AHLA Seeks Clarification on Malpractice Insurance

Proper malpractice coverage is essential to any physician's practice. When that coverage is not readily available or premiums skyrocket, that essential can seem like a luxury. Physicians facing other economic pressures in their practice not infrequently opt to reduce their insurance limits, increase their deductible, drop their coverage altogether, retire or leave the area, or discontinue what they view as high-risk portions of their practice (eg, serving on ER call rosters or accepting Medicaid or indigent patients). As a result, physicians' personal assets (and careers) are more at risk, hospitals face more liability exposure as the “deep pocket,” and patients face significantly reduced access to care.

To avoid those negative consequences, many physicians approach their hospitals for help. As with any problem, the possible solutions are varied, ranging from asking for a check for some part of the premiums to establishing an entire physician insurance program through an independent or hospital-owned insurer. Given the extensive federal regulation of hospital-physician relationships, however, these solutions can raise different problems under the Stark Law, the Medicare and Medicaid Anti-kickback Statute and the inurement, private benefit and excess benefit rules as described below. The consequences of running afoul of those laws can include significant financial penalties, exclusion from Medicare and Medicaid and, for nonprofits, loss of tax-exempt status. At the same time, however, the parameters of what assistance is permitted, and under what conditions, are the subject of some confusion among providers.

AHLA's Request

It is against this backdrop that the American Health Lawyers Association (AHLA) submitted its request for joint clarification to three federal agencies on April 22, 2004 – the Internal Revenue Service (IRS), the Department of Health & Human Services, Office of Inspector General (OIG) and the Centers for Medicare and Medicaid Services (CMS). AHLA is a nonprofit Section 501(c)(3) professional association that does not engage in advocacy. Accordingly, in its letter, AHLA did not propose a specific regulatory response to the instant crisis (nor did it undertake to enter into the tort reform debate by addressing possible root causes of the crisis). In its role as public resource on health law, however, AHLA from time to time seeks clarification from government agencies on issues that affect the health law community – providers, health plans, and patients. The April 22 letter emphasizes that the request for clarification on malpractice coverage assistance programs “should not be construed as an advocacy position of the American Health Lawyers Association or its members.” (AHLA's letter, the accompanying press release and additional information about AHLA may be found on AHLA's Web site at http://www.health lawyers.org/pr_malpractice.cfm

Manifestations of the Crisis

Difficulties in obtaining or retaining physician malpractice insurance are no longer an isolated phenomenon, but a crisis that is affecting health care providers throughout the United States. According to an American Medical Association (AMA) analysis, 19 states are currently experiencing an insurance crisis. These states are Arkansas, Connecticut, Florida, Georgia, Illinois, Kentucky, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Washington, Nevada, West Virginia, and Wyoming. See American Medical Association “Medical Liability Reform – NOW!” 5 (October 21, 2003), citing American Medical Association AMA Analysis (July 2003) (AMA – NOW).

Some of the manifestations of the crisis have been dramatic, including trauma center closures in Nevada and Pennsylvania when orthopedic surgeons (and in one instance neurosurgeons) could not afford insurance; substantial reductions of surgical capacity in a Florida community when 19 general surgeons took leaves of absence; closure of the obstetrics unit at a rural Mississippi hospital (and the only OB unit within 65 miles) when the five family practice physicians performing deliveries stopped doing so to avoid a 65% increase in premiums; and orthopedic surgeons in West Virginia refusing to provide coverage for a Level 1 Trauma Center, resulting in some patients having to be transported 50 miles or more for care. See Id., U.S. General Accounting Office, “Medical Malpractice: Implications of Rising Premiums on Access to Health Care” Report GAO-03-836, pp. 13-15 (August 2003), at 15.

The AMA report further states that only six states appear to have a stable market for malpractice insurance. For example, in Pennsylvania, premiums charged by commercial insurers increased anywhere from 80.7% to 147.8% between 1997 to 2001, and an additional 40% to 50.3% in 2002. In Maryland, only three malpractice insurance carriers are still active in the state in 2004 compared with 15 in 1996. See The Maryland State Medical Society “Medical Liability Insurance Crisis Facts” (2004) at http://www.medchi.org/micra/FactSheet.pdf. In Texas, only four companies were writing new malpractice coverage in 2002, down from 20 companies writing new coverage in 1999. See AMA – NOW, supra note 4, at 8-9, citing The Houston Chronicle, Aug. 3, 2002. In Ohio, five medical malpractice insurers write nearly 72% of the coverage; they increased rates an average of nearly 30% in 2003 (following average increases of 21.4% in 2001 and 31% in 2002), and three of the five have experienced recent ratings downgrades. See Interim Report of the Ohio Medical Malpractice Commission (2004), p.3 & App. 2, available online at http://www.ohioin surance.gov/agent/medmalcommis sion.htm. Faced with such significant premium increases, many physicians naturally search for viable alternatives.

Possible Business Solutions

Captives, RRGs and Commercial Programs

Many hospitals have responded to the current and similar crises by establishing or sponsoring physician insurance programs. These programs often involve coverage provided by (or reinsured with) a limited purpose or “captive” insurance company or risk retention group (RRG). Due to program features, such as a joint defense, waiver of physician consent to settlement and lack of a profit motive, these programs often offer premiums that are below commercial rates for physicians in the same specialties in the same states. Typically, the premium rates are supported by an actuarial review, including consideration of commercial rates and the physicians' claims history as well as the foregoing cost-saving features of the program. Those premiums are often “fixed” (or non-assessable) for the physicians, with the hospital owners responsible for losses that may unexpectedly exceed the premiums and investment earnings. In a “hard market” where insurers are pulling out-of-states or raising premiums substantially, the captive or RRG's rates often will be below commercial rates. Although that may change in a “soft market” when the commercial companies focus on lower rates as a way to increase their market share, the captive or RRG can provide a more stable, predictable premium and source of coverage. With the actuarial or market-based support for the premium rates, these programs also can present less uncertainty and risk from a regulatory perspective than the subsidized programs described below.

The captive can be organized in an insurance-friendly offshore domicile, such as the Cayman Islands, or in states with statutes that permit the formation of captives or RRGs for this purpose. Depending on where the captive or RRG is licensed, there may be various additional arrangements needed to enroll physicians and process claims. For non-U.S. captives, there are also various tax and state law restrictions that affect how programs are structured and operated. (Some managed care organizations also may have specific standards for carriers providing malpractice insurance to participating physicians.) As written, those standards may not recognize captive or RRG coverage.

As with any additional entity in a corporate structure, the captive or RRG entails a certain amount of administration and process, and it will require some additional overhead (including start-up expenses), an initial capital contribution (which may be higher in certain domiciles) and some attention from management of the owner or owners.

Other hospitals choose to partner with commercial carriers for their sponsored physician insurance programs rather than establishing their own captive or RRG. Depending on the demand and loss history, some insurers have been willing to tailor physician programs to meet the needs of the medical staff of particular hospitals. The reasons leading a commercial insurer to consider such a program may include marketing aspects (to get or retain the hospital's coverage), an ability to improve profit margins (by leveraging the success of a hospital risk management program or implementing some of the same cost-saving features as captive programs, such as waiver of consent to settle) or to increase the carrier's book of business in anticipation of improvements in the market. These programs also require monitoring and some management effort, but may not require the creation of any new entity. In these programs, in many respects, the physicians are still dealing directly with a commercial insurer and there are often no guarantees of how long the program will be continued. The commercial insurer's rates are also likely to be subject to state regulation and, as such, will likely require actuarial justification.

Subsidized Programs

In some instances, physicians are as concerned (or more concerned) with the cost of coverage than with availability. Those concerns may not be fully addressed by a captive or commercial program with actuarially supported premiums. For these physicians, possible solutions revolve around some type of subsidy of the cost of coverage, either through further discounts in a hospital-sponsored program (such that rates would fall below actuarial recommendations), direct financial assistance from the hospital to pay some portion of the physician's commercial insurance premium, or an agreement by the hospital to either cover certain losses on the hospital's policy or to indemnify the physicians against certain losses (eg, ER calls for unassigned patients or services at an indigent clinic). These subsidized programs are often aimed at providing a particular community benefit and require that the physicians actually provide that benefit. For example, the terms of the assistance may require that the physician locate his or her practice in an underserved area, accept indigent patients, participate in Medicare and Medicaid on a nondiscriminatory basis and/or accept ER call on a fair rotational basis.

In next month's newsletter, we discuss regulatory implications for these types of insurance programs.

Proper malpractice coverage is essential to any physician's practice. When that coverage is not readily available or premiums skyrocket, that essential can seem like a luxury. Physicians facing other economic pressures in their practice not infrequently opt to reduce their insurance limits, increase their deductible, drop their coverage altogether, retire or leave the area, or discontinue what they view as high-risk portions of their practice (eg, serving on ER call rosters or accepting Medicaid or indigent patients). As a result, physicians' personal assets (and careers) are more at risk, hospitals face more liability exposure as the “deep pocket,” and patients face significantly reduced access to care.

To avoid those negative consequences, many physicians approach their hospitals for help. As with any problem, the possible solutions are varied, ranging from asking for a check for some part of the premiums to establishing an entire physician insurance program through an independent or hospital-owned insurer. Given the extensive federal regulation of hospital-physician relationships, however, these solutions can raise different problems under the Stark Law, the Medicare and Medicaid Anti-kickback Statute and the inurement, private benefit and excess benefit rules as described below. The consequences of running afoul of those laws can include significant financial penalties, exclusion from Medicare and Medicaid and, for nonprofits, loss of tax-exempt status. At the same time, however, the parameters of what assistance is permitted, and under what conditions, are the subject of some confusion among providers.

AHLA's Request

It is against this backdrop that the American Health Lawyers Association (AHLA) submitted its request for joint clarification to three federal agencies on April 22, 2004 – the Internal Revenue Service (IRS), the Department of Health & Human Services, Office of Inspector General (OIG) and the Centers for Medicare and Medicaid Services (CMS). AHLA is a nonprofit Section 501(c)(3) professional association that does not engage in advocacy. Accordingly, in its letter, AHLA did not propose a specific regulatory response to the instant crisis (nor did it undertake to enter into the tort reform debate by addressing possible root causes of the crisis). In its role as public resource on health law, however, AHLA from time to time seeks clarification from government agencies on issues that affect the health law community – providers, health plans, and patients. The April 22 letter emphasizes that the request for clarification on malpractice coverage assistance programs “should not be construed as an advocacy position of the American Health Lawyers Association or its members.” (AHLA's letter, the accompanying press release and additional information about AHLA may be found on AHLA's Web site at http://www.health lawyers.org/pr_malpractice.cfm

Manifestations of the Crisis

Difficulties in obtaining or retaining physician malpractice insurance are no longer an isolated phenomenon, but a crisis that is affecting health care providers throughout the United States. According to an American Medical Association (AMA) analysis, 19 states are currently experiencing an insurance crisis. These states are Arkansas, Connecticut, Florida, Georgia, Illinois, Kentucky, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Washington, Nevada, West Virginia, and Wyoming. See American Medical Association “Medical Liability Reform – NOW!” 5 (October 21, 2003), citing American Medical Association AMA Analysis (July 2003) (AMA – NOW).

Some of the manifestations of the crisis have been dramatic, including trauma center closures in Nevada and Pennsylvania when orthopedic surgeons (and in one instance neurosurgeons) could not afford insurance; substantial reductions of surgical capacity in a Florida community when 19 general surgeons took leaves of absence; closure of the obstetrics unit at a rural Mississippi hospital (and the only OB unit within 65 miles) when the five family practice physicians performing deliveries stopped doing so to avoid a 65% increase in premiums; and orthopedic surgeons in West Virginia refusing to provide coverage for a Level 1 Trauma Center, resulting in some patients having to be transported 50 miles or more for care. See Id., U.S. General Accounting Office, “Medical Malpractice: Implications of Rising Premiums on Access to Health Care” Report GAO-03-836, pp. 13-15 (August 2003), at 15.

The AMA report further states that only six states appear to have a stable market for malpractice insurance. For example, in Pennsylvania, premiums charged by commercial insurers increased anywhere from 80.7% to 147.8% between 1997 to 2001, and an additional 40% to 50.3% in 2002. In Maryland, only three malpractice insurance carriers are still active in the state in 2004 compared with 15 in 1996. See The Maryland State Medical Society “Medical Liability Insurance Crisis Facts” (2004) at http://www.medchi.org/micra/FactSheet.pdf. In Texas, only four companies were writing new malpractice coverage in 2002, down from 20 companies writing new coverage in 1999. See AMA – NOW, supra note 4, at 8-9, citing The Houston Chronicle, Aug. 3, 2002. In Ohio, five medical malpractice insurers write nearly 72% of the coverage; they increased rates an average of nearly 30% in 2003 (following average increases of 21.4% in 2001 and 31% in 2002), and three of the five have experienced recent ratings downgrades. See Interim Report of the Ohio Medical Malpractice Commission (2004), p.3 & App. 2, available online at http://www.ohioin surance.gov/agent/medmalcommis sion.htm. Faced with such significant premium increases, many physicians naturally search for viable alternatives.

Possible Business Solutions

Captives, RRGs and Commercial Programs

Many hospitals have responded to the current and similar crises by establishing or sponsoring physician insurance programs. These programs often involve coverage provided by (or reinsured with) a limited purpose or “captive” insurance company or risk retention group (RRG). Due to program features, such as a joint defense, waiver of physician consent to settlement and lack of a profit motive, these programs often offer premiums that are below commercial rates for physicians in the same specialties in the same states. Typically, the premium rates are supported by an actuarial review, including consideration of commercial rates and the physicians' claims history as well as the foregoing cost-saving features of the program. Those premiums are often “fixed” (or non-assessable) for the physicians, with the hospital owners responsible for losses that may unexpectedly exceed the premiums and investment earnings. In a “hard market” where insurers are pulling out-of-states or raising premiums substantially, the captive or RRG's rates often will be below commercial rates. Although that may change in a “soft market” when the commercial companies focus on lower rates as a way to increase their market share, the captive or RRG can provide a more stable, predictable premium and source of coverage. With the actuarial or market-based support for the premium rates, these programs also can present less uncertainty and risk from a regulatory perspective than the subsidized programs described below.

The captive can be organized in an insurance-friendly offshore domicile, such as the Cayman Islands, or in states with statutes that permit the formation of captives or RRGs for this purpose. Depending on where the captive or RRG is licensed, there may be various additional arrangements needed to enroll physicians and process claims. For non-U.S. captives, there are also various tax and state law restrictions that affect how programs are structured and operated. (Some managed care organizations also may have specific standards for carriers providing malpractice insurance to participating physicians.) As written, those standards may not recognize captive or RRG coverage.

As with any additional entity in a corporate structure, the captive or RRG entails a certain amount of administration and process, and it will require some additional overhead (including start-up expenses), an initial capital contribution (which may be higher in certain domiciles) and some attention from management of the owner or owners.

Other hospitals choose to partner with commercial carriers for their sponsored physician insurance programs rather than establishing their own captive or RRG. Depending on the demand and loss history, some insurers have been willing to tailor physician programs to meet the needs of the medical staff of particular hospitals. The reasons leading a commercial insurer to consider such a program may include marketing aspects (to get or retain the hospital's coverage), an ability to improve profit margins (by leveraging the success of a hospital risk management program or implementing some of the same cost-saving features as captive programs, such as waiver of consent to settle) or to increase the carrier's book of business in anticipation of improvements in the market. These programs also require monitoring and some management effort, but may not require the creation of any new entity. In these programs, in many respects, the physicians are still dealing directly with a commercial insurer and there are often no guarantees of how long the program will be continued. The commercial insurer's rates are also likely to be subject to state regulation and, as such, will likely require actuarial justification.

Subsidized Programs

In some instances, physicians are as concerned (or more concerned) with the cost of coverage than with availability. Those concerns may not be fully addressed by a captive or commercial program with actuarially supported premiums. For these physicians, possible solutions revolve around some type of subsidy of the cost of coverage, either through further discounts in a hospital-sponsored program (such that rates would fall below actuarial recommendations), direct financial assistance from the hospital to pay some portion of the physician's commercial insurance premium, or an agreement by the hospital to either cover certain losses on the hospital's policy or to indemnify the physicians against certain losses (eg, ER calls for unassigned patients or services at an indigent clinic). These subsidized programs are often aimed at providing a particular community benefit and require that the physicians actually provide that benefit. For example, the terms of the assistance may require that the physician locate his or her practice in an underserved area, accept indigent patients, participate in Medicare and Medicaid on a nondiscriminatory basis and/or accept ER call on a fair rotational basis.

In next month's newsletter, we discuss regulatory implications for these types of insurance programs.