Transcript Download Handout 3

Medical Professional Liability Ratemaking
Hospitals / Self-Insurance
March 12, 2004
Today’s Objectives
1.
Coverage Issues for Hospital Professional
Liability (HPL)
2.
Approach to Pricing or Establishing
Funding Levels for Hospitals
3.
Observations Regarding Recent Tort
Reform Initiatives in PA and FL
4.
Q&A
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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 ILF’s

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 & ALAE
Cumulative Distribution of Aggregate Losses -- $10 Million Per Claim Limit
$100,000,000
$90,000,000
$80,000,000
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0
0%
5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
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Observations Regarding PA Tort Reform

Elimination of Joint & Several liability
– Could be a big issue for hospitals if < 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)

D&T 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?
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