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AAOS Now

Published 12/1/2010
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Theodore J. Clarke, MD

Medical liability insurance 101

Key criteria for selecting medical liability coverage

Since 2002, COPIC—a physician-directed provider of medical liability insurance—has provided intensive, week-long risk management rotations for resident physicians. The purpose of these sessions is to give residents an appreciation for the “disease” of malpractice and an ability to recognize its causes and prevent its symptoms. More than 700 residents have taken the rotations to date.

During the risk management rotation, residents participate in activities that provide firsthand knowledge of the factors that can lead to a claim or suit and those that determine defensibility and outcome. They review closed claim files and readings in their medical specialty.

These activities are complemented by attendance at COPIC’s weekly claim department roundtable, where current cases are discussed and management decisions are made. As their schedules permit, residents can also sit in on COPIC’s monthly claims committee meeting, observe selected local medical liability trials, and attend regularly scheduled educational seminars and specialty-specific meetings with COPIC-insured practices. The rotation is augmented by interviews with personnel from patient safety and risk management, underwriting, claims, legal, and administration departments.

Part of the residents’ rotation is a 30- to 40-minute chat with me as COPIC’s chief executive officer, on liability insurance. To many of these young doctors, liability insurance is a novel concept. Many mistakenly believe they have little liability exposure and are unaware of what coverage their program offers.

My task is to help them look at the liability exposure they will have beyond residency and fellowship. They are going to spend a great deal of money on a product they hope never to use. What should they look for in terms of liability coverage? How should they evaluate the company or product that insures their assets and reputation? I propose three key criteria that I believe should be part of any evaluation of liability coverage: rated, regulated, and mission.

Insurers should be rated
Most residents will join practices or systems in which the senior partners or their employer will choose the liability insurer. Most have not given much thought to insurance coverage issues, but they need some basis for evaluating their coverage.

Typically, residents are unaware that a $1M/$3M policy refers to coverage for $1 million per incident for the policy year and an aggregate of $3 million to cover other incidents within that year. But how can a physician determine whether the company behind that coverage has the fiscal resources to make such payments? To answer that question, I introduce the concept of insurance industry rating.

Insurance industry raters include such firms as A. M. Best, Fitch, Standard & Poor’s, and Moody’s. These raters use varying criteria to assess an insurer’s ability to meet past, present, and future policyholder obligations. The rater looks at the adequacy of the company’s capital and analyzes the company’s operations. Most important for the physician-consumer is the company’s balance sheet strength.

The rater will specifically look at the insurer’s financial strength relative to the exposure created by the risk type and volume. This assessment also evaluates risks to the company arising from its financial practices, regulatory and political environments, and its ability to absorb catastrophic losses.

Liability insurance is an asset protection tool. It’s not the job of residents or physicians to analyze the financial strength of an insurance company. But they need to know that resources are available for such an analysis.

Insurers are regulated
Although there has been some movement to federalize insurance reform, insurance is currently regulated primarily by individual states. Significant variations exist among states in oversight for premium adequacy.

Typically, the state’s division or department of insurance (DOI) is charged with consumer protection. Some DOIs believe this includes protecting physicians from rate increases; others concentrate on insurers’ solvency to ensure long-term protection for both the physician and the state.

Most residents are surprised to learn that states have a direct interest in an insurance company’s solvency. Because companies pay a percent of premium to the state insurance solvency fund, the fund would become the insurer if the company became insolvent. Consequently, states will periodically inspect the loss experience, premiums paid, and investment income of insurance companies within their domains.

I suggest that regulation does not depend on either the benevolence of insurance commissioners or market forces. Instead, the true regulators are the board of directors for the insurance company. The COPIC board is dominated by 10 practicing physicians, who approve rates and pay the same premiums as their colleagues in the operating room, emergency department, and clinic. Such accountability from the physician board ensures proper balance between rate adequacy and excess.

What is the company’s mission?
An orthopaedic surgeon who begins practicing in the United States in 2010 will likely spend $1.5 million to $3 million for liability coverage over the 30-year course of his or her career. That usually gets the attention of residents, who are also paying off medical school debt or starting a family.

Most states still require physicians to have liability insurance, which, in addition to appropriately compensating patients unfortunately injured by medical neglect, is necessary protection for a doctor. Still, most studies have shown that the current legal system fails to effectively and efficiently meet the three objectives of tort law: compensation, accountability, and learning. (See “Tort system failures” below.)

I ask residents to consider the mission of their insurance company. Will it continue with the status quo? Is the purpose to improve investor value? Or will their dollars accomplish something more?

The ultimate question for an orthopaedic resident to ask is whether the company is willing to help move orthopaedics from the morass of the current liability system that is hamstringing doctors, hospitals, healthcare systems, and the patients they serve. The key criteria rated, regulated, and mission are the important considerations when choosing an insurance company.

Theodore J. Clarke, MD, is chairman and chief executive officer of the COPIC Companies and a member of the AAOS Medical Liability Committee. He can be reached at tclarke@copic.com

Tort system failures
Compensation
—Only a small percentage of injured patients pursue tort claims, and physicians typically win such claims. When the patient does prevail, compensation is variable. Legal and administrative fees account for 60 percent of all liability costs, further proof of the current system’s inefficiency.

Accountability—Medical professional liability suits take an average of 4 to 5 years to conclude—with no protection for the public from a truly incompetent practitioner during this period. The plaintiff’s bar admits to dreading a case against an inept but affable doctor and to not pursuing cases with little expected economic value.

Learning (quality improvement)—Most valid claims are settled confidentially, with conversations and case reviews discouraged during the discovery phase. This secrecy hinders the ability to learn from the case. By the time a claim closes, medicine may have developed a new technology, drug, or device that makes what could have been learned from the claim obsolete. In the meantime, learning opportunities are lost and quality fails to improve.