Med mal and the ART market
RRG for urgent care clinics takes advantage of risk's unique traits
By Michael J. Moody, MBA, ARM
Medical malpractice (med mal) coverage provides professional liability protection for the negligent acts or omissions of health care providers. As a line of coverage, it frequently has significant swings in both frequency and severity that cause meaningful market distress for doctors and hospitals. As a result, med mal risks have been active participants in the alternative risk transfer (ART) market for quite some time.
One of the earliest, most widespread insurance crises occurred in med mal. This major calamity shocked many in the mid-1970s, when many of the larger med mal carriers began leaving the market. This action caught many health care providers and state regulators off guard, with few options open to them. Doctors and hospitals that lacked needed coverage began scaling back their services, or stopping some services all together. State medical societies looked for ways to resolve the issue and, in a number of states, the insurance departments waived the normal insurance company approval process just so that new carriers could be started. For all intents and purposes, these state-approved insurance companies were, in fact, a precursor to group captives. Many of these companies, collectively referred to as "bed pan mutuals," provide coverage for a real and urgent need; and, as time has proven, many have succeeded in fulfilling that role.
Once they began operations, the state association programs relieved much of the premium pressure that had occurred in the market. However, another significant pricing problem arose in the mid-'80s which forced many health care professionals to consider starting captive insurance companies. Lacking appropriate legal avenues from U.S. domiciles, many health care professionals chose to form their captives off-shore—the Caymans, in particular. In some of these situations, the captive was forced to incorporate a fronting carrier into the captive's structure just to remain legal.
For many of the captives, the fronting issue was eliminated with the advent of the Risk Retention Act of 1987. As a result, medical professional liability has become one of the most popular applications of the RRG legislation. Current figures indicate that more than 60% of the RRG business sector is associated with med mal-related coverages. Further, premiums written by RRGs have been increasing over the past five years, as more and more health care professionals have gotten comfortable with the ART market.
A natural progression
Today, it is only natural for a group of health care professionals who encounter issues with the traditional commercial insurance marketplace to consider an ART market solution. That was the case with "urgent care" physicians, according to Bob Barrese, Senior Vice President and Manager, Alternative Risks Division, Assurance Agency, Ltd. While the urgent care sector of health care was just beginning to see significant growth with more than 8,700 centers nationwide, underwriters were still rating them as emergency room doctors. There are however, striking differences between the two groups, Barrese notes. According to the group's trade organization, Urgent Care Association of America, "An urgent care center provides walk-in, extended hour access for acute illness and injury care that is either beyond the scope or availability of the typical primary care practice or retail clinic."
In fact, the association goes out of its way to note, "They are not equivalent to emergency departments." Rather, "Urgent care ideally helps in reserving the nation's emergency room resources for more serious, life-threatening conditions." Obviously, Barrese says, "The hazard levels appear quite different."
Many of the urgent care doctors were growing disenchanted with the misclassification provided by the commercial marketplace and were interested in looking at viable alternatives. Barrese worked with the association for several years before they were able to put together a Founders Group to fund a feasibility study. As part of this work, they looked at 56 med mal insurance companies. The results, Barrese points out, were that "smaller companies, including RRGs that focused on one thing and really know it well were invariably profitable through both hard and soft markets." And at this point in time, "No one was focused on this space." After reviewing the loss data and completing the feasibility study, he says, it was clear that "the rates being charged were not in line with the hazard group."
Based on the favorable results from the survey, Urgent Care Assurance Company, RRG was formed in Nevada, in March 2007. Significant research had been completed regarding the rates that would be needed to be competitive. Since many of the centers were being charged emergency room rates, for the most part, the new RRG was going to be able to provide a competitive rate. However, several issues arose to challenge the pricing issue, Barrese indicates.
Texas was a good case in point, he says. Typically, when a state completes some tort reform that is favorable to the doctors, it usually requires a court challenge before insurance carriers give much creditability to the new law or use the data in adjusting the rates. However, Texas took the extreme measure to incorporate its tort reform measures as part of a constitutional amendment, thus providing immediate credibility. Accordingly, Texas's liability rates plummeted overnight, thus eliminating the pricing advantage that the RRG had held.
As a result, of the above noted rating issue, the RRG has been most active in the Midwestern states. For the most part, Barrese says, the insureds are smaller premium members with average premiums in the $4,000 to $6,000 range. Currently, the premium volume for the RRG is about $1.6 million. However, the RRG is actively looking for ways to increase this over the next several years.
Keys to success
A critical element to the RRG's success is the commitment to risk management and loss control. In that regard, they have established a formal risk management program that utilizes an existing professional liability program from the Institute of Urgent Medicine. The program is designed to provide continuing education and CME credits and to serve as a benchmarking tool for the RRG. Insureds that take advantage of the training will be offered premium discounts on future policies.
Claims management is another area where the RRG has made a significant commitment, Barrese notes. Currently, "We are outsourcing our claims management activities to an established third-party service provider, ProClaim America. We are fortunate to have identified a claims adjustor that has been with us since the beginning and he is as knowledgeable as anyone on the types of claims we face." He goes on to note, "We do not have a lot of claims since this is not a frequency driven business. Occasionally, we may have a claim that goes to policy limits, but those are quite rare."
Barrese says the RRG has worked on becoming more valuable to its members by expanding the scope of what it provides. The RRG recently amended its license to allow it to write health care stop loss insurance.
"We are developing a companion coverage that will allow the owners to purchase a stop loss product that will incorporate a 'best practices/wellness element' into the coverage," says Barrese. He points out that many of their smaller members have about 10 to 15 employees and, as a result, are having trouble obtaining cost-effective employee health coverage. "While the main focus of the RRG will always be on the professional liability coverage, if we can identify additional ways to use the RRG and provide more value-added products, we will certainly consider them."
One issue that has remained a challenge is the marketing and distribution of the coverage. At this point, Barrese says, the majority of the marketing has been via the association's annual conference as well as regional events throughout the year. He says that they also utilize Internet marketing. For the most part, independent brokers have not been involved in marketing. To some extent, this is due to the newness of the specialty; very few brokers have more than one or two small accounts in their office and thus are reluctant to move the accounts to the RRG. The long-term goal is to identify several key, regional brokers to assist with the marketing responsibilities.
It's clear that med mal has had a long and storied past with the ART market. Given all of the uncertainty that currently surrounds both the commercial property and casualty insurance marketplace and the health care arena as well, it would appear that the usage of alternative risk transfer vehicles will only get larger. Agents and brokers would do well to begin developing a strategy and making contacts for the market hardening that will likely occur in the med mal area.
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