Increasing liability premiums could push independent physicians to consolidate

The percentage of medical liability insurance premiums with year-to-year increases has surged for the third year in a row, a trend that could negatively affect independent providers who have experienced relatively low rates and a soft market for roughly the past 20 years.

While the proportion of medical liability premiums with annual increases was somewhat stable between 2010 and 2018, in 2019 around 27% of premiums saw increases—nearly twice the rate from the previous year, according to a recent analysis by the American Medical Association.

In both 2020 and 2021, roughly 30% of premiums increased, with a number of states reporting double-digit increases.

"The medical liability insurance cycle is in a period of increasing premiums, compounding the economic woes for medical practices that struggled during the past two years of the pandemic," said Dr. Gerald Harmon, AMA president, in a news release. "The increase in premiums can force physicians to close their practices or drop vital services. This is detrimental to patients as higher medical costs can lead to reduced access to care."

Based on a Medical Liability Monitor annual survey of professional liability insurers, the analysis found that recent premium increases are largely a result of malpractice insurance companies underwriting at a loss in claims payments and receiving lower investment returns, said Michael Matray, editor of Medical Liability Monitor.

Since the Affordable Care Act of 2010, the migration from independent practices to hospital employment has decreased the number of medical malpractice insurance policies and kept market rates artificially low—with little inflation for providers choosing to stay independent, Matray said.

However, liability insurers' losses, paired with an increase in the number of eight-figure malpractice verdicts and claim settlements, has led to the market playing catch-up (even with the overall frequency of claims decreasing during the past several years), he said.

Medical premium liability insurance companies began losing money in 2016 with an average combined ratio of 102.1%, an S&P Global Market Intelligence report found. In 2020, that number jumped to 113.4%, meaning insurers paid $113 in claims for every $100 in income.

"As the combined ratios are increasing, it's not uncommon to see the premiums for the underlying insurance increase," said Gerry Glombicki, senior director at Fitch Ratings.

In order for carriers to stay in business, their premium prices have to keep pace with surges in loss costs for the foreseeable future, Glombicki said, which will, in turn, increase physicians' cost to do business. Though, these rates likely won't double or triple every year and will eventually break even, leading to decelerated premiums, he said.

In 2021, Illinois was the state with the largest proportion of premiums that increased by double digits—around 58.9%, followed by West Virginia with 41.7% of premiums and Missouri with 29.6%, according to the AMA analysis.

Year-over-year premium increases in these states ranged from 10% in Idaho and Washington, to 35.3% in Illinois.

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Geography also contributed to major differences in base premiums during 2021, with some obstetricians and gynecologists in Los Angeles County, California facing premiums of $49,804, and others in Miami-Dade County, Florida, looking at rates of up to $215,649 annually.

These high costs can make it enticing for independent physicians to work for hospitals that offer to cover their medical liability, especially as a vast majority of health systems are self-insured and have an excess liability policy—with reserve funds built in to pay claims and potentially expensive verdicts, Matray said.

The fact that provider revenue will likely not be able to offset higher premiums is another element that will accelerate the trend to consolidation, said Glenn Melnick, professor at USC's Sol Price School of Public Policy.

Due to the COVID-19 pandemic and other unexpected shocks to the healthcare system, government programs like Medicare and Medicaid, in particular, need to build policies and procedures into their framework to recognize and handle dramatic losses and crises, Melnick said.

Companies not equipped to deal with the deficit in a timely manner could exit the market if they had threats in capitalization to begin with, he said.

"One of the longer term consequences could be a little bit less competition in the medical liability insurance market, and therefore a more permanent increase in premiums for some," Melnick said.