Malpractice Insurance: How to Lower Your Premiums

Looking for ways to save money on medical malpractice insurance premiums? You may be in luck. The topsy-turvy market for malpractice insurance seems to be taking a turn for the better. Now may be the best time in years to grab some insurance savings.

How long it will last is anybody’s guess. But a physician-friendly trend has emerged recently.

The newsletter Medical Liability Monitor reports that in 2007, 84 percent of malpractice insurers either reduced premiums or froze them at the 2006 rate, and that followed two consecutive years in which 70 percent of insurers cut premiums from the previous year’s level or held them steady.

Better still, a return to profitability led many malpractice insurance companies to send dividend checks or other rebates back to policy holders last year. That seems likely to happen again this year.

So, happy days are here again, right? Not so fast. The malpractice market is notoriously turbulent. But in good times or bad, there are steps you can take to reduce your own burden. Take-or-leave it medical liability insurance is rare. Most physicians do have choices; shopping for malpractice coverage is like shopping for anything else: Let the buyer beware.

Not so stable

As premiums are stabilizing in most areas, physician-owned malpractice insurers are getting healthier. These companies now comprise some 60 percent of the market. Many, including The Doctors Company, are organized as mutual insurance or reciprocal companies. All of them have physicians on their board of directors or in other leadership roles. Although they are subject to the same market forces as any other insurer, these outfits tend to be physician-friendlier, so it’s welcome news that they are thriving.

But regardless of who owns the insurance company, the current state of affairs remains uncertain. Only time will tell how long this buyer’s market will last. After all, it was just three or four years ago that premium rates were climbing by double and triple digits annually. Options like starting self-funded risk-retention corporations and setting them up on tiny foreign islands beyond the reach of U.S courts, or just going bare without any coverage, started looking like reasonable solutions to some.

“The current situation is a stable state but not a satisfactory state of affairs,” says Richard E. Anderson, MD, CEO of The Doctors Company.

“It’s a heck of a lot better today than it was in the first part of the decade, but malpractice is still very expensive,” says Anderson, a former practicing oncologist whose physician-founded firm represents some 34,000 physicians in several states.

Anderson has good cause for concern. Despite recent reductions, insurance rates remain stubbornly high. Obstetricians in Dade County, Fla. - still ground zero of the nation’s medical liability crisis - pay as much as $275,000 a year for standard claims-made policies that cover $1 million per claim and $3 million in aggregated claims. Even in markets with lower rates, the cost of medical malpractice insurance continues to eat away at tight profit margins.

Surveys by the Medical Group Management Association (MGMA) estimate that medical professional liability insurance consumes about 2 percent of medical revenue at multispecialty groups. But that figure is only a national median; the cost can differ greatly by specialty and region. Add in the fact that about 94 percent of a typical medical practice’s payments come from insurance contracts, then figure in the rising costs of everything from vaccines to employee health benefits; suddenly, those few percentage points of profit slipping away to medical malpractice insurance seem more draconian.

One of the most worrisome trends for Anderson and others in the insurance industry is an uptick in the average award made to successful malpractice plaintiffs. True, claims frequency (how often claims are filed) appears stable. Most plaintiffs still drop their cases before going to court, and doctors win most of the cases that do make it to trial. But another important measure - claims severity (the damages paid per malpractice case settlement) - keeps creeping higher.

“Claims severity keeps climbing if for no other reason than because of the rising cost of healthcare,” Anderson says. In other words, when courts or parties to out-of-court settlements compute an injured patient’s medical costs, the tally gets higher each year. It’s climbing at a little more than 5 percent a year - about the same rate as annual medical inflation as computed in the U.S. Labor Department’s Consumer Price Index.

It’s anybody’s guess as to how much longer the respite from jaw-dropping - and profit-depleting - annual premium hikes will last. In the meantime, physicians would be wise to take advantage of the current buyer’s market (a “soft” market in industry jargon) for malpractice insurance.

Getting a better deal doesn’t necessarily mean breaking ties with your current insurer. It might simply mean taking advantage of incentives and discounts your insurer may already offer. Indeed, some of the easiest malpractice insurance savings you can grab might be right under your nose.

Consider these common goodies:

Discounts for attaining certain CME credits. Most malpractice insurance companies offer premium discounts to physicians who take the company’s recommended CME courses in various risk-management skills.

Those insurance company-approved courses and other risk-reduction measures, such as practice assessments, can be worth 5 percent to 10 percent off the annual premium. Often, these courses or seminars are provided at no charge or at a substantially discounted price.

Who wouldn’t jump at the chance to take a few hours of free or reduced-cost CME that helps the practice, counts toward board-recertification credits, and provides a premium discount to boot? Yet many physicians pass up the opportunity.

Anderson estimates that just over half the physicians insured through The Doctors Company took advantage of its CME-related discounts last year. Companies don’t bury these courses and their discounts in contractual fine print. Premium discount options are prominently featured in most companies’ sales literature, policy holder newsletters, and Web sites.

Charles Hill, a Washington, D.C.-based obstetrician, is puzzled that some of his colleagues pass on these opportunities.

“The training insurance companies want you to take is well worth it, not just for the money you save but for the knowledge,” says Hill. “You can learn better ways to communicate with patients, which we now know helps prevent a bad outcome from turning into a lawsuit.”

Hill certainly ought to know. Indeed, nearly every OB/GYN can expect to face at least one liability claim in his career, says the American College of Obstetricians and Gynecologists after surveying its members in 2006.

Hill and his two partners own Reiter, Hill & Johnson, PLLC, the largest obstetrical practice in the District of Columbia. He says the 13-physician practice takes a simple tack with its employed and partnership-track associates.

“We tell the other physicians that they should take the training because it’s a good thing to do, but if they prefer to not take the courses the 5 percent will be deducted from their compensation,” Hill says.

Lucien Roberts, a medical practice consultant and former practice administrator, agrees. “Doctors are really busy. It’s like pulling eyeteeth sometimes to get everyone in a group to take the courses - even though they are good courses with relevant topics,” says Roberts, COO of the consulting firm, Cognos LLC.

Roberts says many practices that base their compensation systems on physician productivity can just deduct the bypassed premium savings from the truant physician’s paycheck or partner share. Practices that divide profits equally or on nonproduction-based measures might deduct the lost savings from the physician’s department.

Five percent may seem puny, but the savings add up. Annual malpractice insurance premiums for obstetricians range from $130,000 to $160,000 in the Washington D.C. area, according to the latest Medical Liability Monitor survey. In other words, the penalties for skipping that four or five hours of free CME could reduce a D.C.-area obstetrician’s annual compensation by $6,500 to $8,000 or more.

Discounts for risk-management efforts. Taking insurers up on their offers to help with claims management, quality initiatives, and risk assessment is another way you might save money on insurance premiums. Yet many physicians pass up these savings, too.

Companies offer discounts ranging from 5 percent to 10 percent for these activities because these are effective risk-reduction steps, says Tom Cox, president of PhillipsCox, an insurance brokerage owned by RCM&D Healthcare of Baltimore.

Look for credits or rebates tied to implementing internal-review procedures or incident-claim reporting procedures. Some companies offer risk assessment courses that can improve your practice’s operations as well as its patient safety outcomes, he says. For example, COPIC, the Denver-based malpractice insurer, awards its preferred status - worth a 10 percent premium discount - to physicians who follow and keep updating their knowledge of recommended risk-management assessment guidelines.

Other steps, such as instituting quality assurance procedures, credentialing the practice with an outside organization, establishing a peer-review process, or setting up guidelines for medical record documentation and consent forms also can bring premium credits.

Even if the effort to do the extra risk management work exceeds the dollars you’ll save on your premium, it’s still worth it. Those steps might bring long-term savings on insurance costs, especially if you decide to change companies, Cox says.

“The new carrier, as part of its underwriting, will take into account the risk-reduction work you’ve done with your current carrier, and that’s almost always going to save you some money on the premium,” he says.

Save money by filling out forms correctly. Each annual renewal cycle brings another long form from the insurance company to fill out. Pay attention to that form, Cox says.

Your insurer has good reason to ask about new services you’ve added; they may bring new risks. Don’t forget, your premium is a blend of the potential risks of malpractice lawsuits for all the physicians of your specialty in your city or region that the company insures. Keeping the insurer in the dark might just bring higher rates later on for everyone, including you.

Of course, don’t forget to tell your insurer about changes in your hospital staff privileges, taking part in a managed-care network, or getting a specialty board certification - those steps might make you less of a risk to them, which could save you money.

Switch safely

Sure, the grass on the other side of the fence always looks greener, but sometimes it really is greener. Switching carriers can be a scary proposition, especially for physicians planning to retire soon.

Hill says he and his partners set goals to help them decide if it would be worth the trouble and uncertainty to switch carriers. They looked for a company that offered a similar range of benefits as their current carrier; an equally sterling reputation for service to physicians; and at least a 10 percent savings on the premium.

“We’d been with a doctor-owned company for a long time,” Hill says. “The last thing I wanted to do was make a change to save a few bucks now and have it become a terrible pain or an obstruction when I retire, which I want to do in a few years.”

Hill says the practice found a new carrier with a solid reputation, physician ownership, and a savings of more than 20 percent on annual premiums to boot.

Setting goals and researching a prospective insurer, like Hill and his partners did, can help you see what lies beyond that beguiling low premium offer.

Rock-bottom premiums may be misleading, says Frank O’Neill, senior vice president with ProAssurance Corp.

“An insurance company can double its top line (total revenues) overnight by pricing its product way below everyone else’s,” says O’Neill. “But if they’ve priced the product so low they can’t pay claims five or six years down the road, have you really done yourself any favors by switching?”

O’Neill says to also look at a company’s track record, size, and financial ratings. Two places to find out about a company’s stability are Fitch Ratings, an international business ratings agency, and A.M. Best Company, which also reports on insurance companies.

But take the ratings with a grain of salt, says Charles Black, an executive vice president with the insurance brokerage Hilb, Rogal & Hobbs.

Black says some very good physician-owned insurance companies might not crack the raters’ highest-ratings tier, but often it’s for a reason that shouldn’t worry you. The ratings firms give some weight to company diversification of product lines and geographic coverage, for example. Sometimes, single-state or regionally-based physician-led insurers are prudent to stay at home and not aim for that highest-possible rating, he says.

“They may have all of their eggs in one basket but it’s a very secure basket,” Black says. “Then, some of them would diversify, expand into other states, but not know the political climate, or assess the risks as well. They start to lose money and the rates go up.”

For most physicians, engaging the services of a multiline insurance broker helps. Hill agrees: “As a physician, yes, I can read an insurance contract, but, honestly, your eyes will glaze over after a few pages and you will miss something, which is why we used an attorney to review the contracts and a broker to show us several companies.”

Playing defense

Another primary consideration of a prospective insurance purchase should be the company’s willingness to defend its physician members against claims.

“Physicians need to satisfy themselves that their company has the desire and the guts to stand behind them,” O’Neill says. Consider when and where a prospective insurer would need your consent to settle a claim.

When it comes to defense, O’Neill says to ask about:

• Policy. Does the insurance policy allow the insurer to settle with a plaintiff when you want to defend against the claim?

• Activity. How many lawsuits does the company defend each year?

• Settlements. How often does the company settle with plaintiffs before a court judgment is issued and how does that compare to industry averages for claim dispositions?

• Success. Is the company hiring lawyers who can match or beat the industry’s average of getting favorable verdicts in the majority (80 percent) of the fraction (5 percent) of cases that get to trial?

For those who want to dig deeper, consider asking a local physician who has been sued how satisfied he was with the insurance company’s efforts to defend him. “It’s always good to know if a company keeps physicians involved in their defense, if it looks for the best expert witnesses, and the quality of the lawyers it hires,” O’Neill says.

Also pay attention to:

Deteriorating protection. Give your current policy a thorough once-over. Is it still providing value? Some insurers try to cut losses by limiting their coverage for defense costs.

“Some are making little trims here and there and it’s usually no big deal until you’re the one who gets stuck,” Cox says.

Look to see if your carrier has modified its consent-to-settle clause, he says. That’s the fine print that guarantees it won’t settle with a plaintiff against your wishes. Some states, including Massachusetts and Florida, post information about physicians’ malpractice settlements online, so it’s something to worry about, he says.

“I’ve seen some carriers modify that from an absolute right to a mediation agreement,” Cox says. “That’s not necessarily bad as long as you are comfortable with your insurance company and its decisions. But this is reputation insurance as well as financial insurance that you are buying.”

Nose and tail. That lower premium the other insurance company offers might not look so cheap after you’ve paid the tail insurance demanded by your soon-to-be-former insurer.

To save money when switching companies, consider ways to forgo your old company’s tail insurance. Consider buying “nose” coverage - also called prior acts coverage - from your new insurance company, suggests Larry Smarr, president of Physician Insurers Association of America, a national trade group for physician-owned or operated insurance companies.

Even with today’s softening market, few companies will budge on the cost of supplemental polices, such as tail insurance coverage, he says. Typically, tail coverage costs between 150 percent and 200 percent of your final year’s premium. The cost depends, in part, on your state’s statute of limitations for patients to seek damages - two years in many states.

What you may forgo with nose insurance are the discounted premiums during your first few years of coverage with the new company. Discounts for newly insured physicians can start as low as 70 percent during the first year and taper off over the next three to four years. By the fifth year of coverage, expect to pay the full premium rate as your risk exposure becomes “mature,” says Smarr. Insurers may limit their offers of prior acts coverage because of your specialty or your claims history, Smarr says.

Retirement may bring different options to save money on tail insurance. You may be able to negotiate for free tail coverage after you retire, says Black. To qualify, most companies will want you to have been insured with them for at least five years, be at least 55 years old, and be retiring from active practice. But that promise can go up in smoke if you change insurance companies just before retiring.

“If I’m over 55 [and] thinking of retiring soon, then the tail coverage could be a big obstacle to switching insurance companies,” Black says. “But today’s soft market might allow you some room to negotiate with the new company on handling nose coverage so, maybe, you don’t have to pay tail insurance to your old company,” he says. For example, the soon-to-be retired physician might be able to start paying at the third-year rate and then retire in three or four years with tail coverage provided at no charge by the new insurance company.

Here are some other money-saving tips:

Shop earlier. Keep track of when annual premiums come due, the experts suggest. Your current carrier might not send its renewal notices until just a few weeks before policies expire. That won’t give you enough time to shop around, make an informed decision, and complete the new insurer’s underwriting process before your current policy expires.

Pay early. Paying in a lump sum instead of quarterly payments could be another way to save money on medical malpractice insurance costs. Medical Assurance Company of Mississippi offers a 5 percent discount to those who pay their premiums in full at the beginning of their policy term, says Tim Boden, administrator at Starkville (Miss.) Clinic for Women: “We look for discounts wherever we can because with our rates at $75,000 to $80,000 a year per physician in a rural state with lots of Medicaid, we’re definitely not going to pass anything up.”

Take a deductible. You have a deductible on your car insurance, your health insurance, and your homeowners’ policy - there are even deductibles on the extended product warranties the big box appliance stores try to sell you. Why not a deductible on your medical liability insurance?

“Put some skin in the game and it could save you some money,” suggests Cox. A deductible might shave 5 percent or 10 percent off of your annual insurance premium.

But be careful. As with any other type of insurance, you don’t want to take a larger deductible than you can pay if the worst should happen. Plus, the insurance company will want proof that you could actually pay that deductible. Pledging your future accounts receivables might not cut it, either. The insurance company will expect the deductible amount to be kept in a very liquid form of escrow, such as a money market account. Some will accept a letter of credit from your bank.

Black suggests taking deductibles only on the portion of your liability insurance that would pay for a settlement. Always try to get first-dollar coverage for legal defense costs, he says. Plaintiff’s cases rarely go to trial and doctors still win the majority of cases that do get before a court. Defense costs can kick in a lot earlier, even for groundless claims that never make near a jury.

Consider whether the premium savings is worth the deductible risk. For an internist with a spotless claims record, taking on a deductible of $10,000 per claim and $30,000 in aggregated claims per year might whittle 5 percent off the annual premium. That translates to $700 for an internist in Los Angeles who paid that area’s average premium of $14,000 in 2007.

Seven hundred dollars. What’s the big deal? Instead of a rate-savings coup to brag about, look at the deductible savings as part of a longer term strategy, Black suggests.

Combine the discounts of, say, a five-member internal medicine group in Los Angeles, and the savings starts to look more substantial. Reinvested, that money plus the interest the deductible in escrow earns will start to add up in a few years. In specialties like obstetrics, emergency medicine, orthopedics and others, those savings will add up even faster.

Black says medical groups can use these accumulated reserves to reach for long-term goals such as becoming self-insured, buying an electronic health record, or maybe just easing some of the pain whenever the next round of insurance premium hikes hits.

Check your status. Your insurance company should give you credit for switching from full-time to part-time status, dropping riskier services such as surgery, or taking a leave of absence, says Cox.

“During the hard market earlier this decade, those types of credits went away or they started blending in the lower premium for part-time over a three-year period,” Cox says. “Now, if your company doesn’t simply [reduce] the premium when you change from full-time to part-time, you should ask them, why not?”

Many companies that give premium discounts for part-time work set the bar at 20 hours a week or less. Many require the physician to have been covered with the company for at least five years, he says.

Try risk-purchasing. Hospitals and large medical groups use their sheer size to garner savings on everything from medical supplies to malpractice insurance rates. So can you. Try banding together with other physicians in your state or region in a risk-purchasing group, suggests Roberts.

Last year, several hundred physicians in Virginia worked out a risk-purchasing arrangement with CenVaNet. The Richmond-based limited-liability company offers health and wellness programs, chronic-care management and other services to physician members. CenVaNet, in turn, negotiated a multiple-year contract on the physicians’ behalf with MAG Mutual, a regional physician-owned liability insurer.

Another option is to set up your own risk-purchasing group. Roberts says joining or forming a risk-purchasing group is less daunting because it doesn’t present all the potential legal and investment commitments, and perhaps entanglements, of forming a risk-retention company or a captive insurance company. Plus, it’s easier to understand.

To minimize everyone’s financial and legal risks, and hold down operating costs, he recommends setting up the organization as a limited-liability corporation, or LLC. With less than $2,000 in legal paperwork for registering and incorporating, you can set up a doctor’s version of Sam’s Club to shop for all types of insurance or other services.

“Risk purchasing is a short-term and a long-term strategy,” Roberts says. “Smaller groups get premium savings right off the bat - maybe double-digit savings - and lock in rates before the market hardens up again. Then, when it does come time to negotiate the next round of premiums, you’ll have several hundred physicians on your side and, hopefully, a good loss ratio.”

Beginning of the end

If you are thinking of switching companies, keep in mind the thousands of physicians, active and retired, still recovering financially after the overextended insurer PHICO fizzled out in 2001. Or those who had to scramble for coverage when other companies, like St. Paul Fire and Marine, abandoned the market earlier in the decade.

“Malpractice has such a long tail period that you really want to put the focus first on whether you are going with somebody who will be around if and when you need them,” Black says.

Cash-flow underwriting - selling policies at less than the projected cost and running day-to-day operations from the incoming cash - was partly to blame for the last malpractice insurance hard market. And it may be why the next hard market is inevitable, says Cox.

“Looking at the past cycles of hard and soft markets, it’s obvious that medical malpractice insurance companies cannot stand the good times,” Cox says. “They do very well in the hard times to survive - raising rates, dropping unprofitable markets - but when the good times come back there are always one or two companies that manage to screw it up for everyone by starting a price war.”

Of course, there’s one way to prevent a rate war. Stick with your current company and seek more premium savings and value from it.

Or as Black puts it: “There’s smart shopping and there’s indiscriminant shopping. Don’t get over-focused on pricing and trying to make up all the ground you lost when the market was hard because the cycle always comes around.”

You can just say no to those too-good-to-last low rates that might come you way. But how easy will it be to withstand that temptation when stingy medical service contracts and stubborn overhead costs keep threatening to squeeze you out of business? Probably, not very easy at all. So enjoy this market while it lasts.

And take every advantage that makes sense.

Bob Redling, MS, has written on practice management topics for more than 10 years. He has been practice management editor for Physicians Practice, Web content editor and senior writer for the Medical Group Management Association, and a speechwriter for the American Academy of Family Physicians. He can be reached via bkeaveney@physicianspractice.com.

This article originally appeared in the May 2008 issue of Physicians Practice.