Anticipating and controlling rising malpractice insurance costs
Escalating malpractice insurance costs can take a huge bite out of providers’ budgets, but measures are available to ease the pain.
The unprecedented proliferation of large jury awards and settlements in medical malpractice cases over the past few years is expected to continue in 2002 and beyond. As a result, most major malpractice insurance carriers have experienced a deterioration of their loss ratios. Malpractice insurance premiums have skyrocketed, and in some cases, carriers have withdrawn from markets. Healthcare providers are challenged by malpractice-insurance-related expenses. Although providers may find it difficult to negotiate malpractice premium price breaks over the next few years as carriers attempt to restore their profitability, there are some measures their they can take to control their malpractice expenses, including selecting a knowledgeable agent of broker self-insuring, preparing a high-quality renewal submission, reinforcing their commitment to patient safety, and paying attention to carrier financial ratings.
Healthcare financial managers involved in the purchase of medical malpractice insurance in the past two years have witnessed startling changes in that market. Premiums are soaring, terms and conditions have become restrictive, deductibles are increasing, insurance policies are not being renewed, and insurers have failed in or withdrawn from certain market segments or territories. Healthcare providers from large health systems to individual physician practices will see their budgets greatly affected by medical malpractice insurance costs over the next few years.
Medical professional liability is a long-tail line of insurance, meaning that claim development and resolution take longer than for other types of insurance. Thus, the profitability of policies typically cannot be evaluated for three to five years. In the early 1990s, medical professional liability was one of the most profitable lines of insurance due to premium increases and malpractice reforms undertaken in the 1980s. Investment returns also were much higher in the 1990s. With the potential for large profits, many insurance companies focused on obtaining market share. Beginning in the mid-to-late 1990s, the flood of new companies entering the $6 billion malpractice insurance market, which is relatively small in terms of total premiums, caused the product to become underpriced. Investment returns have declined in recent years. Carriers have eroded much of the redundancy in their claims reserves, eating away the funds used to offset underwriting loss in the late 1990s. As a result, malpractice insurance has b ecome one of the most troubled lines of business in the property and casualty insurance industry.
(a) Concurrent social and legal factors also have contributed to the deterioration of medical professional liability insurance industry results, which are evaluated in terms of claim frequency and claim severity. Frequency defines how often claims are asserted. Severity defines the total cost of resolving malpractice claims. According to most industry experts, frequency has remained flat or increased modestly this year. The real problem facing the healthcare industry and its liability insurers in 2002 is severity, given the increasing numbers of large jury awards and settlements. Indeed, some experts have characterized the current problem as one of frequency of severity.
Social factors. Over the past few decades, public trust in the healthcare delivery system has eroded. Factors that influenced this erosion of trust include managed care, media attention to malpractice lawsuits, and negative publicity about medical errors since the release of the Institute of Medicine report To Err Is Human: Building a Safer Health System. (b)A recent study of the medical professional liability insurance industry cited the impact of managed care on healthcare providers, noting that as employers reconfigure health plans, patients change physicians more often, leading to a breakdown in the physician-patient relationship.
(c) Moreover, as managed care and government payers have slashed payment, hospitals and nursing homes have had to reduce staffing and, in some instances, physician practices have increased patient volume to maintain financial equilibrium.
(d)Certain social factors have contributed to making malpractice cases more expensive to resolve than ever before. Jury members tend to adopt a cynical view of awards due to the prevalence of “social inflation” factors, such as sports salaries, lotteries, and television game-show winnings.
(e) The escalating cost of medical care also has had a significant impact on the expense of resolving malpractice claims. Large awards are sought for the cost of providing future care for severely injured patients or providing for dependents.
Publicity about medical errors has increased public sensitivity to the potential for this problem and likely has influenced the increase in jury awards and, therefore, malpractice insurance expenses. Although most malpractice lawsuits are dismissed with no money changing hands, the worst cases often cannot be defended on a theory of liability, thus leaving the amount of damages virtually the only issue in dispute.
Legal factors. Many legal factors also have contributed to the current malpractice insurance problem. Juries are far more liberal in major metropolitan areas, and plaintiffs’ attorneys are more sophisticated. Plaintiffs’ attorneys are well financed, and the best attorneys can afford to accept only cases with high damage value. Many good defense attorneys have switched sides because the plaintiff’s side can be much more lucrative. Defense attorneys have a difficult time litigating against the well-financed plaintiff’s bar. Courts have expanded theories of liability, especially against healthcare provider defendants. Juries perceive healthcare organization defendants as having “deep pockets,” and thus ultimate liability for adverse patient outcomes, whether through negligence or not. Also, tort reform has been overturned by court decisions in many states, thereby removing a major factor in actuarial forecasts of ultimate loss.
Insurance a hot topic for property managers - finding best deals and more complete coverage
Insurance is suddenly a hot topic. It’s no secret that dramatic rate increases for both commercial and habitational real estate insurance have owners of office buildings and apartments, management companies and other clients out hunting for the best deals and more complete coverage. My company, Kaye Insurance Associates, is one of the biggest players in the area, handling the insurance for over 5,000 apartment buildings in the New York metro area. We’re intimately involved in the real estate business, creating customized real estate programs and helping clients with hard-to-find coverages. And given the sliding stock market of the past two years and the events of Sept. 11, real estate insurance is a whole new ballgame.
Now more than ever, clients need to find a trusted broker tuned in to the latest products and programs and tied into a large number of markets to find the proper coverage. With common rate increases of anywhere from 50 to 200% for both property and liability insurance, clients would do well to start actively assessing their insurance needs. There are some specific steps real estate pros should take to take to better manage their insurance needs.
* Start early. A week before renewal is not the time to get the news that your rates are doubling. Policy parameters are changing, some coverages previously included will now be excluded, and there is a tremendous underwriting crunch. Call your broker early and start asking questions.
* Call on someone truly versed in the market. Find a broker who specializes in programs designed for firms just like yours. Not only will that broker have insight into the full range of coverages you’ll need, but he’ll also have access to more market options that are constantly changing.
* Do your homework. Work with your broker to develop a complete picture. Your broker should act as a consultant, helping you to put together a comprehensive book to give the underwriter an accurate overview for a faster, more appropriate quote. Without clear, concise and complete information — including your values, building history and information, loss runs for the past five years - underwriters won’t quote you at all.
* Make sure you have speciality coverages for all types of potential exposures. Environmental, terrorism, cyber exposures - all represent potential losses that your broker needs to address. The mold issue has become a growing liability problem for building owners, and has typically been excluded from policies. Ask your broker about environmental insurance that will cover not only losses from mold claims, but also pays for claims for bodily injury and property damage caused by pollution. It also pays for cleanup costs of your property and the property of others for which you are responsible, from a leaking tank for example. Most importantly, this coverage pays for the legal expenses involved with defending an environmental lawsuit. Terrorism insurance, as well, is a current hot button. Again, a knowledgeable broker should be able to provide the latest word and deliver a fitting solution. Kaye, for instance, has a program that includes terrorism insurance for values less than $9 million. And we’re constantly t alking with all the limited carriers currently offering the coverage.
* Get creative. Ask your broker about creative options. Can you structure the coverage in different ways? Tap into a number of different carriers? Adjust deductibles? A new ballgame means new rules. It’s time to rethink and get creative.
Remember: The goal is not to get the cheapest rate. You need the best rate, the right coverage and solid advice on risk management for your properties. Tapping into years of expertise through the right broker is a first step in the right direction.
DESIGNING INSURANCE
Top carriers and underwriting savvy make PDI a go-to market for design professionals E&O
The professionals who design and build structures, from a local convenience store to a towering skyscraper, face a host of exposures to loss as a project moves from blueprints to grand opening. Chief among these exposures are liability for design errors, erroneous cost estimates, structural failure, asbestos, and pollution.
Clearly, the business of arranging professional liability insurance for design professionals is not for amateurs. It’s a highly specialized field that demands a blend of underwriting skill, market knowledge, and familiarity with the operations and risks associated with design and construction.
A leader in this challenging specialty market, Professional Design Insurance (PDI) is the nation’s largest brokerage and underwriting manager specializing exclusively in arranging professional liability insurance for architects and engineers, design/build contractors, and environmental consultants. Based in Indianapolis, PDI was established in 1980 and is owned by shareholders Tom and Norma McComb, their son Ken, and Terry Lee. Lee, who joined the firm in 1985 after a career with Foremost Insurance, is president of PDI; McComb, who founded the agency, is making a gradual transition toward retirement. Ken shares marketing and underwriting responsibilities with Lee.
How and why did PDI come into existence? Lee explains: “My associate, Tom, was executive director of the Consulting Engineers of Indiana. He had a strong background in insurance, and the board gave him a mandate to find affordable professional liability coverage for members. He visited various insurance companies and ultimately worked with them to develop a facility that would first underwrite professional liability for the Indiana engineers group and then approach the executive directors of engineers societies throughout the country. That business was funneled through PDI, which acted as a broker on behalf of the engineering societies.”
Over the next few years, PDI evolved into a wholesale brokerage operation but continued to operate as a retailer in Indiana. Of PDI’s total volume, Lee says, some 35% is architects, 35% is engineers, 20% is design/build contractors, and the remaining 10% is environmental consultants. PDI operates with a staff of seven.
PDI uses domestic and London carriers to place coverage. PDI’s markets literally run the gamut from A to Z: ACE, AEIC, Gulf, Houston Casualty, Lexington, Lloyd’s, National Casualty, and Zurich. As an MGA for Arch Specialty Insurance, PDI has authority to write accounts with billings of up to $10 million. In addition to its markets for design professionals, PDI uses a number of other carriers for environmental consultants.
Support for retailers
Over the years, Lee says, PDI has transacted business through about 5,000 retail agents and, Lee continues, “we have fine tuned the services we render, so when a retail agent calls and says he has a risk but doesn’t know much about the class of business, I give him a quick course in Design Professionals 101. I explain the coverage, list the available markets, and tell the agent what premium range to expect for this type of client. I also tell the agent what he can expect his competition to bring to the table.” In essence, Lee says, “We bring the agent up to speed on this line of coverage, so he sounds knowledgeable when he talks to his client. Often we stay in the background; the architect or engineer might not even know that we exist.
“In all cases, we offer the agent and the insured some of the extra services we provide, such as contract review,” Lee continues. “When an architect is presented with a contract from his client and he has questions about the ramifications or implications of the contract for his professional liability coverage, he sends it to us and we review it. Our goal is to respond to that agent or client within two hours of receipt of the contract.”
Once PDI has provided this service, Lee comments, “typically the insured knows of our existence, and in many cases I’ll talk to the principal of the firm about other questions he has: ‘If I go into this area of architecture, will it negatively affect my premium?’ ‘What are the exposures I should consider if I accept this project?’ We quickly give the insured direct answers to these and other questions.”
Another service PDI provides for insureds is an on-site loss prevention seminar, which involves a two-and-ahalf-hour presentation that addresses a wide range of loss prevention issues. The insured has the opportunity to ask questions and discuss specific situations that are important to him. “We find the seminar is beneficial not only for the insured, who gets some highly specialized information he can’t get anywhere else, but also for the carrier, because it makes the client a better insured,” Lee remarks. “After the seminar, the insured is aware of potential traps and pitfalls, so he knows how to stay out of trouble and when to ask questions and express concerns.”
PDI also has developed a loss prevention manual. Every insured receives a copy, and Lee also leaves manuals with attendees at his loss prevention seminars.
At the retail agent’s request, Lee says, he’ll be happy to make a joint call on a larger client or prospect. “I frequently travel across the country and make a presentation with an agent to his client when he needs that added expertise at the table to win the business,” he says. “If all we did was give an agent an insurance policy and take his money and put it in the bank, we wouldn’t be doing justice to our mission, which is to do as much as we can for the insured and the agent,” Lee says.
Architects and engineers, design/build contractors, and environmental consultants are highly specialized risks that don’t find a home with just any carrier. Each of these classes is vulnerable to changes in the economy and the legal environment, among other influences. How would Lee characterize the market for these classes of business with respect to capacity, competition, and pricing?
“As most people are painfully aware, since 9/11 prices have increased extraordinarily,” Lee responds. “Some 10 to 12 years ago, PDI developed a three-year policy for the architects and engineers market, and we placed a significant part of our book in those policies. Insureds loved the fact that they didn’t have to complete an application every year, and they knew what their insurance costs would be over three years so it was easy for them to project their expenses,” he explains. “Agents liked it because they had that client for three years and didn’t have to worry about competition. It was great for everybody. Unfortunately, when 9/11 hit, the reinsurance market decided it was not going to be on any three-year policies, and they went away overnight.”
A client who had a three-year policy that was up for renewal in the wake of 9/11, Lee says, experienced what could conservatively be described as extreme sticker shock. “In many cases, an insured wound up paying about the same amount for an annual policy as he paid for a three-year policy,” Lee notes. “Since 9/11, this market has continued to be hard, even though a lot of other lines have softened a bit.”
The hard market trend for design professionals E&O continues, Lee says, “but is being modified somewhat by carriers that are pricing business way below market value. In some cases, we find their pricing to be anywhere between 30% and 40% below the lowest quote on the table. Essentially, they are buying business-certainly nothing new in the insurance industry,” Lee remarks. “The biggest concern for the marketplace is that these insurers are seldom in the market for the duration, and when claims begin coming in, the carriers are gone.”
In this kind of market, Lee says, “there’s even more need for us to do everything right: to keep insureds happy by providing value-added services, and to deliver as comprehensive a policy as we can for the best possible price.”
Mimi’s Cafe sets precedent with Calif. wage-hour insurance win
A landmark decision by the California Court of Appeals here may clear the way for restaurant operators to obtain compensation from employment practices liability policies when the employers make costly legal payouts amid the current wave of wage-and-hour litigation.
The appellate court ruled in favor of SWH Corp., former parent of the Tustin, Calif.-based Mimi’s Cafe chain, which had appealed its loss in a lawsuit against Select Insurance Co. The insurer had refused to contribute to a $1.9 million settlement in 2004 of a lawsuit against Mimi’s Cafe by assistant managers who claimed they were denied overtime pay.
California has witnessed an explosion of wage-and-hour class actions in recent years, and several restaurant companies have shelled out multimillion-dollar settlements to employees. Often, operators will not press an insurer if it denies a claim, but the issue is worth pursuing said Wallan, who also represented Lake Forest, Calif.-based Del Taco in a similar lawsuit.
“A lot of folks have simply made the assumption there is no coverage and given up,” Wallan said. “Mimi’s and Del Taco did not give up.”
The case against Del Taco was decided in the company’s favor in an unpublished arbitration ruling, so it had not yielded a precedent that other defendants could easily cite in court, the Pillsbury Winthrop firm indicated.
Typical employee practices liability policies do not cover labor violations by employers but do shield them against misdeeds of employees, such as sexual harassment or racial discrimination. However, if the policy language is ambiguous, restaurant companies may be able to argue for coverage when alleged labor violations result in legal expenses.
In the Del Taco case, the arbitration panel ordered the quick-service chain’s insurer, National Union, to pay $1 million to help defray the company’s legal costs. Del Taco in 2005 had agreed to pay $5 million to resolve three lawsuits filed by employees who claimed they were not paid overtime.
In both cases, the insurance companies argued that their employment practices liability policies exempted coverage for violations of the federal Fair Labor Standards Act and similar state laws. The insurers argued that California’s Labor Code is similar to the FLSA. However, the arbitration panel, and now the state’s appeals court, ruled that “similarity” was too vague a concept and that the ambiguous language of the policies should be interpreted in favor of the insured restaurant companies.
“There are now two tribunals that have reached the same conclusion, [that these policies] do not exclude California state wage-and-hour claims,” Wallan said.
In the case involving Mimi’s Cafe, which now is owned by Columbus, Ohio-based Bob Evans Farms Inc., Select Insurance also had argued that settlements for back-pay claims and wages were not insurable under the policy, he said. The appeals court rejected those arguments.
Ski traveller– SNOWBOARD CHALETS– Lodging for boarders
Way back in the early Nineties, when snowboarding was just emerging from the Dark Ages, the Brothers Dragon found themselves transported from the hills of darkest Wales to the ancient peaks of the Alps. Here they discovered the joy of powder days, the draw of the landscape and a bunch of skiers who seemed to come from a completely alien world.
Wouldnt it be nice, thought the two brothers, as they scraped by seasons working for big holiday companies and living in grotty apartments, if we could set up holidays for other snowboarders, and the odd like-minded skier, that wed want to take ourselves? A chalet not staffed by an inexperienced gap-yearer and populated with condescending strangers, but a place run by riders, for riders. A place that feels like home, with snowboard movies and video games, beers chilling on the terrace and breakfast laid out all morning (because 9am-5pm is what you come to the mountains to escape). Where staff and guests mingle, spending days on the mountain, evenings around the dinner table, and nights out in the local pub.
John and Owain opened the first Dragon Lodge in Tignes in 1996, courtesy of a mountain-loving bank manager who recognised that snowboarding was on the up. For the first five years, Owain lived in the lodge while John split his time between France and Britain, alternating cooking dinners and sweeping the floor with taking bookings and sending out brochures to every skate and snowboard shop in the UK. Additional staff were recruited from a pool of eager friends; when Owain left Tignes for the mountains of Japan, Johns childhood friend Dan stepped up as a partner.
Todays lodge is in its second, larger incarnation, a stand-alone chalet with views out across the lake. It may not be the most luxurious chalet in the Alps, but everything here just makes sense. Theres enough sofa space for everyone. The stereo has an iPod connection, in order that every guest may inflict their musical tastes on others. Wireless broadband is free, with the result that the lounge occasional resembles an Apple Mac convention.
Having been there themselves, the staff are used to hungry riders. Food is freshly prepared; dinners are two-course chow-downs rather than gourmet affairs, which is what you really need after a day on the slopes. Lasagne, curries, roasts, pies, with wine included and vegetarians treated like reasonable human beings, not afterthoughts. And cakes for tea, of course.
Unlike a traditional chalet, the Dragon Lodge posse are riders with multiple seasons under their belt. They are primed to show guests the best spots around the mountain. Officially, two days guiding is included in the weekly rate, but will typically be more if numbers allow and everyones having a laugh and this doesnt mean experts only. Taking out a beginner, making sure they have a good time and seeing the buzz they get off snowboarding is amazing, says John.
Staff are also experienced at living in the mountains on a budget. They provide a bargain-priced shuttle service from the airports and will suggest cheap places to dine out. They also escort guests to their favourite watering holes though dont necessarily expect a ride home.
With the lodge still very much a part of his life, Johns not interested in further expansion. Here, seven bedrooms house up to 20 guests (with no single supplements); any more and you lose the intimacy, the ability to eat together, watch a movie together, hang out together.
Im doing something I like, working for myself, getting to go riding in the mountains a lot, he says. I dont want to get any bigger.
Dragon Lodge, Tignes. From pounds 199 half-board for a week in the winter season. Shorter-term bookings may be available during glacier season and if you book at the last-minute. You can rent boots and board for pounds 70 per week, with an Option Snowboards Test Center on site. Board maintenance is taught to those who show interest.
Rutland Regional makes play for sports medicine
Proximity to the Killington and Pico ski resorts has led the Rutland Regional Medical Center to develop a specialty in the treatment of sports-related injuries. The medical center maintains an orthopedic clinic at the base of the mountain as well as a unit in the hospital on Allen and Stratton roads in Rutland.
Two members of the United States ski team and two National Football League players have been treated at the orthopedic facilities. In addition, two of the medical center’s staff orthopedists are affiliated with the US skiing and snowboarding teams, notes Larry Jensen, the medical center’s vice president for corporate development.
The presence of such prestigious practitioners notwithstanding, the Rutland hospital has difficulty attracting physicians to fill openings in a 125-member staff of doctors trained in 35 specialties, Jensen acknowledges.
Many young physicians can choose among offers from various parts of the United States as well as from other countries, and some are strapped with education debts of as much as $200,000, Jensen notes. Budget constraints prevent the Rutland medical center from competing with the more lucrative opportunities available to doctors at other institutions.
In fact, Rutland recently had to trim a pension plan for 330 members of a nurses’ union at the medical center. In a new arrangement accepted by the union, the medical center is replacing a defined-benefit plan totaling about $10 million a year with a defined-contribution plan that will cost the institution about half as much.
“It was a very difficult decision for us to make,” Jensen says. “It does significantly diminish the value of the retirement program, but we saw no sustainable options over the foreseeable future.”
The move reflects the gap between the actual costs of services provided by the medical center and what the federal Medicaid and Medicare programs pay as reimbursements. This so-called contractual allowance amounts to $78.4 million a year, Jensen says.
The nonprofit medical center’s gross revenues for the most recent fiscal year totaled $212.5 million. If the federal medical insurance programs for the elderly and the poor covered the full costs of services, the medical center could reduce its overall charges to other patients by about 32 percent, Jensen adds.
The hospital recorded 125,000 outpatient visits in the fiscal year ending last October. It also registered a total of 33,000 inpatient bed days. The medical center is licensed for 188 beds. The 110-year-old hospital serves as an institutional cornerstone of Rutland County. In addition to ranking as one of the county’s two largest employers , the medical center sponsors or takes part in a number of community initiatives. Among them is an athletic training and rehabilitation program for high school athletes.
The medical center underwent a major expansion in the 1990s when it added operating rooms and again in 2003 when it constructed a new emergency department.
Cleaning up-literally-in the insurance industry
It isn’t listed in the Fortune 500. It doesn’t trade on the New York or Nasdaq stock exchanges. And it hasn’t crowned itself in glory with its name on a gleaming skyscraper or some spectacular sports palace. But with $25 billion in backing, it’s one of the largest financial institutions in the world. It’s the Water Quality Insurance Syndicate (WQIS)-a pool of 17 major property and casualty insurers that invests its dollars everyday to protect the world’s waterways and marine life against pollution.
But providing marine pollution insurance is only part of the WQIS story. It’s companion organization-the Marine Pollution Response Group -manages on site the cleanup of oil and other hazardous spills, guaranteeing that waters, beaches and marine life will be restored quickly and efficiently to their pristine state.
This one-two punch has earned WQIS and MPRG credentials as true guardians of the sea and has made the insurance industry a visible, influential and respected part of the solution for a cleaner, healthier and safer environment.
As WQIS celebrates its 30th anniversary, Richard Hobbie, president, reflects on its role and future-a future he sees tied, in part, to expanded contacts with agents and brokers.
WQIS, says Hobbie, was founded in the wake of two devastating oil spills. The first involved the Torrey Canyon off the Scilly Isles in 1967 in England that contaminated more than 200 square miles of sea and 90 miles of coastline. If the spill was a horror, says Hobbie, the cleanup was downright frightening: Royal Air Force planes dropped napalm bombs to burn off the oil and sink the ship. Tailor-made for television’s fastgrowing international news coverage, the shocking pictures beamed around the world set off alarms among environmentalists from the Arctic to the Amazon. “If there was one event that set in motion the worldwide
environmental movement, this spill was probably it,” says Hobbie, a former Coast Guard officer.
Two years later the United States grabbed the headlines with a blowout from an oil platform off Santa Barbara in California. While not on the scale of the Torrey Canyon, the spill had farreaching implications. Because there were no marine pollution laws, local residents were stuck with the cleanup costs. That would soon change. Over the next two decades marine pollution would be wrapped in layers and layers of legislation: providing strict liability for cleanup costs, third-party liability damages and civil and criminal penalties-all of which would become core WQIS coverages.
“For the first time, if you spilled oil, you had to pay for cleanup,” says Hobbie, noting that vessel owners previously were liable only if the spill was intentional or involved gross negligence.
For insurers, the challenge was to provide the cleanup coverage needed by clients without exposing themselves to huge individual payouts. But their concerns went beyond just payouts. They began to see marine pollution coverage as a highly-specialized line requiring expertise in vessel risk management, sizeable financial guarantees and responsibility for cleanup management. So WQIS decided that this emerging market would be best served by a syndicate dedicated solely to marine pollution insurance, staffed by specialists, with the costs of cleanups spread proportionately among its members.
The result was WQIS, which opened for business in 1971. The organization rapidly rose to prominence in the industry-spurred by its ability to quickly create coverages for the ever-expanding and legally-driven areas for costly claims.
Today, WQIS is the largest underwriter of marine pollution insurance in the United States. Generating more than $20 million in annual premiums, its policies cover some 40,000 vessels: tugboats, oil, cargo and work barges, ferries, fishing and pleasure boats. Called brown water vessels, they ply mainly inland waterways teeming with other commercial and pleasure traffic-providing real tests for underwriters. But WQIS also has had its share of “glamour” accounts. One was the Howard Hughes-owned Glomar Explorer which secretly salvaged a sunken Russian submarine during the Cold War. Another was the Andrea Gail, a commercial fishing boat that went down with all hands off The Grand Banks in Nova Scotia and was memorialized in the book and film “The Perfect Storm.”
The policies also cover related facilities such as shipyards and marinas. In addition, WQIS is the leading provider of the Certificate of Financial Responsibility (COFR) requiring owners and operators of vessels over 300 GRT carrying oil in U.S. waters to demonstrate that they can pay for a prescribed amount of a cleanup. Despite the high risks involved, WQIS continues to offer policies with a fixed premium, has not raised rates in five years, and still returns a profit to its subscribers-due in part to selective underwriting as well effective loss prevention programs conducted for its clients.
Prescription for malaise? Providers are rushing to participate in Medicare’s new drug-benefit program. Companies are proceeding with caution
BLAME UNCLE SAM FOR the latest anxiety overwhelming the healthcare sector. For the better part of a year, health insurers and pharmacy benefit managers have been preparing bids to provide prescription drugs to the nation’s 43 million seniors. If their bids hit the mark, these providers stand to reap a sizable chunk of the prescription–drug market for seniors. If their bids fall short, they risk becoming marginal players in a market that is set to explode as more baby boomers enter retirement age.
This nail-biting bidding process, part of the government’s plan to provide Medicare Part D drug benefits to eligible seniors when the program goes into effect on January 1, 2006, is secret and unparalleled–the first passing of the baton from the public sector to the private sector for the administration of a federal health-care program. Among the hundreds of health-insurance providers and pharmacy benefit managers gearing up to introduce the new prescription-drug plans is PacifiCare Health Systems, which is spending an estimated $50 million this year to prepare itself internally to develop and market products, establish lists of preferred drugs, enroll and educate beneficiaries, and deal with mountains of federal regulations.
The company, which had previously considered dropping its Medicare offerings, is now basing its future success partly on the bid it presents to the government to provide the drug coverage to seniors. “The government has set up this unique bidding process where we can all become government contractors and provide these services at competitive rates,” explains Gregory Scott, executive vice president and CFO of PacifiCare, a Cypress, California-based managed-care services provider with $12 billion in 2004 revenues.
Like other providers, PacifiCare is enticed by the potential financial gain–sharing in an estimated $59 billion in Medicare payments to private plans for the drug benefits next year, a figure expected to double within five years. Nothing is guaranteed, of course. While all bidders are eligible to become Medicare Part D providers, “the reality is that if your bid is not competitive, you’re not likely to attract any customers,” concedes Scott. “If you bid 50 cents to provide a particular drug and another provider bids 25 cents, people won’t buy your product. We don’t want to bid too conservatively and not get market share, or bid too aggressively and wind up with market share but a product that doesn’t perform from a P&L perspective. Hopefully, we’re smart enough to avoid getting egg splattered on our face.”
To assure the best bid possible, Scott has assembled a dedicated team of a dozen finance, marketing, and customer-service professionals. This group is working with several consultants to design a cost-effective system for providing benefits in the 34 regions where PacifiCare has applied to offer Part D services. Each region requires a separate bid, based on respective market dynamics, notes Scott. “Frankly, I’ve never seen anything like this in my business career,” says the CFO, adding that “a large, new market [has been] created with the swipe of a pen and put in the private sector–a $400 billion to $500 billion program over the next 8 to 10 years. And in my view, we are making a $50 million venture-capital investment in a brand new business that could pay off nicely down the road.”
ALL BIDS FOR PLANS SOLD INDIVIDUALLY to seniors are due June 6 to the Centers for Medicare and Medicaid Services, the federal agency that administers the Medicare programs. The insurers and pharmacy benefit managers (PBMs) will then negotiate over the bids and thus over how much they will be paid by CMS. By October, contracts will be signed, and come January, eligible providers will administer the drug benefits to the nation’s seniors.
How well the investment will pay off for providers depends mostly on the purchasing choices seniors make. It also depends on how corporations respond. While seniors have until May 15, 2006, to sign up individually for a prescription-drug program, companies have no mandate to offer the benefit to their retirees. But starting in 2006, companies will have several options that will allow them to receive financial rewards if they provide retiree drug coverage.
What corporations will choose to do is uncertain. In fact, CFO called more than a dozen finance chiefs and employee-benefit managers and asked them about their upcoming plans regarding Medicare Part D, but the companies declined to discuss their retiree benefits before the implementation of the new drug program. “Employers are just not at the point where they want to discuss this openly,” explains Dana Sohn, a media specialist at Chicago-based Aon Consulting.
Their reticence is understandable given that companies first have to decide whether or not they want to participate in Part D. They have shied away from providing prescription-drug benefits over the past two decades, because of the high cost of many drugs, the rising cost of health care generally, and the need to slash bottom-line expenses. “If you look at large employers back in 1988, about 66 percent offered drug benefits to retirees,” says Leslie Norwalk, CMS deputy administrator. “By 2002, that percentage had dropped to 37 percent, and we feel it has continued to fall since.”
Airborne liability: the Airbus A380 is coming to an airport near you, with increased liability limits on its wings
* A GE Insurance Solutions study in 2006 found the debut of the A380 would result in a 20 percent increase in maximum airliner hull value.
* The industry’s average liability loss is expected to jump from $329 million to $359 million.
* Experts say, however, the A380 is making a quiet entrance from an insurance pricing standpoint.
When the first commercial Airbus A380 blesses the tarmac at Singapore Changi Airport this month with its elegant, 22-wheeled, reinforced-plastic self, it will carry with it a new era of liability exposure in aviation insurance.
But delays in delivery and overcapacity in the market mean the 239-ton jet’s most significant impact on insurance pricing is probably still a few years away.
The A380 is the industry’s latest attempt to fly as many passengers as quickly as possible from point A to point B, a business strategy that’s easy to grasp. The idea is to get maximum revenue out of an aircraft that needs no more space to take off and land than the reigning wide body, the Boeing 747.
The European Aeronautic Defence and Space Co.’s double-decker passenger plane in some configurations could seat more than 800; the current limit is around 500. But that increased seating capacity also means increased liability limits and hull coverage.
A 2006 study by GE Insurance Solutions, now part of Swiss Re, concluded that the increased cost of the A380 will result in a 20 percent increase in maximum airliner hull value, from a previous high of approximately $250 million to as much as $300 million.
The actuaries also estimated that by the time the first wave of 130 Airbus A380s made it to the market, the percentage of worldwide aircraft with seating above 450 could triple to 15 percent. Orders for the A380 are now above 160. Average liability loss in the industry is also estimated to increase 10 percent, from $329 million to $359 million.
Wayne Wignes, executive director of the Global Aviation Practice Group for Chicago-based Aon Corp., says the debut of the A380 reminds him of the 1969 introduction of the Boeing 747. As the 747 did, the A380 will increase prices for all commercial airlines, not just operators of the A380.
“If action or inaction by a service provider is ever found to be the cause of an incident with the A380, the liability would be immense,” Wignes says. “Underwriters would be aware of that, and it would be reflected in insurance pricing.”
In the short term, experts say the A380 is making a quiet entrance from an insurance-pricing standpoint.
One key factor is overcapacity. After Sept. 11, 2001, airlines felt obligated to increase coverage. Premiums skyrocketed from an annualized rate of $1.75 billion to around $4 billion. But when faltering airlines reduced their number of routes, reducing risk exposure, the result was airlines holding too much coverage. A vastly improved industry safety record contributed to the bulge.
Martin Stevens, the London-based chief underwriting officer for American International Group Inc., says the aviation industry’s insurance premiums are now below where they were pre-Sept. 11, and this fall’s A380 debut in Singapore isn’t likely to alter them substantially.
The slow pace at which the aircraft has been delivered also has lessened the A380’s impact, says Steve Alexandris, a vice president and senior airline underwriter in the Atlanta office of specialty insurer C.V. Start & Co. Inc. Originally expected to be in use in Singapore in the fall of 2006, the A380 has been delayed more than a year because it was overweight and required complicated wiring.
The delay meant a handful of top Airbus executives lost their jobs, the number of A380s ordered was reduced and the sales price dropped in some cases. Furthermore, the delay has given customers more time to shop for coverage.
“Is it a big deal?” says Steven Doyle, the London-based executive director for Aon Global Aviation. “Probably it would have been had it come to the industry a little bit quicker than it has. It has been such a long, ongoing process that people are now kind of accustomed to it. You’re not going to see the skies darkened with A380s.”
Luxury-seating arrangements requested by the A380’s first customers are also playing a role. Neither Singapore Airlines Ltd. nor another early customer, Qantas, is ordering planes with much more than 500 seats, equal to what some 747s already carry.
“The addition of the A380 is not suddenly going to dramatically change the risk profile of airports that are already seeing large, wide-bodied aircraft,” Doyle says.
In addition, Alexandris, who specializes in coverage for airlines based in the United States, says U.S. airlines will be slow to take on the A380 because of the country’s litigious atmosphere and the different service needs of airlines based here.
“The U.S. airlines we have spoken to don’t seem to have a whole lot of interest in the A380,” Alexandris says. “They would rather offer two flights of 300 people two hours apart than one flight flying 600 people.”
Evaluation of the effect of a consumer-driven health plan on medical care expenditures and utilization
Consumer-driven health plans (CDHPs) have moved beyond the concept stage and are now health benefit options available to employees in many large companies. Mainstream insurers, such as Aetna, United Health Group, and Wellpoint have introduced their own CDHPs to compete with products offered by start-up companies such as Definity, Luminos, and others. Health policy analysts have expressed concerns that CDHPs could create adverse selection problems and have unintended impacts on service use. These concerns are motivated by analyses of plan designs and philosophical beliefs, but have been largely uninformed by empirical research. In this research project, we used a claims dataset to compare the medical service use and expenditures of employees who were enrolled in a CDHP in 2001 and 2002 to employees enrolled in a health maintenance organization (HMO) and a preferred provider organization (PPO). Our analysis addressed the following questions:
1. What was the impact of the CDHP on payments to providers (i.e., total expenses)?
2. What was the impact of the CDHP on employee out-of-pocket expenses for medical care?
3. Was service use different for CDHP enrollees compared with enrollees in the other health plans?
4. Was the illness burden different in the CDHP versus other plans, and how did it change over time?
5. Were the CDHP effects different in the first year of enrollment, compared with the second year?
Consumer-driven plans differ from traditional insurance and managed care products in philosophy and design. Philosophically, they seek to involve the consumer more directly in health care decision making. Typically, in these products, a “health spending account” is created from which the employee purchases services. Some form of major medical or “wrap-around” coverage is also a key part of the benefits design. If an employee spends all of the dollars in the health spending account in a given year, she then spends her own money until the deductible requirement in the major medical coverage is met. Expenditures in excess of the deductible are covered by the major medical plan. The benefit design can be tailored to cover all or part of these “excess” expenditures. To facilitate informed decision making, the employee is provided with information about health care providers, including physician education and experience, prices, and quality ratings. Usually, this information is available on the Internet to ensure easy access and promote its use .
Consumer-driven health plans are often compared to medical savings accounts (MSA). MSAs first became available in the mid-1980s; they were later regulated by the 1996 Health Insurance Portability and Accountability Act (HIPAA) as a tax-exempt health insurance product offered primarily to employers with 50 or fewer workers and individuals in Medicare . Consumer-driven health plans differ from MSAs in several important ways. Most CDHPs are Internet-enabled health plans that were originally financed by venture capitalists during the dot.com boom of the late 1990s . The use of information technology in an effort to create “informed consumers” is a distinguishing CDHP feature . In contrast, MSAs typically instruct subscribers to “shoe-box” their medical bills for later reimbursement from their accounts, as long as they are under the deductible. For many CDHPs, the Internet has an interactive customer support system to allow a subscriber to track medical expenditures deducted from her account online. Consumer-driven health plans offer online linkages to prescription drug benefit programs as well as online benefit eligibility information to ensure prompt payment to medical providers. Because CDHPs are much more sophisticated in their product delivery to consumers and employers, they are attractive to many medium-to-large employers. In contrast, HIPAA-regulated MSAs contain a number of restrictive provisions that can make these plans difficult to describe to consumers and intimidating for health benefits managers and insurance brokers.
Interviews with employees and CDHP managers suggest several reasons why larger employers are attracted to CDHPs. Philosophically, these employers want informed employee decisions to “drive the market.” Under the CDHP spending account approach, employers believe their employees have an incentive to seek information on providers’ prices and to carefully consider their need for services, because any unexpended funds “roll-over” into next year’s account balance. This potentially reduces the annual “gap” between the spending account contribution and the deductible amount faced by the employee. Also, employers see CDHPs as possibly reducing their administrative expenses. If the CDHP is popular with employees, it may mean that other plan options can be dropped. Finally, some employers may see the CDHP approach as a way to divorce the amount their contribution to health insurance increases each year from trends in premiums, linking it instead to overall employee compensation increases. In this respect, CDHPs would function as “transition vehicles” that could be used to redefine the role of employers in the purchase of health insurance, much as defined contribution retirement accounts did with respect to retirement benefits.
In theory, by combining a high-deductible health insurance plan with a health spending account, a CDHP creates incentives for enrollees to economize on their utilization of medical care. However, there is very little empirical evidence from the MSA experience to inform our research design. Simulation analyses indicate that an employer-funded MSA may have moderate effects on health care spending, depending on who joins (Keeler et al. 1996). A mandatory MSA might reduce spending by 6 percent to 13 percent. The RAND Health Insurance Experiment found that a high-deductible health insurance plan would reduce spending by one-third compared with comprehensive fee-for-service insurance . But, the RAND study did not examine what would happen if the high-deductible plan were combined with a health spending account.