor owned companies had not strayed from their original concept of issuing separate policies to each physician they insured. Initially, every doctor, whether in solo practice or a member of a partnership or other form of group practice, received a separate policy priced on a solo practice basis. Memories of red ink faded as underwriters became more comfortable with their claims-made pricing formulas. The proliferation of group practices and a variety of increasingly large managed care organizations stimulated the carriers' competitive juices. In order to compete, underwriters rationalized that they needed less money to insure a group of doctors under one policy than a similar number under separate policies. They depersonalized their policies by creating "rating slots" and other tail premium deferral mechanisms when a departing doctors position was replaced. The slot concept lost favor to even more creative plans when underwriters started giving rate discounts based upon group size and other criteria of dubious significance in an overly competitive marketplace.
Perhaps the best way to give employed physicians the security they need is to borrow from the past. If regulators would require MCOs, groups and similar organizations to obtain separate policies for each employed physician, and they mandated that the policies had to be transportable, doctors would only have to worry about paying their individual premium if they changed employers for any reason.
The issues are complex and it will take a long time for bureaucrats to find a solution acceptable to all factions. Physicians concerned about their MCOs' financial stability cannot afford to wait. They are encouraged to seek the advice of a malpractice insurance specialist and their personal attorney before its too late. As the saying goes; an ounce of prevention is worth a pound of cure!
Rick Mortimer is Executive Vice President of HealthCare Professionals' Insurance Services of Brea, California, specializing in medical malpractice insurance and alternative risk funding mechanisms for large group practices and integrated health care delivery systems.