In the fight to remain competitive in the new era of healthcare, hospitals are buying physician practices and hiring individual physicians as quickly as possible. But as more and more physicians become hospital employees, hospitals may not be taking a hard enough look at their new medical malpractice liabilities.
These increased malpractice risks, combined with the fact that new physician hires may operate at a loss for the first two-to-three years of employment, means that a given hospital system could find itself facing financial challenges if its administration doesn’t carefully consider the impact of these new risks on the organization’s health — and take steps to mitigate them.
Commercial insurers evaluate individual physician risk as part of the normal underwriting process as a way to limit their liability. But hospital systems — most of which participate in some type of captive insurance company for their medical malpractice insurance — often don’t do enough to evaluate this additional physician risk.
In our experience, many hospitals sign contracts with physicians and physician groups without a clear understanding of these physicians’ past malpractice experience. We’re also finding that, during the due diligence process, some hospitals are not taking the cost of additional medical malpractice insurance into consideration. As a result, they may be surprised by the additional financial burden they’ve taken on — either in the tail risk they assume for acts a physician has committed before becoming an employee (many hospitals are providing this tail coverage through the captive to help facilitate the deals) or for malpractice claims that occur while the physician is a hospital employee.
New physician-employees, new risks
Traditionally, physicians employed by hospitals have been specialists, and most of them worked in the hospital environment, which gave the hospital some measure of risk control and supervision. Today, in addition to hiring hospital-based specialists, hospitals are hiring more primary care physicians, many of whom spend the bulk of their time treating patients in offices outside the hospital and are therefore further outside the hospital’s control.
Of course, different physician specialties affect malpractice costs in different ways. Hiring primary care physicians opens the hospital to new exposures, and represents an entirely new cost. Similarly, malpractice costs can rise when hospitals add new services and hire physicians to staff them. Many hospitals are also employing physicians who were already practicing largely on site. In these instances, hospitals were already the “deep pockets” on claims involving these physicians and were already bearing some cost. So malpractice costs for this group of newly hired physicians may well be incrementally smaller than for newly hired primary care physicians and off-site specialists. In addition, as we discuss later, risk mitigation by the hospital, coupled with intelligent use of a captive insurance company, can reduce costs. In fact, preliminary research conducted by Towers Watson shows that health systems that have a greater mix of employed physicians tend to have better malpractice experience.
Before a hospital takes on new physician-employees — and the accompanying new exposures — there are some important lessons they can learn from commercial medical malpractice insurers on how to evaluate medical malpractice risk. First is risk identification. By examining the historical medical malpractice claims for a physician, actuaries can determine whether there is more activity than expected, and in what areas. (Of course, there is a wide spectrum of malpractice risk, and the inherent risk of certain physician specialties must be taken into account.) Once outliers have been identified, the hospital system can decide whether to mitigate the situation through changes in behavior or protocols, or whether to exit the physician from the system.
Another critical aspect of risk identification is evaluation of the credentialing process. Hospitals should review their own credentialing processes to confirm that they are successfully identifying physicians that may have a poor malpractice claim history, or have lost hospital privileges, had disciplinary issues and so on. Identifying high-risk physicians — both employed and not employed by the hospital — can have a direct and positive impact on malpractice costs. Hospitals bear the malpractice costs for employed physicians, but they are also the “deep pockets” for non-employed physicians in a malpractice suit.
Evaluating the practice’s operational model is also critical. Are physicians in the practice doing work they aren’t qualified to do? Taking on work beyond their scope of expertise can increase physician risk — and lead to increased malpractice claims. Hospitals can improve their malpractice costs by also examining risks associated with other credentialed staff at the practices they are purchasing, including non-employed physicians, physician assistants and so forth, all of whom increase the hospital’s malpractice liability.
Finally, hospital administrators should create specific integration processes for newly employed physicians to make certain they understand and are compliant with the hospital’s quality, patient safety and risk management processes and protocols. Getting physicians to agree to and comply with these protocols is critical to their success. To that end, some health systems are considering structuring compensation incentives to reflect medical malpractice claim information include compliance with medical malpractice claim experience and compliance with medical malpractice risk protocols.
Aligning hospital-physician interests through the captive
Effective use of a captive insurance company provides hospitals with several advantages, and can even help align the interests of the hospital system and the physicians being hired. In fact, a captive can act as an important and broad risk management tool.
While adding physician-employees will certainly result in an increase in malpractice insurance costs, there are also factors at play that may make these costs lower than anticipated if a hospital uses its captive effectively. Many hospitals have been using their captive in this manner and have achieved significant savings over the long term. First, because captives are non-profit entities and have lower administrative costs than commercial insurers, the per-physician cost for malpractice coverage should be lower than what the physician or physician group was paying on the commercial market.
In addition, the number and size of medical malpractice claims may be reduced when hospitals apply some of the same rigorous risk management to physician-employees who work outside the hospital as they do to those who work within the hospital walls. And, the incremental malpractice costs associated with employing hospital-based specialists and surgeons can be softened because the hospital is no longer the “deep pocket” in a lawsuit or claim but instead is financially allied with the physician-employee.
Finally, when a malpractice case goes to trial, the hospital and physician-employee are participating in a joint defense with their captive insurance company. When the physician is not part of the hospital, the plaintiff’s attorneys can pit the physician and hospital against each other, and defense attorneys may rise to the bait in an attempt to reduce their own client’s liability. When the physician and hospital go to trial with a single defense attorney and a single insurance company, the potential financial conflict between the two is removed. Litigation costs are lower, and the settlement is likely to be smaller than it might have been if the hospital and physician were not aligned.
Some hospital systems are also using captives to provide malpractice coverage for physicians who are affiliated with the system but are not — or not yet — employees. This can be a way to bring these physicians under the hospital’s risk management umbrella, especially if the hospital is considering hiring them or purchasing their physician group.
Providing tail coverage for pre-employment exposure has also shown to be an effective use of captives. The cost of tail coverage from commercial insurers can be very expensive, in large part because physicians seeking this coverage often do so because their poor claim experience has led to non-renewal of coverage. Physicians also seek tail coverage when they are transitioning from one insurer to another, and there is little motivation for an insurer to facilitate transition of that coverage to another program or insurer.
Taking medical malpractice risk into account: Where to start
When a hospital is considering buying a practice or hiring physicians, it must take into account medical malpractice risk — both the identification and the financial mitigation costs — early and thoroughly. The risks can be significant, especially when considering the long-tail exposure inherent in malpractice. Leading healthcare institutions are taking these risks into account and getting expert guidance. A good place to start is with risk manager or chief risk officer, who can help guide hospital leaders through a discussion that considers:
· The new risks the hospital faces as it adds physicians, and how best to manage those risks;
· The potential cost impact; and
· The role of the hospital’s captive insurance company in mitigation of these new risks.
As hospitals add new physicians to their staff, they have an opportunity to improve the quality of care patients receive, improve their risk management through better integration of care, better electronic records and improved communication (both between the hospital and physicians and between physicians and their patients) and reduce their per-physician malpractice costs. But doing so means understanding the broadened scope of risks the hospital faces and the best methods for managing and financing those risks.