As the medical malpractice insurance crisis continues to hammer hospitals and doctors around the country with large malpractice verdicts and skyrocketing premium increases, it also has led to surging business opportunities for temporary physician-staffing providers, known in healthcare parlance as locum tenens.
But even that sector has been hit recently as medical malpractice insurers vacate markets in the face of greater losses, leaving entire states--including Mississippi and Nevada--with little or no insurance coverage. Texas, for example, went from nine malpractice insurers last year to only three this year. And where insurance is still available, it's often much less affordable.
Late last year, after the country's No. 2 malpractice insurance provider, St. Paul Cos., exited the medical malpractice business, already escalating premiums jumped even higher. St. Paul's departure sent the 42,000 physicians and 750 hospitals it covered scrambling to secure new coverage. Physicians reported increased premiums of 20% to 100%. In the aftermath of Sept. 11, jittery insurers were reluctant to take on new business and the reinsurance industry was walloped with billions of dollars in claims from the terrorist strikes.
Although annual increases in medical malpractice insurance premiums have averaged 15% to 20% during the past two years, according to industry officials, in some states it hasn't been uncommon for providers to face increases of 50% and higher.
St. Paul wasn't the only casualty among malpractice insurers. In August 2001, Pennsylvania seized control of PHICO Insurance Co., which lost $42 million in 2000. State regulators found PHICO had understated losses of $250 million, suffered a $120 million loss in its surplus in one year and was insolvent. It began liquidation proceedings in February. About 9,400 doctors and hospitals, most in Pennsylvania, were left to find alternative coverage within 30 days.
In New Jersey, medical liability insurer MIIX Insurance Co., which covers 15,000 physicians and more than 140 hospitals in several states, saw its surplus drop by $128 million in 2001. That drop raised a red flag for state insurance regulators, who worried that the company would not be able to cover losses for its members. MIIX reported a $45.4 million loss for the first quarter ended March 31. In May, the New Jersey Department of Banking and Insurance approved the company's new business plan, which would allow MIIX to discontinue writing policies for physicians outside of New Jersey and form a new successor company.
Medical malpractice insurers, hospitals and physicians say they haven't seen a crisis like this since 1986, when market retrenchment and a spate of big verdicts drove premium prices sky-high.
The medical malpractice insurance industry has been in the red for years, according to an April study by Hartford, Conn.-based insurance research firm Conning Research. The industry's loss ratios have risen from 98% in 1994 (loss ratios below 100% usually connote profitability; those above 100% usually mean losses) to a projected 139% for 2002, pointing to bleaker times for malpractice insurers and even higher premiums. Conning Assistant Vice President Geri Riley says that in 2000, the medical malpractice insurance industry suffered a $1.7 billion underwriting loss.
Joseph Roethel, who tracks medical malpractice insurers for A.M. Best Co., predicts the industry will write $6.9 billion in premiums in 2001, a 21% increase over 2000.
"The premiums they've charged in years past haven't been sufficient to compensate for the losses they're seeing now," Roethel says. "It's hard to bump up reserves for years past. And they no longer have the investment income to offset their losses."
While temporary staffing firms haven't escaped the rising costs of malpractice insurance, they haven't suffered to the same degree as many of their clients. St. Paul was the largest locum tenens insurance carrier and its exit left some companies desperately seeking coverage. Industry insiders say most firms were able to find policies but at higher costs.
"People are making more out this medical malpractice situation than it deserves," says Therus Kolff, M.D., who in 1979 co-founded Salt Lake City-based CompHealth, one of the oldest and largest locum tenens firms. "This problem is cyclical and we're just going through another cycle. This has happened before. Those who can weather the storm will succeed."
Kolff has since left CompHealth and now serves as an executive board member with Salt Lake City-based locum tenens firm Vista Staffing Solutions.
Michael Weinholtz, president and chief executive officer of CompHealth, also acknowledges that the liability insurance crisis has struck the locum tenens field but indicates it hasn't been a devastating blow. "It has made it more challenging to procure that insurance," Weinholtz says. "It has definitely become much more expensive. We've seen increases of up to 100% and we've had to raise our rates to cover the cost of the increases. Luckily, we've received very little push-back from our clients because they're dealing with the same issues. We haven't lost any clients as a result of it."
Medical malpractice insurers have dropped coverage in some states and raised rates in others to compensate for their losses. Florida, Georgia, Mississippi, Nevada, Pennsylvania, Texas and West Virginia have been among the hardest hit. Those states have seen some large malpractice jury verdicts in the past three years that have frightened risk-averse insurers and tapped their reserves. Physician recruiters say doctors are fleeing those states--most of which have weak malpractice liability laws that don't cap noneconomic damages--for less litigious markets.
It's such disparities in state laws that have led to calls for national tort reform for decades--a contentious issue in Washington.
A large niche
In such an environment, locum tenens firms continue to grow market share in a niche industry that now approaches $2 billion in annual revenue, according to a new survey commissioned by one of the industry's largest firms, Irving, Texas-based Staff Care. Hospitals and health systems continue to be the largest purchasers of locum tenens physicians, accounting for 60% to 70% of all physician placements, or about 26,000 doctors per year. The locum tenens industry has been growing at a 20% annual rate since 1997, according to industry sources.
Locum tenens company executives say physician placement represents $600 million to $900 million of their business annually. Placements of nurses and allied health professionals, such as occupational and physical therapists and radiological technicians, as well as independent physician contractor hirings account for nearly $1 billion annually in placements.
Kolff says there are financial and liability advantages for physicians seeking locum tenens work. Doctors in private practice purchase their own insurance, typically for one year, whether they work 10% of the time or seven days per week. Locum tenens companies provide coverage for the doctors they place.
"We can turn the spigot off and on," he says. "And because of our size we can spread the risk."
And they also can pass on the costs to clients.
He predicts that in some states hospitals needing specialty coverage are hiring physicians as employees because more doctors find their malpractice premiums are no longer affordable.
"We may see some changes in business models to accommodate the current climate," Kolff says.
Mary Stone, an Atlanta-based risk-management consultant and insurance broker for several locum tenens companies, says the crisis has fueled demand for staffing firms.
"Some doctors are going locum tenens because they can't find malpractice insurance. Others are leaving their practices out of fears of operating in litigious areas. That's causing movement in the industry. It looks like a mass physician exodus from parts of Pennsylvania (also considered a litigious state) where it seems like 25% of the doctors are seeking locum tenens work."
Clarke Shaw, Vista vice president of sales, says hospitals that are financially sound make money on locum tenens physicians and employ them as part of their business strategy. Shaw said locum tenens doctors allow hospitals to maintain uninterrupted patient flow by keeping their emergency rooms and diagnostic centers fully operational.
"We're not that high-priced of an alternative," he says. "This malpractice crisis has brought no real change to our industry, other than creating business opportunities. All the old players are still in and some new players are thinking about getting into the game."
He says more than half of Vista's assignments come from organizations seeking to hire physicians permanently, and not just looking for vacation or temporary coverage.
"Some of our doctors are doing locum tenens because they don't want a full-time job. That's what is so inviting," Shaw says
Kolff concedes that there had been an unsavory stereotype of locum tenens physicians as "last resort" doctors who change hospitals and leave states because of substance-abuse problems or incompetence. But that, he says, is a myth the industry has worked hard to dispel.
"From my perspective, if you are a lousy physician, the last thing you want to do is locum tenens. You are recredentialed now both by us and by every new institution you're assigned to. If you are a drug addict or an alcoholic, or incompetent, the last thing you want to do is leave whatever safety you have where you are. If you have baggage, it will be a very short career for you. Because we were concerned about the stigma of attracting people who are marginal, we went overboard and have been very aggressively credentialing."
Competitor Jim Ginter, president of the locum tenens division of Atlanta-based staffing company Medical Doctor Associates, agrees that tougher credentialing has weeded out problem doctors from seeking locum tenens work.
"The light is a lot brighter now than it used to be," Ginter says. "The hiding-out days are numbered now. It's difficult to have a lot of skeletons in your closet and practice medicine today."
A managed-care component
David Faries, a spokesman for Staff Care, says managed care also can be blamed, in part, for increased locum tenens demand. He says a steadily declining number of physician specialists in radiology, psychiatry and anesthesiology in the 1990s was exacerbated by a perceived need at managed-care companies for primary-care physician "gatekeepers." He says medical schools and residency programs responded by producing more primary-care doctors and fewer specialists.
"We think this is just a normal shift in business patterns," Faries says. "In 1997, 65% of all demand for locum tenens was for primary-care physicians. Now primary care makes up only about 21% of demand."
Faries also agrees that the malpractice crisis is driving hospitals and other healthcare organizations in some states to turn to locum tenens companies for their staffing needs.
"One facility in Pennsylvania lost all four of its obstetricians because of malpractice premium increases. That's driving some demand for our services as well. Two years ago medical malpractice wasn't a big concern. Now you can't go a day without hearing of some state not embroiled in a malpractice coverage crisis."
Staff Care Vice President Dustin Koger says that in the 1980s, locum tenens doctors were used most frequently to cover vacations, unexpected leaves and holidays. "Now CEOs see locum tenens as strategic players to maintain market share," he says.
Koger says it typically takes hospitals six to nine months to recruit a physician. "While they're (searching for) that doctor, locum tenens are treating their patients," he says.
Koger says if states facing malpractice crises are unable to address both the availability and affordability of insurance, they will witness a continued loss of physicians.
"That, in turn, is going to create a huge recruiting issue in those states, and they will continue to have big physician-retention problems on their hands," he says.
That scenario is already playing out across the nation, increasingly in states perceived to be litigious, such as West Virginia, where large malpractice verdicts and generous tort laws have increased premium costs. Robert Harman, CEO of 56-bed Grant Memorial Hospital in Petersburg, W.Va., says as soon as doctors he tries to recruit hear the name West Virginia, a "red flag goes up. . . . It's difficult to recruit physicians in this atmosphere."
"We are losing high-profile physician specialists," says Harman, who has headed the county-owned hospital since 1965. "So far we're having no trouble getting the coverage we've needed through one of the national locum tenens companies."
Harman says his staff physicians' malpractice insurance premiums are coming up for renewal this summer.
"And they're telling me if they get hit hard, they'll start looking out of state," he says. "That's the danger for us."
Bill Welch, president of the Nevada Hospital Association, says his member hospitals also have been grappling with the malpractice crunch.
"We don't have the physician coverage to staff our trauma centers. Physicians are cutting back their practices in high-risk areas and that's making the hospitals the true safety-net providers," he says.
Locum tenens providers could offer relief, but Welch says Nevada hospital administrators are cautious.
"Our hospitals have used locum tenens in several areas over the years and I've had several companies contact me to know if our association will need more help in this crisis," Welch says. "But we are being very cautious about how we pursue that because we don't want our local medical staff to think we aren't concerned about their problems. The paranoia level here is great. We've had to be very careful in looking at staffing alternatives even as our physician community is preparing to walk. I have not seen or heard of an increase in locum tenens use in Nevada, but it may come to that."
Welch says ultimately the solution must be national tort reform. But like most of the other providers and insurers, he says he thinks that's unlikely to occur for years because of resistance from trial lawyers, who have a powerful lobby influence in Washington.
"So it will have to be accomplished on a state-by-state basis first," he predicts.
Don Nielsen, M.D., senior vice president of quality leadership at the American Hospital Association, concurs that immediate relief must be achieved within the legislatures of states suffering the worst problems.
"But those are stopgap solutions," he says. "Physicians are leaving their practices and setting up shop across neighboring state lines where affordable malpractice insurance can be found. We need a national solution, but that will take time."