Physician Migration and Hospital Captives

Modifications to health care delivery are changing at a pace that far exceeds anyone's expectations ' and perhaps exceeds our ability to react and respond in a fashion that protects both provider and patient. One such modification is health care reform legislation, which will send a high number of previously uninsured patients to hospitals seeking care from a necessarily greater number of hospital-employed physicians. This trend will, in turn, alter professional liability exposures for the physicians who are migrating from private practice to hospital employment. It will also hasten the ongoing growth of hospital captives (hospital self-insurance) as a means of insuring physicians. Is this last a wise move?

The Changing Model: A Blip on the Radar, or Something More?

The increasing number of physicians becoming employed by hospitals and health systems has led to a rapidly shifting provider environment. Although some have drawn comparisons to a similar trend that occurred in the late 1990s, that
movement was later reversed because many physicians rejected the concept of direct hospital employment after fiercely feuding with hospital administrations. This latest shift toward direct hospital employment of physicians emerged again in 2009, shortly after federal health care reforms were enacted.

There were early adopters of the pending changes; in particular, health systems that began recruiting and adding physicians in 2009 in order to capitalize on the demand that 32 million previously uninsured Americans would place on their facilities. Additionally, these same hospitals and health systems needed access to primary care physicians and other specialists to capture the revenue that was, and continues to be, up for grabs as the delivery of medicine becomes more competitive.

In its purest form, The Patient Protection and Affordable Care Act (sometimes referred to as “Obama-Care”) is focused on integrating medicine in a way that leads to greater availability of higher quality and less expensive health care. The questions that many people want answered are, will the history of the 1990s repeat itself, or will the physician migration phenomenon be a permanent trend? The answer, increasingly, appears to be the latter.

There are several external factors existing today that were not present in the late 1990s, which suggest that this time around, hospital employment of physicians will be a more permanent phenomenon. “ObamaCare” will lead to longer-term relationships between hospitals and physicians, because it has become too difficult for physicians to thrive in private practice. This is not to suggest that all of the arrangements currently in negotiations will last. However, this time, there appears to be a significant carrot-and-stick incentive, which may keep the parties united after the honeymoon phase is over. Specifically, reimbursement will be tied to outcomes, and providers' payments will be bundled when positive outcomes are achieved.

What Is Fueling the Push Toward Self-Insurance?

Fortunately, the malpractice liability crisis that existed in this country from 2000-2005 has ended, and the business of providing malpractice liability coverage appears to be in a stable pattern. But during that earlier crisis period, when insurance was not readily available, many in the medical profession were forced to make sweeping changes in the way they managed risk. Some of these changes have had a positive, but perhaps temporary, effect on the medical professional liability insurance industry.

The number of medical malpractice filings in Pennsylvania, for example, reached its peak in 2002, when 2,904 cases were filed in a single year (Administrative Office of PA Courts, www.aopc.org). This number has steadily declined, and it reached a 10-year low in 2010, when only 1,491 cases were filed statewide (med mal filings statewide, 2000-2010). Additionally, compared with the time period 2002-2003, the past two available calendar year results (2009-2010) have seen significant declines in plaintiff awards, with no verdict in excess of $10 million.

The National Practitioners Database (NPDB) ' Public Use File of 9/30/11 suggests that the countrywide frequency of medical malpractice filed claims has declined each year following its peak in 2001. The same data suggests the number of licensed physicians has grown moderately over the past 10 years, while the premium volume of the top 20 commercial medical malpractice insurance carriers has dropped significantly from its peak of $5.05 billion in 2001. Perhaps more important to medical professional insurers is the severity trend (the measurement of paid claims as a dollar amount), which has increased only slightly, even after adjustment for medical inflation.

But we should be careful not to be lulled into complacency by these positive trends. Look at the data: History is often the best predictor of the future and, if this holds true, professional liability insurers have not seen their last calamity. The next potential crisis may happen when hospitals' and health systems' captive insurance companies run out of money.

A Crisis in the Making?

According to Aon's 2011 Benchmark Analysis on Hospital and Physician professional liability, the majority of hospital systems self-insure their employed physicians, while 24% rely on commercial/traditional coverage (AON, Hospital and Physician Professional Liability ' 2011 Benchmark Analysis). The study also indicated that a small group relies on a mix of commercial and self-insurance for employed physician professional liability. With a nearly 75% increase in the number of physicians employed by hospitals since 2000, the decision for hospitals to self-insure them is one that must be made carefully. (Data: Physician Compensation and Production Survey, Medical Group Management Association, 2003-2009).

A captive insurance company has been the most popular mechanism for insuring hospital exposures for 30-plus years. Logically, the first place hospitals look to place the growing physician exposures is in their already established self-insurance pool. Generally, the reason for forming a captive insurance company is to create an insurance mechanism to self-insure a commonly linked pool of risks. The perceived incentives for doing so are reduced cost, greater control and the provision of coverage not available in the traditional market due to limited capacity. However, overwhelmingly, the main reason our own hospital clients give us for wanting to form a captive is to make a profit.

Next month, we will discuss further the risks and benefits that hospital captives pose, as well as alternative risk-sharing devices that may be considered.

Modifications to health care delivery are changing at a pace that far exceeds anyone's expectations ' and perhaps exceeds our ability to react and respond in a fashion that protects both provider and patient. One such modification is health care reform legislation, which will send a high number of previously uninsured patients to hospitals seeking care from a necessarily greater number of hospital-employed physicians. This trend will, in turn, alter professional liability exposures for the physicians who are migrating from private practice to hospital employment. It will also hasten the ongoing growth of hospital captives (hospital self-insurance) as a means of insuring physicians. Is this last a wise move?

The Changing Model: A Blip on the Radar, or Something More?

The increasing number of physicians becoming employed by hospitals and health systems has led to a rapidly shifting provider environment. Although some have drawn comparisons to a similar trend that occurred in the late 1990s, that
movement was later reversed because many physicians rejected the concept of direct hospital employment after fiercely feuding with hospital administrations. This latest shift toward direct hospital employment of physicians emerged again in 2009, shortly after federal health care reforms were enacted.

There were early adopters of the pending changes; in particular, health systems that began recruiting and adding physicians in 2009 in order to capitalize on the demand that 32 million previously uninsured Americans would place on their facilities. Additionally, these same hospitals and health systems needed access to primary care physicians and other specialists to capture the revenue that was, and continues to be, up for grabs as the delivery of medicine becomes more competitive.

In its purest form, The Patient Protection and Affordable Care Act (sometimes referred to as “Obama-Care”) is focused on integrating medicine in a way that leads to greater availability of higher quality and less expensive health care. The questions that many people want answered are, will the history of the 1990s repeat itself, or will the physician migration phenomenon be a permanent trend? The answer, increasingly, appears to be the latter.

There are several external factors existing today that were not present in the late 1990s, which suggest that this time around, hospital employment of physicians will be a more permanent phenomenon. “ObamaCare” will lead to longer-term relationships between hospitals and physicians, because it has become too difficult for physicians to thrive in private practice. This is not to suggest that all of the arrangements currently in negotiations will last. However, this time, there appears to be a significant carrot-and-stick incentive, which may keep the parties united after the honeymoon phase is over. Specifically, reimbursement will be tied to outcomes, and providers' payments will be bundled when positive outcomes are achieved.

What Is Fueling the Push Toward Self-Insurance?

Fortunately, the malpractice liability crisis that existed in this country from 2000-2005 has ended, and the business of providing malpractice liability coverage appears to be in a stable pattern. But during that earlier crisis period, when insurance was not readily available, many in the medical profession were forced to make sweeping changes in the way they managed risk. Some of these changes have had a positive, but perhaps temporary, effect on the medical professional liability insurance industry.

The number of medical malpractice filings in Pennsylvania, for example, reached its peak in 2002, when 2,904 cases were filed in a single year (Administrative Office of PA Courts, www.aopc.org). This number has steadily declined, and it reached a 10-year low in 2010, when only 1,491 cases were filed statewide (med mal filings statewide, 2000-2010). Additionally, compared with the time period 2002-2003, the past two available calendar year results (2009-2010) have seen significant declines in plaintiff awards, with no verdict in excess of $10 million.

The National Practitioners Database (NPDB) ' Public Use File of 9/30/11 suggests that the countrywide frequency of medical malpractice filed claims has declined each year following its peak in 2001. The same data suggests the number of licensed physicians has grown moderately over the past 10 years, while the premium volume of the top 20 commercial medical malpractice insurance carriers has dropped significantly from its peak of $5.05 billion in 2001. Perhaps more important to medical professional insurers is the severity trend (the measurement of paid claims as a dollar amount), which has increased only slightly, even after adjustment for medical inflation.

But we should be careful not to be lulled into complacency by these positive trends. Look at the data: History is often the best predictor of the future and, if this holds true, professional liability insurers have not seen their last calamity. The next potential crisis may happen when hospitals' and health systems' captive insurance companies run out of money.

A Crisis in the Making?

According to Aon's 2011 Benchmark Analysis on Hospital and Physician professional liability, the majority of hospital systems self-insure their employed physicians, while 24% rely on commercial/traditional coverage (AON, Hospital and Physician Professional Liability ' 2011 Benchmark Analysis). The study also indicated that a small group relies on a mix of commercial and self-insurance for employed physician professional liability. With a nearly 75% increase in the number of physicians employed by hospitals since 2000, the decision for hospitals to self-insure them is one that must be made carefully. (Data: Physician Compensation and Production Survey, Medical Group Management Association, 2003-2009).

A captive insurance company has been the most popular mechanism for insuring hospital exposures for 30-plus years. Logically, the first place hospitals look to place the growing physician exposures is in their already established self-insurance pool. Generally, the reason for forming a captive insurance company is to create an insurance mechanism to self-insure a commonly linked pool of risks. The perceived incentives for doing so are reduced cost, greater control and the provision of coverage not available in the traditional market due to limited capacity. However, overwhelmingly, the main reason our own hospital clients give us for wanting to form a captive is to make a profit.

Next month, we will discuss further the risks and benefits that hospital captives pose, as well as alternative risk-sharing devices that may be considered.