Are Your HPL Premiums Too High?

Is your premium too high? You might be getting ripped off

Loading could be incorrect for you, lead to overcharges

No one enjoys paying their hospital professional liability (HPL) premiums, but paying too much is even worse. Your premium might be too high if the insurer is loading based on a broad geographical area, and it's up to you to ask the right questions.

Hospitals and hospital groups should ask their insurers about the loading applied to premiums to account for claims inflation, says Nat Cross, head of the healthcare team for Beazley, which insures many of the most highly ranked hospitals in the United States. The insurer's claims database is one of the most extensive in existence and covers more than 455,000 claims made against more than 1,400 hospitals since 1998.

Overcharging on premiums can occur when the insurer doesn't differentiate between hospitals in the same area and, instead, treats them all the same, Cross explains. Applying an across-the-board annual percentage loading to account for claims inflation could result in some hospitals being overcharged by a large margin, he says.

Unless it has access to data showing the actual experience of a hospital or group, 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 confirms that median inflation on claims of more than $500 in the period 2001-2010 was 6%, Cross says. However, this figure concealed a wide divergence from the median in some states.

The problem for the hospital is that it might be facing a premium increase based on artificially inflated claims experience — one that may look at all facilities nationwide, or over a specific geographic area — rather than one focusing on the specific hospital or location, cautions George B. Breen, JD, an attorney with the law firm of Epstein Becker Green in New York City. For example, a provider may be located in a state with a cap on damages for pain and suffering, but its premium adjustment might be based on damages payments made in states without any such cap, or even nationwide.

In Cook County, IL, for example, Beazley data show that median claims over the period grew by 9.5% annually. That growth 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, OH, 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 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. "As in all markets, prices move over time toward an equilibrium that reconciles supply with demand," Cross explains. "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."

Ask how your loading is determined

The money involved can be substantial if your hospital is being overcharged for premiums, notes R. Stephen Trosty, JD, MHA, CPHRM, president of Risk Management Consulting in Haslett, MI. Trosty previously worked for an insurance company.

The difference between the loading you really deserve and the loading applied by the insurer could be as high as 9%, he says, so it behooves the risk manager to inquire about exactly how its loading is determined.

One thing you can do is to look at your claims experience, he says. If you see that claims have been going down but you find yourself with a significantly increased percentage, the risk manager needs to ask the insurer or the broker why. The answer might be geographic loading that is not specific enough, Trosty says.

"Risk managers need to be more proactive in asking for explanations and justifications," he says. "That doesn't happen nearly as often as it should. They just accept it."

Insurers do take some account of the impact of tort reform on anticipated claims inflation, which has had a significant impact in Cuyahoga County, OH. 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, Cross says. This situation puts new entrants to the insurance market at grave risk of adverse selection as they herd toward inadequately priced risks that better informed insurers avoid.

Hospitals are frequently better off insuring with well-established, data-rich insurers for two reasons, Cross says. 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 might 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," Cross says. "Given that HPL insurance claims take an average of 2.2 years to be settled after the incident occurred, this is a real danger."

Sources

• George B. Breen, JD, Epstein Becker Green, New York City. Telephone: (202) 861-1823. E-mail: [email protected].

• Nat Cross, Head of Healthcare Team, Beazley, London, United Kingdom. Telephone: 44 (207) 674 7236. E-mail: [email protected].

• R. Stephen Trosty, JD, MHA, CPHRM, President, Risk Management Consulting, Haslett, MI. Telephone: (517) 339-4972. E-mail: [email protected]

SOURCE-Healthcare Risk Management