Soaring rates for medical malpractice insurance are the newest worry for hospitals and physicians.
Local hospitals are seeing insurance renewals calling for rates that have at least doubled, said Ruth Goodell, senior vice president in the Detroit healthcare practice of Marsh, one of the world's largest insurance brokerages.
That's on the low side. Mount Clemens (Mich.) General Hospital, which buys malpractice insurance in a group with four other hospitals, is bracing for its rates to triple when its insurance comes up for renewal July 1, Goodell said.
What's more, to keep the renewal even at those rarified levels, the 256-bed hospital will have to self-insure a greater portion of claims, meaning more out-of-pocket spending by Mount Clemens General before insurance coverage takes hold, she said.
Like most larger hospitals in Michigan, Mount Clemens General self-insures against malpractice claims under $1 million, then buys reinsurance from commercial insurance carriers for larger claims.
The additional costs to the hospital next year for malpractice coverage could run into the millions of dollars, said Robert Milewski, Mount Clemens General president and chief executive officer.
"This malpractice liability kind of snuck up on us," he said. "This has the potential to wipe out hospital bottom lines."
Medical malpractice rates have been rising nationally for about a year as those carriers that survived a dismal underwriting decade in the 1990s try to firm up their financial positions through increased rates, Goodell said.
The trend started in states with lenient tort laws that allow for big jury awards for pain and suffering. But eventually it began to wash into states such as Michigan that have tried to keep awards in check through tort reform, Goodell said.
Michigan, for example, caps noneconomic damages and requires claimants to give 182 days' notice to hospitals, physicians and other healthcare providers before filing a lawsuit.
The damage done to the reinsurance market by the Sept. 11 attacks also has fueled rising rates, Goodell said. The insurance dollars that flowed to that disaster caused fund availability to constrict, driving up prices.
One of the more troubling parts of the malpractice rate increases is that they are general in nature and not necessarily tied to a poor claims experience by the insured hospital or physician, she said.
"We're telling clients that a 100% increase is about as reasonable as anyone can expect," said Goodell, whose company serves a large block of hospitals in the Detroit area buying medical malpractice insurance.
Michigan Insurance Commissioner Frank Fitzgerald said the state's medical malpractice tort reform has helped keep local insurance rates from running at the astronomical levels experienced by other states that have not enacted reforms.
The state has seen modest increases in the rates that it reviews for those insurers that provide underwriting coverage to hospitals and physicians. The state, however, does not regulate the reinsurance used by larger hospitals, Fitzgerald said.
Mount Clemens General is feeling little consolation that Michigan is not as bad off as other states. The hospital's malpractice rates were fairly flat for the past five years, a good thing considering the slim operating margins with which the hospital has had to live in a tough competitive environment in Michigan, Milewski said.
Now, the looming malpractice increase is a setback for Mount Clemens General and other local hospitals that have spent those past five years dealing with rising labor and pharmaceutical costs combined with huge reimbursement cuts instituted by the two largest payers in Michigan: Medicare and Medicaid.
The reimbursement cuts cost Michigan hospitals hundreds of millions of dollars, resulting in job cuts and cost-cutting, especially in urban areas.
Doctors practicing at the Detroit Medical Center have not been immune to rising medical malpractice rates, said Raeann Shepherd, DMC vice president of risk management.
Commercial insurers are trying to recover from charging too little for insurance in the 1990s with big increases today, Shepherd said. Many insurers once active in Michigan, including Minneapolis-based St. Paul Cos., have stopped selling medical malpractice insurance in the state altogether, Shepherd said.
Increases are ranging from 10% to 100%, depending on how risky the specialty is, she said. Some physicians are having their coverage canceled by carriers with as little as 30 days' notice, Shepherd said.
The DMC self-insures for most of its medical malpractice liability, and it owns an offshore insurance company to provide reinsurance for major claims, she said.
About 1,000 of the DMC's 3,000 practicing physicians purchase their medical malpractice insurance from the health system's captive insurance company, Shepherd said. But with the rates of the captive insurer becoming more competitive as commercial rates rise, the company is seeing an influx of applications from DMC doctors looking for a safe harbor.
Henry Ford Health System, Detroit, is breathing a sigh of relief that it is in the middle of a three-year, noncancellable policy for its malpractice reinsurance, said John Mucha, vice president of risk finance and insurance services.
Without the long-term contract, the state's second-largest hospital company would be dealing with reinsurance premium increases of 200% to 400%, Mucha said. Instead, rates are locked in at the fairly attractive rates of 18 months ago, he said.
Henry Ford Health is hoping the market will stabilize by the time its current contract expires in August 2003, Mucha said. That could happen if insurance companies eliminate underwriting losses through rate increases and if their investment income improves.
Insurers often frequently derive a good portion of their profit from investing cash captured through premiums and retained earnings. "If the market remains the same 18 months from now, we're going to take a bath," Mucha said.
-Crain's Detroit Business, a sister publication of Modern Healthcare