Six years ago, rapid increases in malpractice premiums and the diminishing availability of malpractice insurers in Virginia forced our group practice to look for alternatives to traditional insurance. At that time, premiums were rising 15 percent to 20 percent each year and the number of insurance companies offering insurance was shrinking.
Each year, as our renewal date approached, we scrambled to find the best insurance bargain, often making a decision within days of the policy’s expiration. Frustrated by this costly and time-consuming annual process, we formed a group of more than 40 “high risk specialists,” primarily orthopaedic surgeons and gynecologists. Combined, we had more than 400 years of experience, had paid nearly $40 million in premiums, and had less than $350,000 in claims against us.
We started by forming a captive insurance company, but recently made the transition to a risk retention group (RRG). An RRG is an insurance company formed by insurance buyers who share similar liability exposure.
In the past few years nearly one-half of new RRGs have been medically oriented. Some have been formed by hospitals on behalf of their medical staffs and others by independent groups of physicians.
RRGs were made possible by passage of the Federal Liability Risk Retention Act (LRRA) in 1986. This bill served to increase the availability of commercial liability insurance by preempting most state insurance regulations. RRGs are federally regulated and are exempt from nearly all state regulatory requirements.
RRGs and RPGs
The LRRA also facilitated the formation of risk purchasing groups (RPGs). Although RRGs and RPGs are similar in some ways—both must be composed of homogeneous groups such as physicians with a common goal of reducing liability insurance costs—significant differences exist between them. For example, RRGs retain risk while RPGs are formed to purchase insurance, using the power of a large group to negotiate lower premiums. The members of an RRG must provide capital while RPGs do not require capital.
RPGs also have their advantages. Members of an RPG can often benefit from tailor-made coverage, lower rates, loss control/risk management programs, and rewards for good loss experience. RPGs offer participating insurers the ability to achieve greater profitability and long-term stability.
As of August 2011, more than 250 RRGs and 850 RPGs had been established. Some states—such as Vermont, Nevada, South Carolina, and Montana, which have the largest numbers of groups—facilitate the establishment of RRGs and RPGs. RRGs collect more than $4 billion in premiums annually.
RRGs in depth
An actuary, in partnership with jurisdictional regulators, generally determines how much capital is needed to start an RRG in that jurisdiction. An RRG does not have to be established in the same state where its members practice, and an RRG admitted in one state must be admitted in all other states. Insufficient capitalization or poor selection of physician membership can push an RRG into insolvency.
As an insurance company owned by its members, RRGs can determine who joins the group. This selection process translates into lower rates, effective loss control/risk management programs, participation by RRG members in favorable loss experience, access to reinsurance markets, and stability of coverage and rates.
Most RRGs will need to purchase reinsurance to protect themselves from high, unexpected losses. With expert management, strong financing, and reinsurance, an RRG can be as safe as a standard medical malpractice insurer.
RRGs give physicians the opportunity to control their own malpractice company. The members of the RRG control rates, risk selection (choosing whom they insure), coverage limits, defense costs, risk management, and underwriting.
Most RRGs have limited fixed costs because they have no full-time employees or buildings. The insured physicians are the company management. Members control the selection of managers, attorneys, and auditors. They decides the annual premiums and the covered services. Charges for tail coverage or additional charges for ancillary personnel are decided upon by the RRG leadership.
Members of the RRG own the company and are insured by the insurance company. By federal law, RRG owners must be insured by the RRG and all insureds must be owners. In a time of great uncertainty over the future of healthcare financing and increasing regulation of medical practices, forming an RRG may be a worthwhile and viable option for many orthopaedic practices
Starting an RRG, however, is a very complex undertaking and requires a team of insurance consultants, lawyers, and other knowledgeable professionals. Because all policyholders are owners, shareholder relations and governance of the RRG are key issues. But the rewards of controlling risk and costs are very attractive.
Thomas B. Fleeter, MD, is a member of the AAOS Medical Liability Committee. He can be reached at email@example.com