Medical Professional Liability Ratemaking Hospitals SelfInsurance March 12, 2004

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Medical Professional Liability RatemakingHospital
s / Self-InsuranceMarch 12, 2004
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Todays Objectives

• Coverage Issues for Hospital Professional
  Liability (HPL)
• Approach to Pricing or Establishing Funding
  Levels for Hospitals
• Observations Regarding Recent Tort Reform
  Initiatives in PA and FL
• QA

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Coverage Issues for Hospital Risks

• Retentions have increased significantly in recent
  years (10M per claim is not unusual).
• The cost of commercial excess insurance has also
  increased significantly, despite the higher
  retentions.
• If a hospital purchases ongoing claims-made
  coverage, it still needs to book a liability on
  its financial statements for the unfunded tail.
• For competitive reasons, many hospitals are
  starting to open their captives to offer coverage
  to physicians.

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Data Needed for HPL Rating Model

• Historical and projected exposures
• Historical loss data, limited to some per-claim
  limit (e.g., 500,000).
• Loss development factors (at selected limit)
• Increased limits factors
• Industry loss cost information
• Trend factors
• Discount factor
• Expense assumptions

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HPL Exposure Data

• Traditional inpatient exposure base is occupied
  bed counts, which can be calculated as ( patient
  days 365).
• Rates vary for Acute Care, Psychiatric, Neonatal,
  Nursing Homes, etc.
• Outpatient exposure is measured by numbers of
  visits selected differentials
• ER and Outpatient Surgical visits are considered
  higher risk than Other visits.

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Estimating Historical Ultimate Limited Losses

• Loss development
• Frequency severity
• B-F using expected loss industry loss cost
  historical exposure
• Experience Mod compare actual losses to
  (expected loss expected reported). Multiply
  projected expected losses by selected Mod.

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Projecting Ultimate Limited Losses

• Divide historical ultimate limited losses by
  historical exposures
• Trend the resulting limited pure premiums to the
  projection period
• Select an ultimate limited pure premium for the
  projection period
• May involve credibility weighting the indications
  based on the hospital experience vs. broader
  insurance industry experience
• Multiply by the projected exposures to estimate
  the projected limited losses

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Projecting Ultimate Total Limits Losses

• Multiply selected limited loss estimate by an
  increased limits factor
• Review historical losses in the excess layer for
  consistency with selected ILFs
• General Liability losses are sometimes included
  as a multiplicative factor (e.g., 1.10)
• Adjust to reflect other coverage issues (e.g.,
  aggregate limits).

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Additional Issues to Consider for Self-Insureds

• Many self-insureds fund at a higher confidence
  level than the actuarial best estimate (e.g.,
  75)
• Need to select frequency (e.g., Poisson) and
  severity (e.g., lognormal) distributions
• Many self-insureds fund at a discounted level.
• Need to select a payment pattern and discount
  rate.

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Hypothetical Distribution of HPL Loss
ALAECumulative Distribution of Aggregate Losses
-- 10 Million Per Claim Limit
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Observations Regarding PA Tort Reform

• Elimination of Joint Several liability
• Could be a big issue for hospitals if lt 60
  liable
• Some say the law violates single subject rule
• Certificate of Merit
• May reduce claim frequency, increase severity
• Collateral Source Offsets
• Elimination of Venue Shopping
• 7 Year Statute of Repose
• No primary layer impact until Mcare is
  eliminated.
• Patient Safety Initiatives
• Requires written notification to a patient
  affected by a serious event

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Observations Regarding FL Tort Reform

• 500,000 per physician cap on non-economic
  damages (1 million aggregate for all claimants)
• Exceptions for death, permanent vegetative state,
  or other defined catastrophic injury (1M per
  doctor)
• 150,000 / 300,000 cap for ER physicians
• 750,000 per hospital cap (1.5 million
  aggregate)
• Exceptions for death, permanent vegetative state,
  or other defined catastrophic injury (1M per
  hospital)
• DT estimated a 7.8 presumed factor
• Caps 5.3 Bad Faith Provisions 2.5
• Rates are still increasing in FL, but increases
  are 7.8 lower than they would otherwise have
  been.

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• Questions?