ANNUAL RATE SURVEY ISSUE

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1 ANNUAL RATE SURVEY ISSUE OCTOBER 2017 VOL 42, NO 10 LIGHT OR HEAVY HEADWINDS? RATE REPORT PRESENTS STATE-BY-STATE VIEW OF CHANGING MARKET n this issue, we bring you our 27th Annual Rate Survey. This issue provides a continuing overview of changing rates for physicians medical professional liability insurance. It is a snapshot in time, reporting rates effective July 1, It is a picture we paint state-by-state, county-by-county because where physicians practice largely determines the premiums they pay. This is because insurers base their rates on the aggregate claims experience in a particular geographic area. Because state insurance departments may regulate rates, state tort reforms can affect the cost and patient compensation funds may influence the total premium, it is impossible to project a common national picture. Each year, we survey the major writers of liability insurance for physicians. We ask for manual rates for specific mature, claims-made specialties with limits of $1 million/$3 million by far the most common limits. These are the rates reported unless otherwise noted. We report on three specialties to reflect the wide range of rates charged: Internal Medicine, General Surgery and Obstetrics/Gynecology. With the exception of Medical Protective, Princeton, PLICO and Physicians Reciprocal Insurers and MPMPPIA, all rates shown were volunteered by their respective companies. Those companies rates published herein were I CONTINUED ON PAGE 2 MEDICAL PROFESSIONAL LIABILITY IN 2017 by Paul Greve, JD, RPLU, and Alison Milford, ACAS, MAAA he medical professional liability (MPL) insurance marketplace remains stable, but insurers ended an unprecedented run of consecutive years of underwriting profitability in The gradual transition in underwriting profitability coupled with the uncertain future of healthcare in the United States as well as consolidation among both healthcare providers and MPL insurers are just some of the major challenges the industry faces at present. In recent years, we have used the metaphor of sailing a ship to describe the MPL insurance industry. The industry has experienced favorable tailwinds and few waves, making for smooth sailing during the last decade. However, some headwinds appear to be supplanting those tailwinds in the form of the slipping underwriting results mentioned above, signals of an increase in the number of large verdicts and settlements in recent years as well as various challenges to maintaining or growing the business that put pressure on overall profitability. This pressure on profitability, prompted, in large part, by significant price competition, is exacerbated by issues associated with healthcare reform and the consolidation of potential buyers in certain market segments, such as physicians and hospitals. These increasingly challenging sailing conditions may make for a rougher sail, but ships with deep keels can help maintain smooth sailing. So, are the headwinds light or heavy? T THE NATIONAL ENVIRONMENT: HEADWINDS There is a potential confluence of factors that present challenges to the medical professional liability insurance industry. Some of the factors forming headwinds include: Signals of an increase in the frequency of more severe claims may be an emerging challenge to profitability. Claims closing at more than $1 million appear to be increasing in frequency as reported by a number of insurers, particularly claims against hospitals and long-term care facilities. However, for survey respondents, only slightly more than 14 percent noted observing an increase in the frequency of claims greater than $1 million. Consolidation of physicians and hospitals through employment as well as merger and acquisition has left fewer buyers. While the trend may have decelerated, physicians are still moving into hospital employment or joining large multi-specialty groups that may have the ability to self-insure through a captive insurance company or a risk retention group. Hospital systems are still seeking to grow through acquisition of other hospital systems, independent hospitals, imaging centers, ambulatory surgery centers and other types of healthcare providers. Hospital self-insured retentions remain high, further eroding the amount of MPL exposure available to be written. This headwind is clearly top of mind for the survey participants with nearly two-thirds of respondents citing consolidation as the biggest threat to market share. The recent level of profitability, coupled with fewer buyers of physician and hospital medical professional liability coverage, has resulted in significant price competition among MPL carriers. The remaining one-third of survey respondents cited CONTINUED ON PAGE 2

2 2 CONTINUED FROM COVER obtained through independent research and are believed to be accurate. The rates reported should not be interpreted as the actual premiums an individual physician pays for coverage. They do not reflect credits, debits, dividends or other factors that may reduce or increase premiums. Rates reported also do not include other underwriting factors that can increase premiums. States without compensation funds by far the largest group are reported first. Patient compensation fund states are grouped at the end of the survey. In patient compensation fund states, physicians pay surcharges that range from a modest percentage of premium to more than the base premium. Also, limits of coverage can differ in these states, which is noted with each PCF state. When we contact survey participants, we ask them to provide data on all the states in which they actively market to physicians. We only report rates for companies that maintain filed and approved rates for each state in which they sell medical professional liability insurance. We try to capture the leading, active writers in each state, but every writer may not be included. In comparing this year s report with previous reports, it is evident that the market is always changing. Many companies formerly included no longer sell physicians malpractice insurance in certain states, do not currently entertain new business, have withdrawn from this line of insurance or no longer exist. The companies shown were available for business as of July 1, We estimate that this survey represents companies that comprise 65 to 75 percent of the market; as such, it is the most comprehensive report on medical professional liability rates available. The expanded rate report could not have been completed without the cooperation of the many people who work in the companies surveyed. Their cooperation is invaluable in providing this information to all who have an interest in medical professional liability. CONTINUED FROM COVER pricing concerns as the biggest threat to market share. Claims costs have risen moderately and continue to do so, and defense costs are leading the charge. Reproducing the electronic medical record (EMR) has become very costly due to the extensive, and thus expensive, discovery demands of the trial bar, especially the cost to produce EMR metadata. In addition, the increasing cost of engaging expert witnesses is another contributor to higher defense costs. Affecting the indemnity side, medical costs for future care continue to increase. Concerns about the future of the structure, cost and risks of the healthcare delivery system create great uncertainty for the MPL industry. This uncertainty is evident in the survey responses with more than half of the respondents expecting no change in frequency as a result of healthcare reform, but with the balance evenly split on whether it will result in an increase or a decrease in frequency. Although operating results continue to be profitable, they are experiencing shrinking margins from multiple directions: eroding exposure, aggressive pricing, fixed expenses and less investment income. The industry combined ratio has crept above 100 percent for the first time in a decade (see Exhibit 1 on Page 3), due in part to a reduction in exposure and premium that has resulted in upward pressure on JAMES H. CUNNINGHAM Publisher MICHAEL MATRAY Editor HERB JONES Circulation Manager expense ratios since many expenses are fixed. There is also pressure on investment income as yields and realized gains slip. THE NATIONAL ENVIRONMENT: DEEP KEELS Just as a deep keel can steady a ship as it sails through headwinds and choppy waters, the following factors continue to promote stability within the MPL insurance industry: While some jurisdictions are showing signs that there may be a course change underway, claim frequency remains relatively flat and near historic lows across the MPL industry with a possible exception being the long-term care segment in certain jurisdictions. A number of carriers and large hospital systems report continuing stable, and in some jurisdictions even lower, claim frequency in recent years. This view is echoed by the survey participants with almost 80 percent of respondents noting that frequency has been flat during the last two years and the balance of those responding noting a frequency increase. The attitude of the general public towards malpractice litigation does not appear to have changed over time despite changing levels of access and greater uncertainty about the future of healthcare in the U.S. But the trend to larger verdicts must be observed as it may indicate a more punitive attitude when fault is found. The high cost to the trial bar of pursuing malpractice litigation serves as a barrier to the numbers of suits being filed, par- P.O. Box 680 Oak Park, IL Fax: editor@mlmonitor.com website: Subscriptions: Annual subscription rate $499, which includes monthly issues and the Annual Rate Survey. Subscriptions are available at or by calling Medical Liability Monitor, Inc. Published monthly. May not be reproduced in whole or part without permission.

3 ticularly for claims that, by the plaintiff s self-assessment, have limited merit or damages. Effective patient safety as well as risk management programs and practices continue to help prevent patient injuries. These include such measures as patient simulation labs and team training in order to promote better intraprofessional communication and strictly enforced patient care protocols. While there has been some additional erosion in 2017 (notably Wisconsin and Florida Supreme Court rulings overturning damage caps), the successful malpractice reform legislation enacted during the last 15 years has mostly withstood challenges. The MPL insurance industry is well-capitalized. Many carriers have strong balance sheets bolstered by years of building surplus. Operating revenues are aided by investment income although yields and realized gains are not what they once were. THE RATE SURVEY RESULTS: STEADY AS SHE GOES While the 2015 Annual Rate Survey indicated a barely noticeable overall average increase (0.2 percent) in rates for the first time since 2007, the average change in rates for 2016 and now 2017 seem to have settled back into the pre-2015 trend of modest decreases in the overall average rates. The average change in the rates reported in the 2017 Annual Rate Survey is an overall decrease of 1.1 percent, a slightly larger decrease than the one reported for 2016 (0.1 percent) and more in line with the 2012 through 2014 results. Similar to results from the 2016 Annual Rate Survey, the majority (74 percent) of responding companies reported that rates have remained flat between 2016 and An indication that is virtually unchanged from the 75 percent of companies reporting rates remained flat in the 2016 survey. Exhibit 2 (on Page 5) summarizes the overall average rate changes by range from 2006 to Changes in the charges established by Patient Compensation Funds (PCFs) in a number of states continues to be a source of distortion in this review. For example, the changes for the large players in Indiana generally include modest, low-single-digit increases in response to an increase in the attachment point for the PCF in that state from $250,000 to $400,000, but the PCF surcharge in Indiana did not change. Also, decreases in the PCF surcharge for Kansas and Louisiana were, in some but not all cases, partially offset by increases for the primary carriers. The PCF increased the charge in Nebraska, New Mexico, Pennsylvania and South Carolina, but the primary carriers 160.0% 160% 140.0% 140% 120.0% 120% 100.0% 100% 80.0% 80% 60.0% 60% 40.0% 40% 20.0% 20% 0.0% 0% MPLI Industry Combined Ratio ( ) DATA SOURCE: A.M. BEST SPECIAL REPORT ON Coverage U.S. MEDICAL Year PROFESSIONAL LIABILITY SECTOR MAY 10, 2017 If we look at the changes reported by region, roughly 55 to 60 percent of the states in both the West and the Midwest regions reported a change in rates compared to approximately one-third of the states in each of the Northeast and South regions. Exhibit 1 did not change rates. If the rate changes implemented by only the primary carriers is reviewed, removing the distortion created by changes in the PCF surcharge, the overall decrease is boosted very slightly, but still results in a decrease that rounds to 1.1 percent. However, the percentage of companies that indicate the rates did not change between 2016 and 2017 is 81 percent versus 74 percent when the full rate, including the surcharge, is considered. In addition, the percentage of insurers reporting rate increases drops from about 13 percent when PCF charges are included to about 6 percent when only considering the primary insurer portion. The percentage of insurers indicating a rate decrease is virtually the same whether the PCF surcharge is included (12.4 percent) or not (12.6 percent). The overall changes by specialty for each of the three specialties reported in the survey mirrors the combined specialty change, implying there has likely been little in the way of changes among specialties. The decreases for Internal Medicine, General Surgery and OB/Gyn are 1.1 percent, 1.0 percent and 1.0 percent, respectively. In the 2017 Annual Rate Survey, there are no states where the rate change increase or decrease is in the double-digits. In fact, only five states report decreases of more than 5 percent: Hawaii, Kansas, Michigan, Montana and Ohio. No states reflect increases of more than 5 percent, including the PCF surcharge. If the surcharge is excluded, the increase for Indiana is right at 5 percent. Staying true to form since the mid-2000s, most increases were less than 10 percent. Of the 13 percent of companies reporting an increase in rates, less than 1 percent are increases greater than 10 percent. These statistics are very similar to the rate changes reported between 2015 and If we look at the changes reported by region, roughly 55 to 60 per- 3

4 4 MEDICAL LIABILITY MONITOR OCTOBER 2017 VOL 42, NO 10 cent of the states in both the West and the Midwest regions reported a change in rates, compared to approximately one-third of the states in each of the Northeast and South regions. The only region reporting an average rate increase, albeit a very slight 0.6 percent, is the Northeast region. This average increase is driven by the roughly 12 percent increase in the surcharge in Pennsylvania. Absent that increase, the reported change for the Northeast region would be barely positive, rounding to a zero percent change. Including the change in the surcharge, Pennsylvania rates are about 1.7 percent higher; without it, they are flat. Only Maine and New Hampshire report changes in the Northeast region with Maine reporting an increase of 2.5 percent and New Hampshire a decrease of 2.3 percent. Other Northeast states are reporting that rates remained flat. In the South, decreases in Texas and Virginia of 3 percent and 3.6 percent, respectively, and increases in Florida, Georgia and South Carolina of 1.5 percent, 1 percent and 1.8 percent, respectively, combine for an overall decrease for the region of 0.9 percent. The increase in South Carolina is partially due to a 5.4 percent increase in the PCF surcharge. Louisiana is effectively flat, reporting a decrease of 0.1 percent, but excluding the 1.6 percent decrease in the PCF surcharge, rates in Louisiana increased about 0.8 percent. The balance of the states in the South are not reporting any change in rates. The change reported for the Midwest is a 2.1 percent decrease. Kansas, Michigan, Missouri and Ohio all report decreases around 5 percent. A very slight decrease (0.3 percent) was reported for Illinois due to one carrier reducing the rate for the OB/Gyn specialty. Nebraska and Indiana are each reporting increases of roughly 3 percent, but the increase in Nebraska is driven by an 18 percent increase in the PCF charge, while primary insurers in that state hold rates flat. As noted previously, the increase in Indiana is due to primary carriers increasing rates in response to the increase in the attachment point for the PCF. The rest of the Midwest states hold the line with no change. The two states with the largest reported changes are in the West region Hawaii and Montana report average decreases of 9 percent and 7.2 percent, respectively. The result for Montana is driven by a large change reported by one of the players in that market, while the dominant carrier is holding rates flat. Alaska reflects a reported decrease of 3.3 percent. Other states in the West region reporting slight decreases are California, Idaho and Nevada each reporting decreases of 0.5 percent or less. In New Mexico, the PCF surcharge increased by 9.3 percent, while the primary carriers are holding rates flat, driving an increase for the state of about 1.3 percent. The other six states in the West region did not report any change in rates. EMERGING RISKS: THE COMING WAVES While rates have remained relatively flat, there are some white caps on the horizon with the potential to rock the MPL boat. These emerging risks include: MPL insurers are seeing more systemic risk/batch claims involving large numbers of related incidents. Examples include unnecessary surgeries as well as patient infections such as MRSA, Hepatitis C and C.Diff, among others. Settlements for these types of claims can be in the tens of millions of dollars, although some of these are MPL costs and some are not. Cyber liability/network privacy coverage is increasingly being purchased by healthcare providers from their MPL insurers. However, the limits sold by traditional physician carriers ($50,000 to $100,000 with the ability to purchase upwards of another $5 million in limits) to individual providers are low in comparison to those available to facilities. MPL carriers are heavily reinsuring most of this type of risk. The healthcare industry has been especially vulnerable to costly cyber incidents, such as a lost laptop with patient clinical and financial information as well as well-publicized ransomware incidents. More than 85 percent of the survey respondents note that they have experienced cyber liability claims. The creation of contracting networks by hospital systems and large physician groups may promote more claims of negligent credentialing of individual providers and participating facilities. Hospitals could potentially be the deep pocket target of the trial bar for these types of cases. These structures create the potential for contractual liability and for the trial bar to allege ostensible/apparent agency. The opioid epidemic may also present challenges to the MPL industry. Physician accountability may be an issue, but given the low limits of liability coverage available, most physicians are less likely to be a major target of the trial bar in comparison to the pharmaceutical industry. However, defending this type of litigation may be problematic and expensive given all the recent media focus. The rapid technological advancements being made with innovations such as wearable devices, telemedicine and artificial intelligence could create new forms of clinical risk. One can foresee allegations that such technology was not properly used or omitted although it was available. Technological breakdowns could lead to complex litigation involving MPL insurers and product liability insurers. New reimbursement models that shift payment away from fee for service may change provider behavior and thereby affect MPL litigation in unpredictable ways. MPL insurers will need to be very watchful on how reimbursement changes could affect clinical risk as the legal standard of care evolves accordingly. Hospital insurers are beginning to experience more claims for diagnostic error due to their employment of physicians. Regulatory risk in healthcare has been present for some time due to state and federal government actions. To date, there does not appear to have been a recent increase in federal regulatory enforcement. Directors and officers (D&O) policies typically offer limited antitrust coverage. Most traditional physician carriers offer low limits of regulatory coverage with the ability to purchase higher limits. But a handful of commercial carriers now offer a comprehensive regulatory risk policy for claims arising out of Medicare fraud and abuse, HIPAA, the False Claims Act, qui tam actions and other regulatory violations. The average change in the rates reported in this year s Annual Rate Survey is an overall decrease of 1.1 percent, a slightly larger decrease than the one reported for 2016 (0.1 percent) and more in line with the 2012 through 2014 results. MPL MARKET SEGMENTS In recent years, many traditional physician insurers have moved into other MPL market segments. In 2017, we continue to observe MPL specialty insurers expanding geographically in an attempt to grow premium. Many have also launched or acquired companies that offer products and services related to MPL and/or that are intended to help grow

5 non-insurance revenue. Hospitals, Health Systems. The number of buyers in this segment continues to decrease due to consolidation. Renewals in 2017 are usually characterized by flat to single-digit (sometimes more) decreases at renewal, especially in favorable jurisdictions and for hospitals with betterthan-average loss experience. There is an over-abundance of excess coverage capacity for hospitals and, therefore, much competition in this segment. More excess carriers are willing to write integrated programs with excess coverage layered over some of the HPL/GL coverage as well as the auto, general liability and crime/fiduciary coverages. A number of hospital excess carriers are offering multi-year programs. However, some of the systems that have been experiencing higher-severity claims may be getting pressure in the form of higher premiums, sometimes forcing consideration of higher self-insured retentions. Physicians. By most metrics, the individual/small group segment of the physician marketplace continues to shrink. The number of physicians in private practice is now below 50 percent in the U.S., and primary care physicians are still being recruited by hospitals. Physicians and groups desiring to remain independent have increasingly formed or joined multi-specialty groups, but this increases the efficacy of selfinsurance via a captive or risk retention group vehicle or to exert greater leverage in purchasing coverage from a commercial insurer. Physician renewal rates are trending from flat to singledigit decreases. Even larger reductions are available for larger physician groups, especially those risks with good loss-experience, due to ferocious competition in this segment of MPL. Long-Term Care. This segment is the most troubled for MPL insurance, but even that statement is not universally true. Some carriers withdrew from this segment in Renewal pricing is beginning to move towards double-digit increases within this segment, but it varies widely depending on losses and venue. Those facilities with good experience in good venues have generally seen flat renewals in 2017, and those with unfavorable loss experience and in unfavorable venues may experience nonrenewal or renewal at a 20-percent increase or higher. Miscellaneous Facilities. Miscellaneous medical facilities remain the most competitive medical professional liability segment in 2017, as it has been for a number of years. This development has been driven by both ample underwriting capacity and favorable loss experience. Healthcare reform has encouraged expansion in the number of such facilities. The one area of marked unfavorable claim development has been correctional facilities, so much so that it has Exhibit 2 Overall Average Rate Change by Range ( ) Range > +100% 0.0% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% to +99% to +69.9% to +49.9% to +24.9% to +9.9% % to -0.1% to -10.0% to -20.0% < -30.0% Physician renewal rates are trending from flat to single-digit decreases. Even larger reductions are available for larger physician groups, especially those risks with good loss-experience, due to ferocious competition in this segment of MPL. affected the profitability of this segment for certain carriers and therefore pricing trends at renewal. Most miscellaneous facilities are experiencing flat to low-single-digit renewal increases or decreases depending on loss experience and the carrier. Allied Health Professionals. The allied health profession segment continues to thrive under healthcare reform and physician shortages, especially in primary care. Therefore, physician assistants, advanced nurse practitioners and other types of allied health professionals are in high demand. Annual premiums are renewing on a flat basis. Rates are low and have been for more than a decade. More than two-thirds of survey respondents noted that they were not seeing any increase in the number of claims related to physician assistants and nurse practitioners. CONCLUSION So, there are further signs of the switch to headwinds as the MPL insurance industry sails into the near future, but any conditions that could create major storms are still difficult to make out on the horizon. Continued pricing competitiveness as well as signals of an increased number of large verdicts and settlements that exceed $1 million may continue to erode profitability. Consolidation of buyers in the physician and hospital segment continues, if somewhat more slowly, in 2017, which coupled with price competitiveness makes for challenges in maintaining revenue or achieving growth. Strong balance sheets represent a deep keel and, with steady hands of experienced leadership on the rudder, it is expected that the MPL insurance industry will capably navigate the potentially choppier seas ahead. Paul A. Greve, JD, RPLU, is executive vice president/senior consultant in the Willis Towers Watson Health Care Practice. Alison M. Milford, ACAS, MAAA, is a director with Willis Towers Watson s Atlanta office. 5