Prepare for rising liability costs

Hospitals and physicians should prepare for increasing liability costs, according to the 2010 Hospital Professional Liability and Physician Liability Benchmark Analysis created by Aon Risk Solutions, the global risk management business of Aon Corporation, in conjunction with the American Society for Healthcare Risk Management (ASHRM) in Chicago.

In its eleventh year, the study confirms an emerging change in the liability environment: The frequency of claims against hospitals has entered a growth phase, says Erik Johnson, FCAS, MAAA, Health Care Practice leader for Aon Risk Solutions' Actuarial and Analytics Practice and author of the analysis. Combined with continued claim severity growth, this uptick is expected to drive liability costs up at a rate higher than general inflation, he says

"Last year was the first year in which we thought we saw an increase in claims, and this year we certainly have confirmed that the number of claims has entered a growth phase. It's not huge, at 1%, but it is growing," Johnson says. "The severity of claims has been very consistent in rising over a 10-year period and continues to grow at about 4%. That means we think the cost of claims is increasing at a 5% annual rate, which is quite a bit higher than inflation."

The Hospital Professional Liability and Physician Liability Benchmark Analysis has examined trends in frequency, severity, and overall loss rates related to hospital and physician professional liability for the past 11 years, Johnson says. The 2010 analysis includes 119 hospital systems and more than 1,800 facilities, representing 23% of the total U.S. hospital industry segment.

Erosion of tort reform one cause

A number of things could be driving the increased number of claims, Johnson says. There was a significant drop in claims in 2003 through 2006, which can be attributed to tort reform, a stronger focus on patient safety, and more investment in safety technology, he says. In the current environment, the number of claims is being affected by an erosion in those earlier tort reform efforts and a lack of new tort reform, he says.

"The continued economic stress on households is another factor," Johnson says. "The increase in claims is modest, but it is significant for an industry that is used to seeing a decrease or a flat level of claims. We're going to have to get used [to] a growth pattern in claims."

U.S.-based hospitals are expected to face more than 44,000 claims arising from incidents occurring in 2009, according to the report, with anticipated costs exceeding $8.6 billion. Claims resulting from incidents in two key hospital risk areas, the obstetrics unit and the emergency department, make up more than a quarter of that expected expense, Johnson says.

Loss rates, which measure the total cost of medical malpractice claims per hospital bed, are expected to grow 5% annually. In 2011, hospitals are expected to experience a rate of $3,280, reflecting a $150 increase from 2010's expected rate of $3,130 and a $300 rise from 2009's rate of $2,980.

From 2000 to 2006, tort reforms, patient safety initiatives, and sympathetic public attitudes were influential in the reduction of medical malpractice costs. Today, there is less momentum associated with establishing new tort reforms, and existing tort reforms face serious legal challenges in several states, Johnson says.

"The uncertainties of health care reform and difficult economic times represent significant sources of risk for many hospital systems," Johnson says. "While many hospitals have grown accustomed to declining professional liability costs, the underlying claim frequency and severity cost drivers have entered a period of growth. Whether commercially insured or self-insured, hospitals and physicians should prepare for increases to their professional liability costs in the coming years."

Compare to your own stats

Risk managers should use this information to guide their financial strategy, says Dominic Colaizzo, managing director of Aon Risk Solutions' Health Care Practice.

"This challenging environment increases the pressure on health care providers to seek the most appropriate and cost-effective risk financing programs — and to monitor and manage the overall cost of risk per exposure," Colaizzo says.

Colaizzo and Johnson point out these additional findings of the analysis:

• Claim severity (indemnity and claim-related expenses) continues to increase at a consistent rate of 4% annually.

• Hospital professional liability claim frequency is growing at a rate of 1% annually.

• For accidents occurring in 2010, hospitals should expect to incur $204 per birth for liability costs associated with obstetrics claims and $6.30 per visit for emergency department claims.

• Hospitals are employing more physicians and as a result, the health care industry may experience a shift in claims costs from physician professional liability to hospital professional liability. From 2005 to 2009, the average number of employed physicians per hospital bed increased 12% annually.

Johnson advises risk managers to study their own claims in light of the patterns revealed by the Aon study.

"Risk managers should be aware of their own statistics and the underlying cost drivers. The premiums reflect losses, but they also reflect drivers in the marketplace like capacity, surplus, and competition; and that's one reason premiums have been flat or decreasing," he says. "But risk managers should be paying attention to frequency and severity of their losses as well, because ultimately that will drive their total cost of risk."

Sources

• Erik Johnson, FCAS, MAAA, Health Care Practice Leader, Aon's Actuarial and Analytics Practice, Raleigh, NC. Telephone: (919) 786-6246. E-mail: erik.johnson@aon.com.

• Dominic Colaizzo, Managing Director, Aon Risk Solutions' Health Care Practice, INFO.