Average for Hospital Med Mal Claims Inflation Conceals Wide
Variances State by State
Hospitals should seek clarification from their insurers of claims
inflation loadings to avoid risk of being overcharged, Beazley
analysis suggests
Phoenix, 14 October 2011
Hospitals and hospital groups should seek clarity from their
insurers on the loading applied to premiums to account for claims
inflation, according to Lloyd’s insurer Beazley. Applying an
across the board annual percentage loading to hospital professional
liability (HPL) premiums to account for claims inflation could
result in some hospitals being overcharged by a large margin.
Beazley insures many of the most highly ranked hospitals in the
United States, including a quarter of Healthgrades’ top hospitals
and 15% of US News & World Report’s best hospitals
(2011 rankings). The insurer’s claims database is one of the most
extensive in existence, covering more than 455,000 claims made
against more than 1,400 hospitals since 1998.
In the absence of such data, it is likely that an insurer would
have to apply a single percentage loading for anticipated claims
inflation when renewing coverage, no matter where the hospital is
located. The figure typically levied is 6% and Beazley’s
research did confirm that median inflation on claims of
more than $500 in the period 2001 to 2010 was 6.0%. However,
this concealed a wide divergence from the median in some
states.
In Cook County, Illinois, for example, median claims over the
period grew by 9.5% annually. That means an insurer charging
local hospitals a burning cost premium (i.e. just sufficient to
cover the actuarial expected cost of claims) and increasing that
premium by only 6% annually, would be charging a sum that fell
short of the expected cost of claims in Cook County by 25% a decade
later.
In contrast, hospitals in Cuyahoga County, Ohio, saw the median
cost of claims actually fall between 2001 and 2010, by 5% annually.
A hypothetical insurer applying a standard 6% claims inflation
loading to the premiums paid by hospitals in Cuyahoga County would
be charging over 2.5 times the burning cost after a
decade.
Across the state of Michigan, median claims inflation from 2001 to
2010 rose at only 2.5%, less than half the national rate. In
this case, an insurer applying a 6% claims inflation loading over
the period would be charging 35% more than the burning cost by the
end of the period.
Nat Cross, head of Beazley’s healthcare team, said: “As in
all markets, prices move over time towards an equilibrium that
reconciles supply with demand. But in hospital professional
liability insurance the information held by a number of the
suppliers of insurance is very imperfect and can lead to lasting
and widespread price distortions.”
“Clearly insurers do take some account of the impact of tort reform
on anticipated claims inflation, which we can see has had a
significant impact in Cuyahoga County, Ohio. But there are
other, subtler differences between states and – even more so –
between individual hospitals that mean that claims inflation can
vary quite widely from the median. This puts new entrants to
the insurance market at grave risk of adverse selection as they
herd towards inadequately priced risks that better informed
insurers avoid.”
“Hospitals are frequently better off insuring with well
established, data-rich insurers for two reasons. If they are
in a low claims inflation region, they are less likely to be
penalized by a claims inflation loading that is based on a
market-wide median. If they are in a high claims inflation
region, they may benefit for a short while, but they will also run
a far greater risk that losses will drive their insurer to pull out
of writing HPL insurance altogether. When this happens, the
claims that the insurer is still responsible for are unlikely to
receive the care and service they require. Given that HPL
insurance claims take an average of 2.2 years to be settled after
the incident occurred, this is a real danger.”
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