Medical Malpractice Insurance Coverage for Multispecialty Physician Groups And Single Specialty Group Medical Practices

Over the past decade, we have witnessed growth in the merger of smaller practices into single specialty large group medical practices and multispecialty physician groups.

This growth has been fueled by a number of factors including the desire to exercise greater leverage in negotiating with health insurance companies and implementing savings from bulk purchasing and central management. Many of these groups hired experienced management staff to assure that all available benefits were obtained as quickly and efficiently as possible. Many delegated management to the founding members of the group. All experienced significant growing pains. Some more than others.

Since one of the largest expense line items for large groups is the cost of medical malpractice insurance, it is an issue that is often tackled early, shortly before or after the group is formed. When smaller groups merge, the new practice is faced with its physicians insured by many companies with each old group having its own corporate coverage for the former corporations. Since all of these old practices will be running off their accounts receivable for many months, the old corporations cannot be closed and coverage should be continued until the corporations are legally closed, either through the purchase of tails (See former blog posting dated October 19, 2009), continuing the former coverage, or endorsing the old corporations onto a new policy.

It is important to address the issue of unifying coverage for all members of the group under one company to avoid the possibility of cross claims between members of the group that can occur when a number of doctors are on the same claim but represented by different companies. Also, unifying coverage brings other benefits discussed below. Often, however, this issue is not addressed until after the group has begun operations. It is important to have malpractice insurance coverage in place for the new corporation on the first day of operation. This coverage may not be available in the standard malpractice insurance market if no one company insures a majority of the group’s physicians. If a group has to go outside the standard market for “stand alone” corporate malpractice insurance coverage, the cost, while usually manageable, is often significantly more expensive than would be available in the standard market and can carry heavy premium front loading so that there is not a pro rata refund if the policy is canceled when the group obtains a single malpractice insurance policy. Clearly, the best way to proceed is to get this all done before going live with the new corporation. As a practical matter this rarely happens.

So what are the benefits of coverage with a single company? As noted above, it can help avoid or diminish the likelihood of ugly cross claims between members of the same group. Also:

• For groups with good claims histories, group purchasing of medical malpractice insurance can significantly reduce the cost per physician, showing group members an immediate and gratifying benefit of all the work that went into merging the practice.
• There may be some members of the group who have had to pay high premiums or look to the high risk markets for coverage due to claims or other issues, who could now obtain coverage at closer to standard prices or from a standard medical professional liability company.
• Many of the companies that insure large groups offer free on site risk management studies and can make recommendations to help lower future claims.
• Large groups can secure coverage that best positions the group for future self insurance when the group becomes large enough to make this feasible.

The issue of reducing the cost of medical malpractice insurance is usually the main focus of a large group’s search. The key to reducing cost is to shop widely among standard and Excess & Surplus companies with a broker or brokers experienced in these markets. Standard companies, often called “admitted” companies are companies whose rates and forms are approved by the state. They are not allowed to charge rates other than those filed with and approved by the state or use policy forms that have not been filed with and approved by the state. Excess and Surplus companies, often called “Surplus Lines” or “Non Admitted” companies are approved by the state as meeting its solvency requirements, but do not have to file rates and forms with the state. Surplus Lines companies have much greater flexibility in negotiating rates and in creatively meeting emerging coverage issues that can often be faced by large medical groups and multispecialty medical practices. Our next posting will deal with Surplus Lines coverage in greater detail. Obviously, groups should only accept offers made by highly rated “admitted” and “non admitted” companies.

Companies have wide latitude in offering savings to large groups with excellent claim histories, Group savings of over 20% can be realized. Groups with poor claims experience will not see significant savings, making a key element of group formation proper credentialing and a key element of continuity, the establishment of a strong oversight committee to insure “best practices” within the group.

A side question of the search for group medical malpractice insurance coverage is whether it is better to work with a broker that charges a fee or one that is paid a commission by the insurance company. The argument for fee based representation is that it insures broker neutrality and levels the playing field for all companies. While many medical malpractice insurance brokers will represent their clients either on a fee or commission basis, the commission basis will usually get the group its best overall cost. This would not be true if determining the cost of malpractice insurance was an exact science. But it isn’t. Instead it’s a competitive marketplace and a good broker will obtain bids from many companies and negotiate hard to get the best price. Pulling the commission out before the negotiations does not guarantee a lower price to the group. Instead, the group can land up with the same price it would have had with an insurance company paying the commission, but now the group has to add its fee to that price.

Regarding physicians who have had claims activity, licensing board actions or the like, the severest treatment usually falls on solo practitioners or small groups, because the medical malpractice insurance company has little incentive to undertake a detailed review of the history of the past conduct and the steps taken to assure that they will not recur. Also, the premium does not outweigh the risk of future loss. In a large physician group setting, medical professional liability companies have a greater incentive to undertake this review and, are open to being convinced that there are good reasons to believe that these issues are in the past and can even help establish risk management procedures.

Many companies have risk management divisions. While it is not cost efficient to send a risk management team out to do a survey for a solo practitioner or small group, it does make sense to do it for large groups. When these services are available, they are almost always free and they tend to be excellent and well received.

The last benefit mentioned above is proper positioning for future self insurance. The medical malpractice insurance market in 2010 is highly competitive. Rates are at a low point and will probably remain this way for another two to three years before the market cycles back to higher premiums. Under these circumstances, it is rarely beneficial for new groups to form new self insurance programs. The cost of buying insurance will usually be cheaper than the cost of funding a self insurance program. Many currently “Self-Insured” programs are paying higher “Self-Insured” costs, than the cost of purchasing medical professional liability policies from insurance companies. However, it is a good time to position a group for self insurance by assuring that the group’s coverage includes “incident trigger” (See posting dated November 5, 2009) language and considering products that convert from claims made coverage to occurrence coverage (See blog posting dated October 19, 2009).

All in all, current market trends favor large group medical practices and these groups should undertake a serious annual review of their medical malpractice insurance policies.