Aon study: Liability costs for long term care rise

4% annual increase in average claim size

A 4% annual increase in the average claim size is responsible for the growth of long-term care liability costs, according to  Aon Risk Solutions' "2011 Long Term Care General Liability and Professional Liability Actuarial Analysis." The study was released recently by Aon Corp. in partnership with the American Health Care Association.

The yearly analysis measures the severity and frequency of liability claims, tracks the loss rate (liability cost) as a percentage of the Medicaid per diem reimbursement rate, and calculates the overall loss rate per occupied long-term care bed in the United States to help gauge the level of risk facing long-term care providers, explains Aon Global Risk Consulting's associate director and actuary Christian Coleianne, FCAS, MAAA, who coauthored the study.

About 17,000 individual non-zero claims from long-term care facilities were aggregated by Aon Risk Solutions' actuarial and analytics practice to perform this analysis. The claims experience spans 2003 through 2010. The facilities operate about 260,000 long-term care beds, consisting primarily of skilled nursing facility beds, but also including a number of independent living and assisted living beds. Participants represent about 14% of the beds in the United States.

Nationwide, the severity of liability claims increased steadily from $125,000 in 2005 to $153,000 in 2010. In 2011, claims severity is projected to reach $159,000. In addition, the average annual loss rate per bed, which has hovered about $1,400 for the past five years, is projected to be $1,430 in 2011. Likewise, since 2005, the loss cost as a percentage of the Medicaid per diem reimbursement rate has been near its 2010 level of 2.22%.

While claim severity has grown, liability claims frequency has decreased from 1.07% in 2003 to 0.91% in 2010. Claims frequency is projected to drop slightly to 0.90% in 2011, which means less than one liability claim will arise for every 110 residents in a long-term care facility.

The increase in the size of claims outweighs the decrease in claim incidence. The resulting growth in liability costs is important for long-term care providers, who also must contend with uncertain Medicaid funding and cuts in Medicare reimbursement, which took effect in October 2010. Providers need to explore ways to control the growth of liability costs to preserve an already threatened funding base, Coleianne says.

"Limiting non-economic damage awards alone may not be enough to control liability costs. California caps non-economic damage awards at $250,000, yet liability costs in the state remain among the highest in our study, largely due to provisions in California's Elder and Dependent Adult Civil Protection Act that run counter to the longstanding MICRA [Medical Injury Compensation Reform Act] caps on non-economic damages," Coleianne says. "Tort reform laws have been circumvented in West Virginia as well, where liability costs are the highest in our study. Texas-style tort reform, where constitutional amendments have protected a hard cap on damages since 2003, stands in sharp contrast to both California and West Virginia."

Since Texas implemented tort reform, loss rates have been among the lowest in the database, which underscores the point that tort reform is supported by constitutional protections is highly effective in controlling liability costs, Coleianne says.


Christian Coleianne, FCAS, MAAA, Associate Director and Actuary, Aon Global Risk Consulting, Columbia, MD. Telephone: (410) 309-0741. E-mail:

A free full copy of the Aon report can be downloaded at