The New Medical Professional Liability Insurance Crisis: Healthcare Corporate Malfeasance
Whether by mandate or prudent business practice, virtually every physician in the US carries medical professional liability (MPL) insurance. Though some physicians ignore clear warning signs about financially questionable insurance models, the vast majority use specialized advisors and conduct due diligence before purchasing coverage. But when physicians become employed by corporations, the due diligence process is often ceded to executives that at times put the interests of their shareholders before their physician employees. When creative MPL models fail – and they often do – physicians become personally liable. With COVID-19 threatening the viability of numerous healthcare and insurance companies alike, physicians should demand more information relating to their MPL coverage.
Understanding the Models: Captives
A captive is a company formed by an organization to self-insure its risk. This model is commonly used by hospitals and rollup specialists to insure against their medical professional liability. Unfortunately, conflicts of interest too often tie the fate of a captive to the fate of its parent corporation.
For example, when St. Vincent’s Hospital in NY went bankrupt, its captive insurance plan went down with it. All physicians covered by the defunct MPL program had to pay into a new fund or go uncovered.
Now Hahnemann Hospital in PA is going through a bankruptcy proceeding. Employed physicians and residents were not responsible for negligently managing the insurance program; the executives were. Yet the initial motion to require coverage for physicians was denied by the Federal Judge, noting, “The Debtors appear to have failed to maintain appropriate insurance for physicians they employed…”
The Court later approved a settlement whereby Hahnemann’s parent will pay $9.3 million in premiums – to its own affiliated insurance company, Philadelphia Academic Risk Retention Group (PARRG) – to cover the exposure. PARRG was formed in 2018 and according to its own actuary in its 2019 year-end filing, “Adverse development beyond [$800,000] …. could result in regulatory action.” As a risk retention group (see below), regulatory action could put the physicians and residents back in the same situation of having no MPL coverage for the work they performed on behalf of the hospital.
Publicly traded staffing company Envision Healthcare has accumulated an estimated $7 billion in debt after borrowing money for years to buy up independent physician practices. It is now reported to be in bankruptcy talks and to have already cut its employed physicians’ pay. Envision has presented at conferences about the benefit of having its own captive. Time will tell if these benefits inure to its employed physicians, but if Envision declares bankruptcy and the captive is not properly funded, then the physicians could find themselves without coverage in the event of MPL lawsuits. Absent a bailout, the physicians would be left to defend themselves.
Regardless of whether a company forms a captive, healthcare corporations often take risk through a self-insured retention to save money in the short term. A retention is similar to a deductible, except that a retention must be paid before insurance coverage is triggered. If retentions cannot be paid, insurance coverage might be lost.
Consider this language that was sent to a departing physician by a national anesthesia consolidator relating to his tail (“ERP”) coverage: “You are not eligible for an ERP Endorsement unless all premiums have been paid for this Policy and all deductible and retention amounts have been paid.” In other words, if the corporation cannot meet its obligations, the insurance company does not have to meet its either.
(Note: According to sources close to the matter, COVID-19 has put considerable strain on this consolidator. If it fails and the retentions are not properly funded, its employed physicians could lose their coverage.)
Risk Retention Groups
In response to a professional liability affordability and availability crisis, Congress passed the Federal Risk Retention Act of 1986. Thereafter, groups of similarly situated professionals – such as physicians – were authorized to insure themselves through a model called a risk retention group (RRG). Formed under federal law, RRGs were permitted to circumvent considerable state oversight and filing requirements. But this permission came with a trade-off: RRGs cannot participate in state guaranty funds, which protect physicians in the event of insurance company insolvencies.
The minimum capital required to start an RRG varies based on the state of domicile but on average is around $3 million. This initial funding provides little cushion to RRGs that do not collect enough premium to cover claims, which can be challenging in the saturated marketplace.
Conservative risk retention groups can pay reinsurance companies additional money to secure a “front.” A fronted RRG program includes first dollar protection to insureds, even if the RRG becomes insolvent.
Even in the absence of a front, a select few risk retention groups are independently well-funded and have strong financial strength ratings. They operate for various reasons, at times to avoid archaic state regulatory frameworks. Other times to allow their owners to realize profits from sound risk management and claim control practices.
All RRGs are required to make their financial statements publicly available. Given the lack of guaranty fund protection, any physician insured with a risk retention group should be analyzing these financials carefully.
Although the most common type of MPL coverage, claims-made requires the purchase of extended reporting (“tail”) coverage at termination. Independent physicians tend to be well-versed in this coverage and can address the provisions individually or through their group practice.
Healthcare corporations, however, have been known to set up claims-made policies with “slot” coverage. Slot policies allow for physicians to come on and off without the need to purchase a tail each time a physician leaves. The tail obligation accumulates over time, but the premium for the tail only comes due when the policy is terminated.
If a corporation cannot renew its policy, it is typically because it cannot afford to do so. By then it is highly unlikely that it can afford to purchase tail coverage for its employed physicians.
ARIS Teleradiology Holdings, a national teleradiology company with a few subsidiaries, was forced to cease operations in March (2020) after it was unable to secure financing. It had a claims-made slot policy for its physician employees and no money to purchase a tail. Former employees received a letter giving them an option to pay for their own tails. It read, “You MUST take one of these actions or you will have no coverage for future reported claims arising from the period of time that you worked for Aris Teleradiology Holdings, Inc.”
Physicians who read images on behalf of Aris are now personally responsible to cover themselves, despite a contractual provision to the contrary.
Unrated Insurance Companies
Despite the existence of several reputable rating agencies, there are still a handful of companies that operate without any financial strength ratings. Unrated companies are prone to insolvencies. If your employer has placed its MPL coverage with an unrated insurance company, demand better.
Does Reinsurance Help?
The above models all use reinsurance to cover claims up to a negotiated amount. The mere existence of reinsurance – regardless of how financially strong the reinsurer is – says nothing about the model itself. Absent a “cut-through” provision, reinsurers do not cover claims when the underlying company goes out of business.
Where are the Regulators?
Even with the failure of many healthcare companies and their alternative insurance models, and the shaky finances of some companies still operating today, regulators rarely take action prior to companies going out of business. Many MPL companies have perished and more are undoubtedly on the way. Large healthcare companies already struggling to pay off massive debt might be pushed to bankruptcy in part due to the pandemic. Captives operate in a shroud of secrecy, as they are not required to make detailed public filings. And laws against the corporate practice of medicine have done little to protect physicians against negligently designed MPL models.
So other than remaining independent, what can physicians do?
How Employed Physicians Can Protect Themselves
Ask About Coverage
The majority of physicians and medical practices are insured through “A-rated” insurance companies, and many are on policies with permanent (occurrence) coverage. If an employer has a claims-made policy, make sure you are not part of a “slot.” When physicians end their employment, ensure that the tail provided has no contingencies to it, and request a copy. Do not accept the employment contract alone.
Current employed physicians can take comfort knowing that if their employer is insured with a reputable company on an acceptable policy form, they will likely be able to transfer their coverage – even if the company goes out of business. The more secretive the model, the less likely transferability becomes. Encourage employers to be transparent about coverage and use third party advisors to validate the model and the finances behind it.
Maintain Independent Coverage
Even when physician practices sell to a hospital or management services organization (MSO), they are generally permitted to maintain their own MPL insurance – if they negotiate doing so upfront.
The time to inquire about, and negotiate, independent coverage is before a deal closes. Prior to executing a contract, be sure it includes a provision to maintain a separate MPL policy.
Most of the time, physicians will know that their employer has secured appropriate tail coverage for the time during which they provided services on its behalf. If corporations refuse to disclose any details of their insurance coverage though, it might be a sign that they are not funding it properly. Depending on the situation, it might be best to decline tail coverage in favor of securing “nose” coverage from the next MPL insurer.
Physicians insured on a claims-made policy can generally transfer prior exposure to a new carrier. By doing so, physicians can maintain control of their own coverage.
Contact Your Legislators
Most politicians are unaware of the new medical malpractice insurance threat to physicians. State insurance departments need to get tougher on unrated and poorly financed companies. Even risk retention groups are regulated by the state of their domicile, and those states should be more vigilant in their oversight. Captives should no longer be allowed to operate without having to satisfy the same reporting requirements as all other MPL companies. And any retentions or “slot” arrangements that could jeopardize coverage in the event of a bankruptcy should be legally required to be disclosed to employees.
Brian S. Kern, Esq., is a Partner with Acadia Professional, LLC. He has consulted on MPL coverage for many of the largest medical practices and MSOs in the US. He has also assisted many physicians through complex litigation resulting from carrier insolvencies.
Brian S. Kern, Esq., Partner, Acadia Professional.