Provider networks are being created at a furious pace, often without regard for the risks the new entities are facing.
To better position themselves to contract for managed-care dollars, health systems are gobbling up hospitals and affiliating or partnering with doctors in unprecedented numbers. But they are overlooking some potential liabilities, according to risk management professionals and attorneys who defend malpractice suits.
"Sometimes I wonder if the hospitals understand, as they try to get their arms around the medical community, what . . . they are biting off," said Bruce Hill, an attorney with Orlando, Fla.-based Adams, Hill, Reis, Adams, Hall & Schieffelin, which represents 50 U.S. hospitals in malpractice cases.
"Hospitals shouldn't just be looking at the upside that says, `Oh my goodness, aren't we great because we did this deal and we now control 65% of our market,"' Hill said. "If you have 65% of the market, you've also got 65% of the (professional liability) risk."
Hospitals and health systems spend about 1.6% of their net patient revenues on the costs of risks related to professional and general liability, according to a survey by the Healthcare Financial Management Association and Deerfield, Ill.-based MMI Cos., a healthcare risk management, liability insurance and consulting firm. Other industry experts estimate such costs to be 1% to 5% of the hospital or health system's net patient revenues.
The organizations' survey, released last year, is part of a five-year study of healthcare risk management. MMI and the HFMA acknowledge the costs of healthcare risks from professional and general liability are difficult to quantify in this period of rapid consolidation. There is no comparative data from past years.
"We keep going through these cycles in healthcare, but we're beginning to know that the late 1990s are being defined by collaboration and cooperation, which will be the cost controls," said Samuel F. Hohmann, executive director of the Institute for Health Risk Management Studies, an affiliate of MMI.
The liability of a lawsuit used to fall solely on the party it was filed against, but closer ties between hospitals and doctors mean lawyers are looking more at hospitals' deeper pockets.
"There will come a time when the hospital is the only defendant, especially when all the physicians will be flying under the hospital's wings. So hospitals have to be concerned with protecting themselves," Hill said. "When the hospital owns the clinic or outpatient-care center, they are becoming more and more liable."
To protect themselves as they become integrated, hospitals and health systems are trying to get physicians under the same professional liability umbrella.
Earlier this year, Columbia/HCA Healthcare Corp., the nation's largest for-profit hospital company, began an effort to lessen its liability risk under integration by developing its own malpractice insurance for doctors. It has launched pilot projects in three markets (Aug. 5, p. 20).
If Columbia successfully implements the project nationwide, it could rival St. Paul (Minn.) Fire and Marine Insurance Co., the largest medical malpractice liability insurer. St. Paul covers 45,000 physicians. Nashville, Tenn.-based Columbia is associated with 90,000 to 100,000 doctors.
Analysts say Columbia's strategy may prove to be a good one, although it isn't likely to make a lot of money selling the malpractice insurance.
Columbia wouldn't comment about its reasons for the move.
Insurance industry observers say insurers likely are losing money or breaking even on malpractice insurance because their rates aren't keeping up with inflation. In addition, physician management companies and other self-insured programs similar to Columbia's are chipping away at the business traditionally offered by commercial insurers.
"Hospitals and healthcare systems that offer malpractice (insurance) are probably going to break even or lose a little money because there's so much competition," said Tom Hermes, a professional liability and healthcare consultant in the Hartford, Conn., office of Tillinghast-Towers Perrin, an international consulting firm.
"Individual physicians and hospitals probably aren't going to be around in the next five or so years, so it makes no sense to go after (a single physician's) business when you could go after a group of them," Hermes said.
If hospitals aren't considering self-insuring physicians, they need to make sure doctors joining their medical staffs have adequate liability insurance. Contract provisions that require physicians to have their own malpractice coverage have been upheld by courts for decades.
In many cases of litigation, plaintiffs are attempting to shift doctors' liability to hospitals, which typically have much higher malpractice coverage levels.
Industry analysts say primary-care physicians are considered adequately covered with a $500,000 policy, while specialists should have about $1 million in coverage.
If the hospital is sued for care a physician gave, it would be covered through the hospital's indemnity plan. "If the physician has adequate insurance, you would have laid that risk off," Hill said.
With more physician-hospital organizations and joint ventures between hospitals and doctors beginning operation, such entities also should consider their liabilities when contracting with managed-care plans, consultants said. "When they start putting these programs together and operating in the managed-care arena, they are creating new liabilities," Hermes said. "It's hard for lawyers to go after managed-care plans because they aren't providing the care. The doctors and hospitals are."
Managed-care liability coverage from commercial insurers costs between "10 and 20 cents per covered life," Hermes said. "So far, the commercial (managed-care liability) coverage has been pretty cheap. If you have 50,000 covered lives, you have a $5,000 to $10,000 premium."
Entering the world of risk will mean changes in providers' roles. In addition to being caregivers, "providers also have to become an insurance vehicle," said Pam Lockowitz, senior vice president of MMI Risk Management Resources, an MMI division.
To help reduce risk in a capitated environment, Lockowitz said providers need to focus on increased use of clinical protocols, especially in "high-frequency and high-utilization" areas.