By: Kim Piersol, FCAS, MAAA of Huggins Actuarial Services, Inc
Systemic Risk is defined as “risk to an entire system or sector” which spills over into, and has a significant effect on the general economy. The underwriting cycle in property and casualty insurance is an example of systemic risk. The insurance industry is not a generator of systemic risk. Insurers, particularly writers of Medical Professional Liability insurance (“MPL”), are vulnerable as recipients of systemic risk.
General systemic risks that can affect effect the entire insurance industry include “hyper” inflation or severe deflation on rates of return. In addition, a severe general economic crisis would have a significant impact on the entire insurance industry.
The Patient Protection and Affordable Care Act (“PPACA,” a.k.a “ObamaCare”) and its regulations are overly complex and lengthy. More importantly, the PPACA itself is a significant generator of systemic risk to the MPL industry. Failure to achieve one of the stated goals of the PPACA, namely to “reduce healthcare spending by enhancing the quality and cost-effectiveness of healthcare services”, could put the MPL industry (and the entire U.S. economy, for that matter) at risk by contributing to financial ruin as private health insurance costs will eventually erode cash wages.
The PPACA will also severely exacerbate other systemic risks specifically associated with the MPL industry. Because the PPACA reforms almost every aspect of our private health insurance system, it has already had an effect on the flowing risk factors in the MPL industry:
1. Mandates insurance coverage for pre-existing conditions
2. Expands access to insurance – many more “insureds” in the system
3. Too few medical providers
a. Looming crisis in primary care – “drift” in doctors from primary care to hospital or group employment
b. Shortage of nurses
The PPACA will add 30-50 million to the rolls of “insureds.” Supplying insurance to protect the health of more people is a “societal good.” The question is: “who will see all the “new” patients?” Estimates place the shortfall of primary care doctors at 30,000 in the next few years even though medical schools are flush with applicants, residency slots are filling at higher rates than ever before, new medical schools have been chartered, and class sizes have expanded.
So where are these new doctors going? A significant portion of them are going into hospital medicine. Hospital medicine is the fastest growing specialty in American medical history. The number of doctors practicing as hospitalists has increased 172% from 2003 to 2010. There are now more than 30,000 doctors nationwide classified as “hospitalists. This “drift” from individual physician practice to hospital or group practice is partly associated with the looming uncertainty over the potential effects of PPACA.
For the young doctors just finishing residency, practicing as a hospitalist has many attractions:
1. Financial: Starting salary at $200k vs. $150k as an office-based internist. Most new doctors out of their internship have racked up a huge debt burden accrued by financing their medical school education.
2. Lifestyle: The 7-day-on, 7-day-off schedule of the hospitalist is extremely attractive to the residency graduates who choose to stay in an environment to which they’re well-adapted – no “on call” or after hours responsibilities.
3. Documentation and regulatory burdens of the primary care physician are mitigated
4. IT and compliance mandates are avoided
There is also a severe a shortage of nurses. The median age of nurses is now 46 years old and 50% of the nursing workforce is nearing retirement age. The PPACA will add 30-50 million to the rolls of “insureds.” Also, the increasing elderly population in the United States (e.g. the “baby boomers”) will require more nurses. The nursing shortage could contribute to an uptick in medical malpractice claims in the future.
Recently, there has been an observed increase in the frequency of large MPL claims. In 2011, seven states had their largest ever medical malpractice awards for cases ranging from inadequate staffing at nursing homes to medical negligence in hospitals. While hospitals have improved the quality of their treatment and have improved safety measures, the “bigger losses are getting bigger.” MPL insurers and reinsurers need to recognize this growing trend in their pricing.
The underlying frequency and severity of large claims is projected by most to increase in the near future. Whether commercially insured or self-insured, hospitals and physicians should prepare for increases in their professional liability costs in the coming years. Also, there does not appear to be on the horizon a push for significant national tort reform. This projected increase in frequency could put pressure on plaintiff law firms with their contingency fee agreements. More unresolved claims imply the necessity of increased funding and a developing lack of access to revolving credit could put severe strain on the resources of these law firms.
Whether or not the PPACA will be upheld by the Supreme Court and not repealed by a republican president, the future of the MPL industry can expect many changes due to the systemic risks associated with the business. Insurance providers and self-insured hospitals and physician groups need to be prepared for these risks in their management decisions in the future.
Piersol, Kim E.
Mr. Piersol is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. Prior to joining Huggins, he served as Senior Vice President & Chief Actuary for Crum & Forester Insurance Companies. Prior to that he served as chief actuary for CNA Insurance Companies, and was a consulting actuary for KPMG LLP, Arthur Anderson LLP, and CFO of AIG Risk Management. He has over thirty-nine years of experience in the actuarial field.
Mr. Piersol has served on the CAS exam committee and participated in presentations at CAS seminars. He has served on the American Academy of Actuaries Environmental Liabilities Work Group, the NAIC Technical Advisory Committee on Catastrophe Reserves, the Workers’ Compensation Reinsurance Bureau Actuarial Committee, and been a director & treasurer of the Professional Liability Underwriting Society (PLUS). He also served on the Professional Liability Actuarial Subcommittee of ISO. Mr. Piersol achieved his Bachelors of Science in Mathematics at Furman University, Greenville, SC. He has also served as a 1st Lieutenant in the United States Army Field Artillery. Contact Kim at 610.892.1808 or email@example.com.