SAN DIEGO - Shell-shocked by the high cost of malpractice insurance premiums? You might want to consider self-insuring your practice, says a man who created such a plan, and described the experience to attendees of the Radiology Business Management Association (RBMA) meeting.
Washington Managed Imaging is a Seattle-based network of 13 radiology groups with about 280 affiliated radiologists, according to its executive director Michael Fenton, who spoke here on Monday. The company had little difficulty acquiring malpractice insurance coverage from commercial carriers until 2001, when the September 11 terrorist attacks turned the insurance world upside down.
Nearly three years later, the attacks continue to reverberate through the insurance industry, with especially dire consequences for physicians who need malpractice coverage, Fenton said. Large reinsurance companies -- the companies that insure property and casualty insurance firms -- took a huge financial hit on September 11, and have been trying to recoup their losses ever since through premium increases.
Couple that with bad business decisions by some malpractice insurance firms -- plus the fact that insurance companies have always regarded radiology groups with some suspicion -- and malpractice insurance can end up being prohibitively expensive, Fenton said. According to the American Medical Association, all but six states in the U.S. are either having severe problems with medical liability insurance, or are showing problem signs (the healthy states are California, New Mexico, Colorado, Wisconsin, Indiana, and Louisiana).
How bad is it? Coverage has been refused for some radiologists who had just one paid loss (insurance claim) in seven years, according to Fenton. Washington Managed Imaging's radiologists read between 15,000-20,000 exams a year -- over the course of seven years that's 105,000-140,000 studies without an error.
"I consider myself to be fairly good at what I do, but I guarantee I ain't that good," he said. "This to me is inhuman that they are trying to institute this, but that is the policy. This is a very tough deal for radiologists."
The self-insurance option
As a result, Washington Managed Imaging began to look at setting up a self-insurance company in early 2003, and Fenton was assigned to investigate the task. It's a daunting project, he said, basically involving the creation of an entirely new insurance company that has to comply with all state and federal laws regarding insurance firms.
Self-insurance firms are considered captive insurance companies because they are owned by the same people they're insuring. One of the first tasks is to choose a domicile for the new company -- some offshore locations like Bermuda and the Cayman Islands are used, but a number of U.S. states are attracting business with low taxes and registration requirements. One of these states is Hawaii, which Fenton chose for Washington Managed Imaging. He then retained legal counsel in Hawaii, and also chose a Hawaiian member for the captive insurance company's board, per state regulations.
The next step is to commission an actuarial study see what the self-insurance firm's expected losses would be over the next year. This can typically amount to $15,000-$25,000. The exercise is useful for a couple of reasons: If your physicians balk at the expense, it's a good sign that they aren't serious about self-insurance. In addition, the results of the study can give you a good idea if your existing insurance carrier is giving you a good deal or not, Fenton said.
The make-or-break step for any self-insurance plan is securing reinsurance coverage, Fenton said. If a group has its own self-insurance plan, it doesn't mean they're on the hook for unlimited liability in the case of a huge damage award -- instead, a reinsurance company pays for damages over a certain level. But reinsurance firms are big corporate monoliths, often based overseas, that sometimes don't look kindly on self-insurance companies, especially those run by radiologists.
Reinsurance firms will require a detailed business plan for the captive insurance company, information about your imaging group, five years or more of data on your malpractice loss runs, your most recent actuarial study, and a description of the malpractice market in your area. They'll also want to know how much risk your group will retain, and whether you're using nighthawk coverage, which some reinsurance firms don't like, Fenton said.
Fenton was able to secure reinsurance coverage for Washington Managed Imaging's plan after a visit to London, a major hub of the reinsurance industry. Reinsurance brokers are also available to connect captive insurance companies with reinsurance firms, although their cut will typically be 2%-3% of premiums.
Another task of self-insurance is administering the plan -- collecting premiums, issuing claims, rating each radiologist's risk, etc. Fortunately, these tasks can be outsourced to third-party firms, Fenton said. The captive insurance firm will also need to make arrangements for investing the cash it collects through premiums.
Fenton's research showed that implementing a self-insurance plan would result in premiums slightly higher in the first year than its proposal from its existing commercial carrier, with a capital investment to fund the company of $12,000 per radiologist. To go forward with the self-insurance plan, Fenton needed 140 of the 250 radiologists who were then affiliated with WMI to sign off.
But a funny thing then happened: The group's existing insurance carrier came back with a new proposal that included a deep discount on premiums. The carrier had heard that WMI was looking into its own plan and dropped its rates to "buy the market," he said.
By this time the group had spent some $100,000 and three months of Fenton's time investigating the self-insurance project. Still, Fenton doesn't think the exercise was in vain. The self-insurance option remains open, he said, and he plans to propose the option again when their carrier submits new malpractice insurance rates later this year.
Fenton also believes that while the practice may have won a short-term rate reprieve, the malpractice insurance crisis will be solved only by tort reform, which isn't likely. "This is the only long-term option," he said. "Without it, you're a prisoner of the insurance companies."
By Brian CaseyJune 8, 2004
AuntMinnie.com staff writer
Related Reading
U.S. Senate turns back medical malpractice bill, July 10, 2003
Malpractice insurance crisis persists in West Virginia, Pennsylvania, August 7, 2002
Radiologists slammed by malpractice insurance crisis, April 23, 2002
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