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GOING BARE:  SHOULD A PHYSICIAN FORGO MEDICAL LIABILITY INSURANCE?

Should physicians bet their practices by assuming they will have no medical malpractice claims?  Some experts would answer, “No.”  Nevertheless, some physicians believe they can forgo liability insurance and “go bare.”

As a risk management technique, going bare, or retention, occurs when physicians decide to fund their losses instead of paying them through insurance or other means.  For example, doctors in certain specialties find the cost of medical malpractice insurance onerous.  Other practitioners can buy it but dislike the terms and conditions available.  Still others don’t want to delegate the handling of their claims to an insurance company which may put its short-term interests before the physician’s long-term benefit.

Physicians may have love-hate relationships with insurers.  They like having the financial protection.  On the other hand, they may feel that insurers are too “trigger happy” to settle claims simply to be able to wash their hands.

For many reasons, some physicians or groups of physicians may want to retain or self-insure their professional liability exposures.  Some critics feels that self-insurance is a euphemism for no insurance.  Retention is, however, a well-recognized risk management tool, though it has some definite pitfalls in the arena of medical malpractice insurance.

Hence, some suggestions and observations regarding retention as a medical professional liability risk management tool:

Retention may be more practical for hospitals and related facilities than for physicians.  Retention presents a fairly wide spectrum of possibilities, depending on whether it is a doctor or hospital (or even hospital chain) pondering this option.  Hospitals typically retain relatively large levels of risk, i.e. $1-5 million for each occurrence, subject to overall limits.  Hospitals, HMO’s, PPO’s, and other provider networks often require individual physician members to maintain some minimal level of insurance.

One problem is that individual uninsured practitioners would be risking personal assets by going bare.  Physicians often have substantial personal assets which conceptually pose a large legal target.

Medical malpractice may be a hard area to self-insure.  While some physicians may possess business expertise, the thought of asking any but the largest groups to self-insure sends shivers up the spine of many risk managers.  Large physician groups occasionally self-insure.  The politics of covering physicians should make one wonder about the viability of self-insurance for smaller groups.  Some factors to weigh include:  financial considerations, comfortability of risk-taking, claims administration, settlement politics, and accreditation.

Evaluate some tests of when self-insurance is viable.  Most businesses and firms start looking at self-insurance when their deductible reaches $50,000 – $100,000.   The loss history must be sufficient for an actuary to provide estimates of incurred claims, including a reasonable evaluation of IBNP (incurred but not paid – reserves on known claims), IBNR (incurred but not reported, reserves for claims yet unknown, but reasonably expected), and what some insurance people jokingly call IBNE (incurred but never enough, a contingency margin that actuaries use in projecting “expected losses,” better thought of as enough funding for 50 out of 100 years, but short in the other 50 years).  Claims-made policies generally increase IBNR reserves, since actuaries can’t assume that an excess insurance policy will always be there for long-tail claims.

Be comfortable with the thought of retaining larger chunks of risk.  In practice, it may be hard to find many physicians comfortable with the idea.  Many value the benefits of a good night’s sleep.

Weigh your interest in self-administering claims.  Another factor to ponder is the chore of claims administration.  Medical malpractice claims can be tough to administer.  They are one of two areas for which a third-party claims administrator (TPA) is in order (unemployment insurance is the other).  They are knowledge-specific claims, are paper intensive, and just take a vast amount of time to handle.  The workload varies, causing staffing issues.

Another headache is settlement authority.  It may be difficult to get a physician to say (s)he felt (s)he made a mistake (for claim purposes).  Settling a medical malpractice claim often requires notification to the national practitioner data bank.  Physicians often try to handle this by “committee.”  It may be difficult to get a group of physicians to agree to settle a claim that may result in a proverbial black mark against a doctor.  This is especially true when the reason for settlement is not because you can point to something someone actually did wrong, but because you believe a jury will want to give this person money — and it will be your money.

Some observers believe that juries work awards backwards, deciding what they want to give someone and then figuring out what they have to do to give it to them.  They do not like telling a severely injured person that it wasn’t anyone’s fault and they will just have to live with it.  This requires not just using a TPA, but giving the TPA settlement authorities that no one wants to give to a TPA.  This is unlikely.   That’s why some medical malpractice policies contain “consent” (to settle) clauses.

The claims-made coverage of medical malpractice in effect requires that a self-insurance program continue for a long time horizon (at least 20 years – bad baby cases would have an 18 year lag followed by the state’s statute of limitations).  The only way around this is to buy “nose” coverage for claims of incidents that occurred prior to the purchase of the policy, and an unlimited reporting period tail for claims that are made after the end of the  policy period.  This is very expensive, if it can be procured at all.

External constituencies may demand proof of insurance.  Physicians who have hospital privileges or contract with insurance plans  must have proof of insurance.  A minimum requirement of $1 million and generally $1million/$3 million or $5 million may make it difficult to “self-insure.”  You may have to provide copies of the state law stating that you can self-insure, and provide statements that you are a fully funded trust, audited annually, with annual actuarial studies.

The comments here are targeted at switching to self-insurance from what is traditionally insured.  Medical malpractice policies are often fairly narrow compared to commercial general liability (CGL) policies.  That means there are claims that may fall outside the policy’s scope.  Many recommend formalizing a self-insurance program for those claims, setting aside a contingency reserve for defense/indemnity.

Several forms of “pooled” risk are available but – again — this option may be available only with larger physician groups.  They tend to be captives that cover many subsidiaries, or cooperative purchase agreements where loss history of one will affect others.  But, once again, only the larger/largest groups do it.

Many remember the “good old’ days” back in the mid-1980’s when insurance practitioners formed “liability” captives at astonishing numbers. Many of these were medical malpractice but located in Bermuda and mostly all hospital-sponsored. The Cayman Islands got a kick-start as a medical malpractice captive domicile because Bermuda would not permit physician-owned facilities. That has now changed, as has the insurance market. There is nothing wrong with physician groups retaining risk, as long as they are driven by the same philosophies and risk management disciplines as any other groups that may wish to do so.

Medical malpractice may be a tough category to self-insure.  Unfortunately doctors form a category that is very difficult to address.  The disciplines they adhere to in the practice of medicine rarely are applied to risk management and insurance matters. It is extremely difficult to get consensus to establish business operating guidelines etc. When a hospital takes the initiative and makes its facility available to the doctors, there is a better chance of success. This is not to say groups of doctors are all bad at risk management; some have worked very well. The risk retention group is a viable option as are captives.  There are successful examples of domestic pools and trusts. (One problem is how an insurance coverage program shares bad experiences, which can frequently be caused by the same individuals again and again.)

While some doctors have gone “bare” in the past, others are aghast at using the concept in today’s environment.  It may be unwise for hospitals to permit it. In private practices, some doctors may be allowed to go “bare” as long as they display a sign to that effect in their offices (this differs by state).  In the final analysis, one should approach it from a basis of risk and financial analysis.  In other words, standard textbook risk management techniques should be applied.  Spend time explaining the concept and the operating guidelines (maybe through a steering committee).  If there is genuine need, genuine commitment and the numbers make sense, go for it!

Absent being “judgment proof,” medical malpractice retention as a “self-insured” may not be a prudent option.  Taking a high deductible – maybe, but this will affect budgeting on the “duty to defend” issue.  Medical malpractice is a risk that makes many practitioners uneasy about retaining it in full.  It is a highly leveraged claim situation.  Medical malpractice lends itself to true insurance well.  “Naked” doctors without such coverage may lose their practice when sued for medical malpractice, due either to the huge cost of defense or the award/appeal process costs.

In most states, physicians are individually licensed professionals.  All of their assets are available to subsidize retained risks.  Once that is understood, many physicians become persuaded to buy insurance of some kind.

Gregory Sosbee CPCU, Principal of Grunes Tal Associates states,

Years ago I worked on an IPO with a group of teaching doctors who also had an environmental consulting and expert witness operation.  While they heavily criticized all other doctors and the legal system as the cause of the medical malpractice problem, they had no interest in going bare.  Their view was that they would buy all the cover they could and increase their charges to their clients.  From work with other MD’s on the IPO, I gathered that most specialist physicians are of the same opinion: i.e., “If you want our services – you pay the bill.”

Beware of legal expenses when retaining medical malpractice exposures.  While retention may have some viability for medical malpractice exposures, more realistic may be a “pooling” arrangement or preferably offshore arrangement using a risk retention group.  The biggest consideration in retaining these risks is legal expense, which can amount to over 50% of judgments and settlements.

Many doctors think retention is viable, but this may be an urban myth.  Most doctors are accomplished practitioners but many – especially surgeons – are confident that they are experts in law and insurance.  They know about as much about them as an insurance adjuster knows about resecting colons.  The difference is that insurance adjusters don’t try to resect their own colons.

Make retention a conscious choice.  If a physician ends up retaining medical malpractice losses, this should be because he or she intends to do so, not because they simply didn’t think about their need for insurance.  Most experts feel that you should retain those losses that are:

  •  predictable and
  • comfortably absorbed.

Whether medical professional liability claims fall into this category for physicians depends on two factors:

  • the credibility of a physician’s loss experience and future loss projections and,
  • the financial ability to pay one’s own claims.

Retention should not result from a physician simply not thinking of procuring insurance.

Those who retain or self-insure liability exposures are medium- to large-sized organizations.  Smaller firms – as well as physicians — may lack the financial wherewithal to retain or self-insure for professional liability risks.  This leads to the next tip.

Make sure you have the funds to retain risk.  This is especially true if the retention is going to be more than letting one’s insurance coverage lapse.  Practitioners must ensure that they have adequate assets to fund losses.  Among the alternatives:

  • Setting aside cash reserves to fund expected (and unexpected) losses;
  • Obtaining lines of credit sufficient for paying claims;
  • Having an abundance of working capital or liquid short-term assets that can be used to pay medical malpractice claims.

Without these or other suitable funding mechanisms, physicians can find themselves in a cash-flow crunch when time comes to pay settlements, judgments or legal fees.  The latter may be tens of thousands of dollars, and come due quarterly or even monthly.  Timing factors complicate the situation further, as you cannot tell with absolute certainty when a large settlement, jury award or legal bill will materialize.  Other factors must be weighed when pondering the decision to retain professional liability exposures.  These include:

  • a medical practice’s business plans and commitments;
  • pro forma financial forecasts of a medical group’s operations;
  • continuing capital and cash flow needs;
  • the physician’s or medical practice’s vulnerability to external economic factors;
  • new capital accessibility;
  • banking relationships and credit facilities.

Physicians must ask themselves:  “Do I have the cash flow to fund medical malpractice liability losses, which can be unpredictably expensive or subject to great volatility?”  If not, think again about whether retention is really for you.

Bill Quinlan, Director of Risk Management for Forum Health, cautions,

Going bare will result in going broke.  Physician practices are generally worth insuring.  Risk retention groups, pools, mutuals, captives are all viable alternatives, given a critical mass of physicians.  For individual practitioners, though, retention won’t save much.

Self-appraise your personal and professional risk-tolerance.  How much do

you value a good night’s sleep?  If you are risk-averse, retention may be unattractive.  You might understandably be uneasy, realizing that one big jury hit could render an uninsured medical practice insolvent.

When considering retention, make sure that you are not so bedazzled by the

premium savings that you overlook the danger of a claim that dwarfs all previous losses in your professional history.

Doctors working as government employees might be able to “go bare” and forgo insurance coverage, since they are often covered under a government tort claims statute and may have reduced exposure.  In truth, it is not going bare, but rather using a different coverage mechanism with somewhat higher standards of liability and, in some cases, immunity.

One risk manager reflected on a pediatrician he had known who put a noticeable sign in his waiting room stating, “I do not have medical malpractice coverage.”  This may deter some claims, but not all.  It only takes one big claim to put a physician out of practice.

Outside constituencies may virtually demand that a doctor carry medical malpractice insurance coverage.  Risk managers for hospitals have to wonder about granting staff privileges to such physicians.  Most MD’s would be hard-pressed to earn privileges to practice in hospitals when the physicians lack insurance coverage for medical malpractice.

Check state requirements for liability insurance.  Since many state insurance departments have medical liability funds to cap exposures for doctors, they also usually require some minimum liability insurance coverage before the doctor can access the fund’s liability limit.  In these cases, going bare means higher liability limits and would seem to be an unwise choice.  Qualifications for such funds are usually very specific and should be checked carefully by the practitioner.

Cathy Jones, CPCU is President of Integrated Risk Solutions, a Dallas, TX risk management and insurance consulting firm.  She states,

I have worked with a physician’s group that went “bare” for several years.  It took a lot of good risk management techniques and a really strong attorney to pull it off.  When they decided to go back into the marketplace and buy insurance, though, some couldn’t get retroactive coverage, but some could.  This gets a little scary when you think of the long statute of limitations for injuries to children, for example.

Going bare may be a “bust.”  It also will not avoid lawsuits.  It is tempting to think that having no insurance will deter claims.  The theory is that, without insurance, physicians will no longer be “deep pockets” or attractive lawsuit targets.  During the height of the malpractice crisis, some doctors “went bare,” thinking this would stem the financial incentive for filing claims.

Such reasoning is misguided, however, and confuses cause with effect.  Liability insurance coverage is a result of claims, not the cause of them.  Most claimants and lawyers file lawsuits without ever first knowing if a doctor has insurance.  They assume the doctor has such coverage.  They really do not care that much, since their concern is compensation.  To them, it matters less whether that compensation is funded through insurance or the doctor’s own personal coffers.  Without insurance, claims do not vanish.  Instead, the claims attack — and attach to — the defendant doctor’s assets.

Thus, lack of insurance does not deter the filing of claims, or cause them to disappear once an action is initiated.  Further, going bare deprives a physician of having someone else (i.e., an insurance company) pay for defending a groundless lawsuit.  Much of what doctors buy when they purchase coverage is legal insurance, the right to have a lawyer hired to defend them.  These costs are usually paid up-front — monthly or quarterly — while claim settlements or judgments may take years in medical liability cases.  Interesting reasons may exist for a physician to retain losses, but the notion that doing so will deter claims should not be among them.

Consider the administrative hassles.  Retaining professional liability exposures also imposes new responsibilities and headaches, including:

  • the hassles of having to be in the claims-handling business;
  • the annoyance of having to oversee or manage an outside attorney who is handling your case, something normally done by an insurer;
  • fending off allegations by patients of bad faith claims-handling.

Each of these challenges may be manageable.  Administering a self-insurance program can become a major distraction, however, far afield of the physician’s core mission of caring for patients or building a thriving practice.

Beware of claim valuation problems.  Medical malpractice risk management exposures can be retained theoretically.  Retention programs, though, must have some reasonable basis for computing maximum probable loss.  That is, what is the largest loss or claim that is likely to occur?  In a professional liability context, what is the maximum probable loss for medical malpractice?  This is a rhetorical question, but one that is very hard to answer.

Suppose, for example, a patient enters a hospital to have his right leg amputated due to a diabetes problem.  By mistake, the surgeon removes the left leg.  The patient will have no trouble finding a medical malpractice attorney eager to take this claim, which the lawyer may view as a “slam-dunk” case of liability.

What would the reserve be in a retention or self-insurance program for this?  Physicians will likely lack any insight or frame of reference here.  The value of a physicians’ tools and office equipment can be reliably estimated:  office computers, examining tables, autoclaves, etc. There are standard resources available to gauge the replacement cost of such equipment, along with bricks and mortar.

While the value of damaged or destroyed property can be reliably quantified, such is not the case for bodily injury due to an adverse medical event.  Pricing what a jury may give an injured patient for damages, including the “wild card” of pain and suffering, is highly problematic.  A jury’s assessment may be colored by sympathy for the patient.  Lay juries may not understand the technical defenses presented by the physician and the physician’s attorney.

Thus, while self-insurance and retention programs might conceivably be viable for property-related exposures, they are much riskier for professional liability.  They risk personal bankruptcy on the physician’s part.

Market pressures may inhibit retention as an option.  Key business

constituencies may be skeptical of retention as off the beaten risk management path, and may view it as a “negative” when pondering whether to do business with you.  Some hospitals and health care facilities may ask — if not demand — that physicians produce certificates of insurance.  These are not insurance policies per se.  Rather, they recap the status of a physician’s professional liability insurance.  Medical institutions want assurances that, in the event of a claim, the practitioner has liability insurance to pay claims arising from any mishaps.

Retention is not an all-or-nothing choice.  It can be blended with insurance.  One  arrangement might be to carry a deductible or self-insured retention (SIR) with an insurance layer atop that.  For example, a physician might decide to retain the first $5,000 of loss.  The latter can include both claim costs and legal fees.  Above that threshold, the doctor buys a $5 million medical malpractice liability policy.  Here, a physician might reason that he or she gets the best of both worlds: absorbing the most common and routine losses, but having the comfort of knowing that there is coverage for the infrequent catastrophes.

Explore captive options.  A captive is an insurer owned by one or more companies within the same industry.  Often, a captive insurer pools its member’s premium money in order to pay claims and service the insurance needs of some niche market — oil companies, nuclear utilities, attorney malpractice or physician liability.  A captive is a hybrid between strict retention and full insurance.  There is a pooling of financial resources similar to the original insurance concept on which Lloyds of London was based, for example.  Captives can be single-parent (owned by one company) or multi-parent (owned by many companies) organizations.

Some physician groups have established captive insurance companies. Multi-parent captives comprised of companies or professionals in the same industry often provide professional liability coverage for groups of physicians.  Captives represent a long-term commitment, because many require minimum certain capital contributions prior to joining.  For the physician looking to jump from one insurer to another based on price, captives may not be an attractive option.

How to kick the tires when picking captives is a book-length topic in itself.  A number of physicians and medical groups have banded together to pool resources and form insurance programs for medical professional liability.  The benefits include:

  • long-term sources of insurance capacity insulated from fluctuations in the conventional insurance market;
  • greater control over claims handling, adjustment, settlement and trial;
  • increased control over underwriting;
  • specialized loss prevention resources which most conventional insurers lack.

Some physicians find retention an attractive option.  Medical malpractice insurance can be frightfully expensive.  Policies may be riddled with exclusions.  Insurers can cancel or non-renew coverage.  Insurers can go broke.

For physicians with the fortitude and financial resources to forge their own course, retention — either in a pure or blended form — may be an option worth considering.  It is not for the squeamish or risk-averse, however.

The above was excerpted from Quinley, KM Bulletproofing Your Medical Practice: Risk Management Techniques for Physicians that Work (SEAK 2000).  Please click here to download a free complete copy of Bulletproofing Your Medical Practice: Risk Management Techniques for Physicians that Work.