The fates of several rural hospitals in Washington hang in the balance after the seizure of one of the state's main providers of medical malpractice insurance.
Washington Casualty Co., which insures almost 75% of the state's rural hospitals, was ordered into state receivership last month after its 2002 annual report revealed the company's balance sheet was nearly $4 million in the red. Although regulators hope to rehabilitate the Bellevue, Wash.-based insurer, the fallout could be disastrous for the state's smallest hospitals, many of which already are struggling to afford liability coverage.
"This could be devastating, said Leo Greenawalt, president and chief executive officer of the Washington State Hospital Association. "It could cripple our rural hospitals. ... Some of them may have to close."
Washington Casualty, founded by several district hospitals in 1977, currently insures 46 hospitals and 20 clinics in its home state, as well as six Idaho hospitals and two Oregon clinics.
These facilities, Greenawalt said, face two possibilities, both of them dire: If Washington Casualty goes under, the smallest hospitals may be unable to find replacement coverage at any price. "Nobody wants to insure 20- to 30-bed hospitals," he said. "There are no other prospects out there." And if the company pulls through, premiums could skyrocket, pricing even some of the larger hospitals out of the market.
Hospitals statewide already are reeling from huge increases in liability coverage premiums. Odessa (Wash.) Memorial Hospital, one of Washington Casualty's customers, saw its rates nearly double to $64,000 from $34,000 in the past fiscal year, and officials fear another rate increase could bust the 38-bed hospital's already strained budget.
"We're in a very financially precarious situation to begin with, so another significant increase would be detrimental," said Carol Schott, Odessa Memorial's chief financial officer. "There's no more room in our budget and we're already borrowing to our full capacity. ... We would have to look at scaling back services."
Samaritan Healthcare, Moses Lake, Wash., said Washington Casualty was the most affordable insurance carrier it could find. That's why the 50-bed hospital swallowed a 56% premium increase last May and expects to shoulder another 65% increase this May-bringing its annual premium to $867,000.
"We've budgeted for this increase. There's not much else we can do," said Scott Campbell, Samaritan's marketing director, adding that he is optimistic Washington Casualty will pull through. "But if the insurance commissioner needs to raise rates even more to right the company, that could be a problem."
Regulators have asked hospitals insured by Washington Casualty not to jump ship, fearing that an exodus of clients could threaten the company's ability to recapitalize. But some hospitals, including Odessa Memorial and Grays Harbor Community Hospital, Aberdeen, Wash., admit they already are shopping around.
Tom Troy, president and CEO of 172-bed Grays Harbor, said he was startled by last year's 126% premium jump to $735,000 and is reluctant to repeat the experience. "I have questions about their reliability," Troy said. "They said the huge rate increase last year would solve their problems, but it didn't."
Washington Casualty may be paying the price for keeping its premiums artificially low during the 1990s in a bid to win greater market share. The company steadily has ratcheted up rates for hospitals in the past few years and stopped insuring individual physicians in 2001 after suffering growing losses in that business.
Yet in many respects, Washington Casualty's predicament is a sign of the times. Malpractice insurance carriers nationwide say they are grappling with growing investment losses, difficulty finding reinsurers to share their risk and rising jury awards for medical liability claims. According to the American Hospital Association, the average jury award jumped 43% to $1 million from 1999 to 2000, the latest year for which data are available.
St. Paul Cos., the nation's largest medical liability carrier, pulled out of the market altogether in 2001, citing massive underwriting losses. And Physicians Insurance, Washington state's largest insurer of individual doctors, posted a $19.5 million operating loss for 2002 and a $21 million drop in its surplus reserves.
Greenawalt said the threat of soaring jury awards has compelled state insurance regulators to boost their surplus requirements, making carriers far more vulnerable to state seizure. Washington Casualty, for instance, was required to have reserves of $41 million this year, up from $31 million in 2001 and $20 million in 1999.
"They went from being a relatively healthy company to being on the insurance commissioner's watch list purely because they couldn't keep up with the growing reserve requirements," he said. "If the original estimate had held, they would have had plenty of money."
Indeed, regulators said that while the company is technically insolvent, it still has enough liquidity to maintain operations.
For now, however, Washington Casualty's future remains uncertain. Insurance regulators are developing a plan to help the company emerge from state control and resume normal operations in the next few years, but other options-such as a private buyout or even closure-haven't been ruled out.
"Nothing's off the table at this point," said Bill Ripple, spokesman for the Washington State Office of the Insurance Commissioner.