A Risk Financing Focus: Physician Group Practices and Integrated Delivery Systems

by Rick Mortimer

HealthCare Professionals' Insurance Services, a division of
R.W. Mortimer & Associates Insurance Agents & Brokers, Inc. Brea, California


INDEX
Executive Summary
Preamble
The Changing Business of Health Care
The Malpractice Insurance Business
Financing Risk
Risk Management for Health Care Provider Organizations
The Role of Insurance Brokers
The Alternative


EXECUTIVE SUMMARY

RISK MANAGEMENT FOR THE HEALTH CARE INDUSTRY

For over 25 years, HealthCare Professionals' Insurance Services (HCP) has specialized in the design and procurement of risk transfer programs for health care providers. By staying ahead of the evolutionary changes taking place in the business of medicine, our team of insurance professionals understands and is able to anticipate, the special needs of the new generation of blended healthcare benefit plans and provider delivery systems. We are proud of the reputation we have earned as an innovator of insurance plans and alternative risk financing programs tailored to meet the specific needs of solo practitioners, group practices, and large healthcare provider organizations.

This document provides a brief history of the changes that have occurred in the business of medicine and our perception of the financial challenges confronting the healthcare industry as it moves forward in the new millennium. We have observed that each change in the nomenclature of the healthcare delivery system that has taken place has been accompanied by new theories of tort liability. Our paramount concern is how individual doctors are unexpectedly being affected by the shift of the financial responsibility for their medical negligence to their corporate provider organizations.

We focus on the historical use of insurance and the traditional role of insurance brokers to emphasize our position that the new generation of health care plans and provider systems cannot afford to purchase their property, casualty, and professional liability insurance in a "business as usual" fashion. We encourage healthcare plan managers to add "fee-for-service" insurance brokers to their teams of independent legal and financial advisors.

By charging for our services on a fee basis, we have eliminated the conflict of interest inherent in tradition commission-based method embraced by most insurance brokers. By not relying on insurance carriers' payment of commission as our sole compensation base, our clients have the comfort of knowing that we truly work for them. We do not sell insurance to earn a commission, we work on behalf of our clients to procure only the insurance they need. By working for our clients on a fee basis, we offer them the added benefit of being able to access virtually every segment of the medical malpractice insurance marketplace including direct writers, provider-owned carriers and traditional commercial insurance companies.

By including HCP on their team of independent advisors, clients are not only able to take advantage of HCP's existing carrier relationships, broad base of knowledge and expertise gained through serving the needs individual practitioners, small and large healthcare provider networks and groups, they are also, with rare exception, able to reduce the costs of their risk financing programs.


PREAMBLE

Since 1959, R.W. Mortimer & Associates has been helping families and business owners meet their needs for financial security and peace of mind through the purchase of insurance. As our company grew, our founders recognized that one of the keys to its success was the ability to provide a level of professional expertise and personalized attention and service generally superior to that offered by its competitors. They realized they could increase our company's competitive edge by catering to the specialized needs of selected industries.

The medical malpractice crisis of 1975-76 presented a unique opportunity to specialize in the healthcare industry. To help resolve the crisis, our principals played a key role in the formation of a doctor-owned, reciprocal insurance company to fill the void left when most commercial insurance underwriters stopped writing medical malpractice insurance policies in California. Our HealthCare Professionals' Insurance Services (HCP) division was formed to meet the special insurance needs of physicians, surgeons, and other healthcare providers and organizations.

During the past 25 years, HCP has earned recognition in the healthcare and insurance industries as a leader in the creation and implementation of innovative solutions to the management of financial risk for large group practice health care providers and other similar organizations. This paper shares our insight into meeting the insurance and risk management needs of the changing healthcare industry as it moves forward in the 21st century.


THE CHANGING BUSINESS OF HEALTH CARE

It has been estimated that prior the 1975-76 medical malpractice insurance crisis, over 90% of all physicians and surgeons were either in private practice or constituents of a two or three member partnership. Personalized attention was the embodiment of patient care and house calls were common.

When doctors went on strike to protest the rising cost of malpractice litigation and insurance, the public was rudely awakened to the realities of the business of medicine. Patients found their healthcare bills skyrocketing as their doctors and other providers raised their fees to recover their increased costs of insurance. The cost of care was compounded as providers added charges for diagnostic tests and examinations performed principally to help them avoid being accused of malpractice. And, the doctor-patient relationship began to erode.

Patients were pummeled from two sides by the rising cost of healthcare. They were not only forced to pay more for their health insurance, their family budgets were also effected by new policy exclusions and reduced benefits for diagnostic services precipitated by insurers. Families that had never failed to pay their medical bills began to find it difficult, if not impossible, to meet their obligations.

Doctors and other providers were also caught in a financial squeeze. The pressure of increased operating costs, including the expense of keeping pace with technological advances in their practices, was compounded by their inability to collect their fees in full. Providers only had one of two choices; either take their patients to collection, or write-off their unpaid balances. Either way, they recognized that the underlying problems would not be solved until they could find ways to reduce the cost of their services.

Two solutions evolved. First, solo practice physicians and surgeons clustered into groups to spread their overhead costs and relieve them of distracting administrative responsibilities. The group practice concept was not only designed to reduce the cost of healthcare but to tend to patients' needs more efficiently by giving them access to a variety of different specialists at one location.

Second, entrepreneurial physicians planted the seeds of a new species of group practice that blossomed into health maintenance organizations (HMO), physician hospital organizations (PHO), preferred provider organizations (PPO), independent practice associations (IPA), physician practice management companies (PPM) and managed care organizations (MCO). Collectively, they are referred to as provider organizations (PO).

During the early 1990s, politicians moved healthcare reform to the top of their list of priorities. Threats of nationalized healthcare and a universal payment system challenged the medical establishment and the healthcare industry to bring down costs or lose the free enterprise delivery system. As a result, the flower of acronyms proliferated at an even faster rate and Wall Street applied the needed fertilizer.


Wall Street saw the opportunity to make money by supplying the capital to bring medical and health insurance providers together under one financial umbrella. In a move towards 24 hour healthcare, health insurance underwriters joined forces with workers compensation insurance carriers to provide an umbrella of benefits. The public trading of PO stocks served as a catalyst to move an increasing number of doctors out of private practice and to become employees of wholly-owned subsidiaries or independent groups managed by POs.

Since the mid-1990s, the number of employed people enrolled in HMOs and other types of employer provided healthcare benefit plans has been steadily increasing. It is presently estimated that over 60% of the individuals and families protected by employer sponsored plans are enrolled in HMOs or similar plans. Initially, businesses benefited from the significant reductions in costs that were achieved when the plans they selected convinced the healthcare providers to accept a flat monthly fee based upon the number of enrollees rather than receive payment based upon the traditional fee-for-services rendered paradigm. By 2000, employers had become concerned by their employees' complaints with the quantity and quality of care provided by their HMOs. Businesses recognized that the HMOs had squeezed everything they could out of doctors, hospitals and other providers and that they could not expect them to deliver the quantity and quality of care required without paying more. To find additional savings, business then shifted its focus away from the providers and onto the HMO plans themselves.

Business expects HMOs and other POs to operate efficiently and cost effectively. However, employers understand there is a trade-off for any savings they may achieve by accepting a plan that is not able to deliver the quality or quantity of healthcare needed. Although they realize their overall operating costs can increase due to lost productivity caused by employee illness and disgruntlement, there is a limit to how much they can afford to pay. As a result, HMO and PO managers are under intense pressure to remain price competitive.

In addition to market pressures, HMOs and other healthcare plans are being forced by bureaucrats to broaden the scope of healthcare services that are covered under their benefit plans. Many POs have failed financially and untold others are struggling for survival because they have not been able to pass the full amount of the additional costs to their enrollees by increasing their premiums.

If HMO and other plans administrators cannot find ways to reduce their operating costs without sacrificing the quality and quantity of care delivered, an increase in the number of medical malpractice complaints is inevitable. The medical malpractice insurance industry is already feeling the affects. During 2000, it experienced one of its worst years since the 1975-76 crisis. Many underwriters have withdrawn from the market while most others are tightening their underwriting standards. All are increasing their premiums significantly.

Every healthcare provider, regardless of specialty, practice structure or affiliation, must evaluate their existing malpractice risk financing plan to determine what can be done to minimize their costs. In the next section, we look at the more common methods.



THE MALPRACTICE INSURANCE BUSINESS

Prior to the 1975-76 crisis, commercial insurance companies collected an estimated 80% plus of the premium dollars paid by healthcare providers for malpractice insurance. In response to the commercial insurers' demands for overwhelming premium increases, doctors formed their own mutual and reciprocal insurance companies and cooperative underwriting facilities. Overnight, the "bed pan mutuals" (so-called by their commercial carrier competitors) captured the individual physician and small group market by convincing doctors to replace their expensive occurrence-type policies with the new claims-made coverage model, which offered the lure of lower operating overhead of their non-profit status, which would be passed on in the form of lower rates.

Other than changing to the claims-made policy form, by and large the new companies carried on the commercial underwriter's practice of catering to the needs of the individual physicians and surgeons who dominated the healthcare market place. When presented with requests for proposals from physician partnerships and other groupings, some struggled with the concept, and many continued to issue separate, stand-alone policies to each individual doctor, or refused the larger clinic opportunities. Carriers who specialized in covering hospitals and larger clinics avoided extending individual doctor coverage under their policies to independent physicians and surgeons who had been granted staff privileges by their hospital and/or clinic policyholders, as they did not view these physicians as a direct corporate risk.

The changes in the way healthcare protection is purchased, and the delivery of care by the accelerated growth of large group practices and managed care facilities forced malpractice insurance underwriters to rethink the way they do business. Policies and services originally designed for individual practitioners and small groups do not fully meet the needs of providers that require protection for their corporate interests. Particularly the new demands for creative financing options for larger numbers of physicians under one buyer. Many underwriters recognize that the malpractice exposure can be more accurately quantified when significant numbers of doctors are required to conform to defined treatment standards and are paid based upon patient volume rather than for services rendered. However, this change brought about an increasing numbers of medical malpractice cases of failure to diagnose attributed to the outgrowth of managed care.

Until recently, many aggressive underwriters were willing to gamble their surplus to capture a share of the premium pool and related services paid by large managed care, group practice and integrated delivery facilities. Others continue to be cautious about taking on large groups of physicians at discounted rates, as losses grow disproportionately to historical trends. Not only did a significant number of commercial carriers reentering the market, an increasing number of doctor-owned companies previously committed to underwriting primarily individual practitioners and small groups in single states tailored and priced their policies and services to the specific needs of large groups, hospitals, and integrated systems.

But times have changed. During an extraordinary 12-year long soft market, underwriters got sloppy. Mesmerized by the perfume of seemingly endless increases in premium income,

underwriters ignored the growing stench of mounting losses caused by lax underwriting practices
and giveaway pricing. The pungent odor of pools of red ink has become more than carriers can bear. They no longer have a choice. They are struggling to get their combined operating and loss ratio in the black to avoid joining the ranks of PIE, PIC, Frontier and other recently failed underwriters.

The medical malpractice insurance market has firmed and will continue to harden as underwriters shun marginal risks, increase prices for those they accept, or, as is happening in some regions, leave the market all together. Shades of 1975-76, some states are experiencing a full-blown malpractice insurance crisis because of lack of availability and affordability.

Simply put, malpractice claims costs are raising and carriers can't survive without increasing their rates. You know things are getting tough when Saint Paul and CNA, the first and second largest underwriters of med-mal coverage in the country, put national moratoriums on new business in mid-2000. That's a lot of lost market capacity. More was lost when SCPIE, a major carrier in California with a nominal market share in other states, placed a moratorium on new non standard business.

Unfortunately, those doctors, hospitals and groups practices that purchased their coverage from low cost carriers that have failed, are now paying the price of being trapped in the quagmire of the bankruptcy courts. Those who were wise purchased their policies from carriers protected by state guarantee funds. Those who were a bit greedy and purchased their protection from a malpractice trust, risk retention group, or surplus lines carrier not protected by a guarantee fund are learning first hand that you get just what you pay for. Buying strictly on price was tantamount to being conned. The deal that sounded too good to be turned down, should have been.

The ever turning cycle of pricing phases has once again rotated to the catch up phase. How long it will take for carriers to return to profitability is anybody's guess. Some have taken their lumps and merely withdrawn from the market. Others will follow their lead. Most are trying to survive by bringing in new managers to search for the magic potion that will cure their underwriting ills and turn red ink into gold. Unfortunately, buyers can't avoid being pinched by the slowly grinding gears driving the hard market cycle.

As carriers leave the market and capacity shrinks, the good old days of a buyer's market are rapidly fading into history. Buyers used to having carriers fight for their accounts are feeling like members of a leprosy colony. Besides being asked to pay higher prices, they are finding it increasingly difficult to even get underwriters to talk to them. Seller's are no longer willing to underwrite using another carrier's application or a broker's spreadsheet. If a submission is not on the seller's own application form with a "wet" signature it often ends up in the black hole of a circular file. Quotes for individual doctors and small groups given within a couple of days are a thing of the past. Large group practices and complex provider organizations that used to get their quotes within a week or two are now waiting a month or more!

Most service problems being encountered can be tied directly to the shrinking number of carriers still writing medical malpractice coverage. Instead of staffing up to handle the flow of new applications, most carriers are attempting to absorb the increasing workload without increasing their operating costs. With more applications, quotes, policies issued, phone calls handled, and
more claims from more customers, there is a developing service crisis that underwriters don't seem to care if it affects their customers. Typical of past hard markets cycles, carriers are so focused on trying to get into the black that they have lost sight of the importance of service to buyers, particularly those with profitable loss ratios that they need to keep.

During the go go 90's soft market, it was easy to avoid a rate hike by merely moving your coverage to a different carrier. You didn't even have to worry about buying "tail" coverage because your new carrier would fill the gap with prior acts protection. Today, few carriers are willing to bet that their luck will be better than the carrier you have, or want, to leave. There are things you can do to minimize the impact on your purchase of malpractice insurance. You may not be able to avoid premium increases altogether, but you can prepare for them. Here are a couple of things you should know.

v First, know if your present carrier has been losing or making money on its med-mal business.
v Next, know how your present carrier feels about your account. Does the carrier like your specialty? Are they making money on your account? Has your account been profitable to your present and past carriers over the last five years?

These easy and simple to get details will help you determine whether you are a candidate for a significant rate increase, cancellation or non-renewal. If you don't qualify as a preferred or standard risk because of your specialty or losing loss ratio, odds on, you're going to be forced to go shopping.

If you concentrate on making your account more attractive and presenting the best image possible, there are still some carriers willing to work with you. If they know you are well managed, making a profit, and have a viable internal risk management program that has produced attractively stable historical loss results, chances are, they'll still cut you a pretty good deal.

Think carefully before you make a voluntary move from your existing carrier just to save money. If you're currently insured by a financially strong "A" rated company that wants a 50% rate increase, and a competing carrier only wants 25%, look beyond the quote. If both companies are financially sound and comparably rated, make the change. Otherwise, stay where you are. On the flip side, if your present carrier is losing money and its services have slumped, it might be wise to move to a stronger carrier even if you have to pay more.

Competition exists, even in a hard market. The key is to be sure you deal only with quality carriers. The best way to make your buying decisions is to rely on an experienced, competent insurance broker that specializes in medical malpractice insurance.


FINANCING RISK

There are a number of ways healthcare providers can finance their malpractice risk depending upon individual circumstances. The choice is ultimately based upon relative costs.

Solo and small group practitioners typically choose to purchase insurance because of its simplicity. They select the amount of insurance they believe they need to protect their estates, pay the premium and then file their policies away until a patient accuses them of malpractice. As long as they control the purchase and administration of their insurance, including the selection of their insurer, they can rest comfortably.

Unfortunately, those individual doctors who are providers for a PO and rely upon the PO's administrators to protect them against malpractice claims cannot rest so easily. By pooling the risks of a large number of individual doctors, plan administrators have been able to convince underwriters to discount their premiums. In addition, the POs often assume a portion of the malpractice risk by accepting large deductibles or self-insuring a portion of the exposure. This is all fine until the plan encounters financial difficulties.

The recent bankruptcy of a major California PO serves as an illustration. The PO procured a master policy from a doctor owned carrier that provided claims made malpractice coverage for all of its physicians. Whenever a doctor left, the plan purchased an extended reporting "tail" endorsement to protect the doctor against claims made after his or her departure. The carrier agreed to allow the PO to pay the tail premium on an installment basis. When the PO declared bankruptcy, it terminated all of its doctors. It was not only unable to pay the premium to purchase their tail protection, it could not pay the outstanding tail premium installments. The only way the doctors were able to protect themselves was to individually purchase tail policies for their own accounts or convince their new carriers to provide prior acts coverage.

While most group practice and PO administrators purchase "first dollar" insurance to fund their malpractice exposures, some attempt to reduce their costs by accepting large deductibles or self-insured retentions. A bold few have embraced alternative funding mechanisms such as captive insurance companies, risk purchasing and risk retention groups. The selection of these alternatives has been limited because the premiums charged by malpractice insurers have been so low for such a long time. This may all change as underwriters attempt to recover their soaring underwriting losses by dramatically increasing their rates. We tell you more about this in our Malpractice Insurance Business segment.

While there is little that the smaller POs can do in the short-run to reduce their costs, those with panels of 100 or more full time equivalent doctors can immediately improve their cash flow and potentially reduce their overall costs by considering a self-insured retention plan (SIR). Here are some of the things CFOs need to consider.

SIRs are different than deductibles. Underwriters frequently force deductibles upon their policyholders as a way to distance themselves from payment of small losses, minimize the impact of claims frequency or compensate for premium inadequacy. Deductibles seldom exceed $50,000 whereas self-insurance retentions generally begin at $100,000.

Underwriters will typically offer a substantial premium reduction when a policyholder agrees to assume the first $100,000 or more, of each malpractice loss. The amount depends upon how much premium the insurer wants to provide for full indemnity protection adjusted to reflect the cost of claims expected to be assumed by their policyholder. POs that have solid risk management, loss prevention and minimization programs in place, and that are currently paying premiums in excess of $1,000,000, should consider a SIR.

Even in times of rising prices, underwriters are generally willing to reduce their first dollar coverage premiums by between 30% and 40% if the organization agrees to retain (self-insure) the first $100,000 of expense and indemnity costs on each claim incurred. Although the savings will be reduced, the SIR exposure can be reduced by placing a cap on the aggregate amount retained each year.

An SIR should only be considered if there is good cause to believe the odds of having to pay claims are better than those bet by insurance carriers. Before making the decision, not only is it essential that prior claims experience be reviewed, industry trends must be considered as well. A five-year forecast of the expected costs of handling and settling claims, conducting actuarial reviews, and maintaining the risk management effort must be prepared. The decision to implement a SIR should not be made if there is any concern over the accuracy of loss forecasts and the expected costs of claims administration.

Remember, if a carrier is providing first dollar coverage, they are marking up the cost of claims by at least 30%. It possible to estimate the amount by applying the selected retention to historical claims experience and multiplying the retention amount by 30%. An SIR should only be considered if the forecast of claims settlement costs plus the SIR premium savings will, over a period of not less than five years, result in a savings.

Although it typically takes between 18 and 36 months to settle malpractice claims, there is an immediate need to set aside funds to cover the costs of defense and prepare for payment in the event of an unfavorable result. Managers should only decide to implement a SIR if they are highly certain their organization has the financial resources to pay at least two times the selected retention without jeopardizing its solvency. If the current profit margin is slim and cash flow is marginal or negative, the organization may be better off paying higher insurance premiums rather than coping with the uncertainties of funding a SIR.

An SIR should only implement if you:

are willing to make a long?term commitment to one insurance company;
can comply with all reasonable risk management recommendations;
have manageable and verifiable loss experience;
can afford to take the risk; and

you have obtained the advice of an insurance broker or consultant experienced in serving the insurance and risk management needs of large managed care organizations similar to yours.


RISK MANAGEMENT FOR HEALTH CARE PROVIDER ORGANIZATIONS

The proliferation of provider organizations has produced a significant change the way healthcare services are delivered. By bringing the services of physicians, hospitals and other healthcare providers under the umbrella of one provider organization, the separate images of each physician and entity are perceived as one. Regardless of the nature of their relationship, whether providers are employees, joint ventures, independent contractors, or subsidiaries, they take on the identity of the PO. The creation of large POs through mergers and acquisitions has eroded the traditional doctor-patient relationship and greatly depersonalized the delivery of healthcare services.

Large POs are exposed to complaints of malpractice not typically leveled at solo practitioners and smaller entities. Patients who would not ordinarily think of suing their doctor for malpractice, no longer hesitate. Patients are being aggravated by the perception of a lack of continuity of care by attending physicians, prolonged delays in receiving treatment, and long waits to actually be seen by a physician. Claims triggered by patient hostility are becoming the norm and increasingly costly for POs as their medical malpractice underwriters pass the increased claims costs back to them in the form of premium increases.

Plaintiff lawyers are cashing in on new theories of tort liability that attempt to hold POs vicariously responsible for the overt acts and negligence of their providers. Failure to properly select or deselect panel providers or monitor their performance is becoming more common as causes of action. Allegations of failure or refusal to provide, or pay for, experimental or otherwise controversial treatment for life-threatening maladies are resulting in million dollar settlements. Few are covered for claims arising out of physicians' medical liability by conventional medical malpractice insurance policies. New insurance products are developing and are becoming more readily available for handling the growing exposures of this burgeoning industry.

While claims of malpractice are generally understood, large POs are confronted by an array of other kinds of risk. Examples include; claims against directors and officers for malfeasance and antitrust violations, claims alleging discrimination in the credentialing of providers, violations of various state and federal statutes and regulations governing employment practices (including ERISA), and assumption of the claims-made tail exposure of acquired providers.

The most effective way to control the cost of malpractice claims is to prevent them from occurring. And when confronted with a claim, minimize its financial consequences. Risk management is the key to loss prevention and minimization.

The risk management process starts with the charting of the organizational structure and examination of each function performed by the organization. Incident and claims reports are analyzed to identify the reasons for patients' complaints and malpractice claims. Opportunities for improvement in patient services including record keeping, billing procedures and other administrative matters are prioritized. Medical records are analyzed to identify how patients were injured, who was responsible, and what could have been done differently. Corrective measures designed to prevent similar incidents from occurring in the future are implement and enforced on an ongoing basis.

Risk management also involves an assessment of the risks assumed that may otherwise be avoided. For example, instead of assuming the responsibility to provide malpractice insurance for individual providers, require each of them to provide evidence they have their own insurance in required amounts.

Another technique is to assume a portion of the risk currently transferred to a professional risk bearer. This can be accomplished fairly simply by the use of deductibles or self-insured retention plans but should only be considered if a savings can be realized. As discussed in the Financing Risk section, the decision making process is complex and goes beyond the simple calculation of premium credits.

There are three risk management terms you need to be familiar with.


RISK CONTROL:
encompasses the avoidance
or elimination of risk and
risk reduction through loss
control. Loss control reduces the probability that
loss will occur and also
reduces the magnitude of
losses that do occur. Risk
control, however, only
addresses a portion of the
risk management process
and is not a complete
solution in itself.

RISK FINANCING:
involves various techniques to pay for losses that occur in spite of risk control techniques that are utilized. It involves assumption of risk and risk transfer. Assumption or retention of risk, either wholly or partially means that the risk is borne or financed internally.

RISK TRANSFER:
can mean either a contractual transfer
of risk or transfer
through the purchase
of insurance.




THE ROLE OF INSURANCE BROKERS

Despite what most insurance agents would have you believe, the purchase of insurance is relatively uncomplicated. Most individuals and business managers know it is prudent to buy insurance to protect their assets. Because many buyers look upon insurance as a necessary evil and a mere commodity, they generally look upon agents and brokers as little more than shopping services to find the best price for the type of policy wanted. They place little value on the agent's or broker's services because insurance companies pay them commissions for bringing the buyer to them and servicing the business once placed.

However, those few POs that have risk management professionals on staff regularly rely on the advice and services of a knowledgeable independent broker. The challenge is to find a broker with a working knowledge of the healthcare industry, that has hands-on experience in dealing with the risks faced by healthcare providers, and who is schooled in the art of risk financing, not merely with the purchase of insurance. Only a handful of brokers in the United States are able to meet these criteria with any consistency.

Before the 1975-76 crisis, most doctors, hospitals, and other health care providers relied upon the leadership of their medical societies and associations to select the carrier and designated sales agent. As a result, their "sponsored" programs effectively stifled competition for their business, and created quasi-monopolies for the bidders (carriers and agent) who won their endorsement.

Although the formation of doctor-owned companies appeared initially to increase competition, most were founded around the nucleus of the members of local medical societies and, therefore, catered specifically to the needs of the individual practitioners. Few would allow agents or brokers to sell their policies. During the past few years, some of these companies have revamped their operating premise. They entered the group practice arena and were forced to play catch-up with their commercial competitors who lost the physician market 25 years ago although they maintained control of the larger risk market. They remain under pressure to acquire the knowledge of risk management techniques and alternative funding mechanisms necessary to capture a representative share of the large healthcare provider market. Many are relying on qualified brokers for help.

The typical insurance agent is not equipped to deal with the complexities of the business risks confronting large healthcare providers. Even many who have the requisite skills cannot be relied upon to place their client' needs above their own interests. Why? Because there is an inherent conflict of interest in the way most brokers do business; i.e. on a commission basis.

Most carriers pay brokers a commission for the policies they procure on behalf of their clients. The premiums are divided into two parts. Part one is the amount retained by the carrier. Part two is the amount paid to the broker as a commission for services rendered. It is rare for a buyer to know how much the broker receives.

The dilemma facing the commission-oriented broker is that they must cater to the carrier's needs
while trying to serve the client at the same time. Because the carrier dictates the underwriting

conditions and sets the rates for the broker's commissions, it is unusual for these brokers to
approach any direct writing carrier, including the bed pan mutuals, because direct writers typically price their policies net of commissions.

Traditional brokers are caught between the proverbial rock and a hard place. The better job they do for their client in reducing costs, the less they get paid. PO managers are cautioned to only take the advice of a broker that is unwilling to disclose the amount of commission he will receive with a dose of caution.



THE ALTERNATIVE: HEALTHCARE PROFESSIONALS' INSURANCE SERVICES (HCP)

R. W. Mortimer changed the way typical insurance agents and brokers do business by establishing its specialized healthcare division. Rather than serve as a "shopping service" with ties only to insurance carriers that pay broker commissions, HCP strives to become a vital member of each client's team of independent management advisors. We expect to make a significant contribution to our client's financial success by serving shoulder-to-shoulder with their attorneys, accountants, actuaries, and risk management team to employ the latest risk financing techniques and seek out cost reduction opportunities wherever available for its client. Because we are committed to professionalism, we base our compensation on the value of the advice we give and quality and quantity of services we render.

Because we present ourselves as members of each client's team of independent management advisors, we are able to open doors to insurance carriers overlooked by, or not otherwise available to, commission brokers. Due to our long-term dealings in the underwriting marketplace, we have established working relationships with virtually all of the leading medical malpractice underwriters. We have earned an impeccable reputation for our integrity and technical competence that our clients can use to their advantage.

Our principals and staff of qualified service representatives recognize that they cannot be all things to all people. That is why we do not hesitate to consult with other experts in their respective fields. We assume the role of coordinator and assemble and monitor the team of actuaries, claims investigators, loss and quality control technicians, captive managers, and other experts needed to complement the our services. The same concept applies to the selection of an insurance carrier and the placement and service of the insurance piece. Our broad and unbiased knowledge of the many insurance carriers and products results in a wider variety of options from which our clients are able to chose and is unique to professional medical malpractice insurance.

Our selection of carriers is based upon our evaluation of their policy forms, claims handling facilities and reputation, plus the carrier's ability to meet their financial obligations. If commissions are included in a carrier's pricing, they will be asked to compute their charges on a net basis. Should a carrier be unwilling to quote on a net basis, the amount of commission included will be fully disclosed and the amount we receive will be applied as a credit to our fees. Typically, our fees are less than the amount of commissions customarily paid by underwriters.

Our function is to help our clients evaluate their exposures to loss and to design and structure financing plans that satisfy their specific needs. Even those clients with risk management departments already in place can benefit from our services. Because we charge for our advice and services on a fee basis, our clients have the comfort of know that our recommendations are never commission driven.

"Rick" Mortimer has published several papers on the changing landscape of the medical malpractice insurance industry. Rick has been a featured guest speaker at the annual meetings of Physicians' Insurance Association of America, Medical Group Managers' Association, Unified Medical Group Association, and American Medical Group Association. It is just this kind of experience that has prompted several of the country's largest medical groups and clinics, as well as hundreds of smaller groups and soloists, to call HCP their broker.