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As hospitals take on more physicians and buy more group practices in response to the move toward accountable care, risk managers are dealing more and more with the question of tail insurance.
Covering the physician's past activities always has been an option if the hospital wanted to woo a particularly desirable physician group, but now the volume of acquisitions is forcing a harder look at the value of tail insurance — and the inherent risks. Aside from the cost considerations, offering tail insurance can lead to violations of federal regulations, cautions Linda M. Robison, JD, a partner with the law firm of Shutts & Bowen in Fort Lauderdale, FL.
"It's a real regulatory nightmare. Hospitals have to be extremely careful if you offer tail insurance, even the ones that are captive," Robison says. "They have to make doggone sure that the cost of that tail coverage, when considered with the physicians' salary, won't bust the stock problem."
The tail is a liability of the group, Robison explains, and therefore the group is responsible for buying tail coverage. Sometimes a hospital wants to acquire a physician group so much that it will require the group to purchase the tail insurance but promise to increase compensation enough to make up for the cost.
Or in some cases it is not necessary to offer compensation. Robison says she routinely advises hospital clients to require that physicians buy their own tail coverage as part of the contract terms, with no mention of the hospital paying for it in any way.
Assisting the physician practice with paying for tail insurance is not necessarily a bad idea, but Robison says there is a serious risk that the deal will violate regulations requiring fair market value for the physician group.
"It could be viewed as a purchase for the referrals, even though the doctors are going to be employees," Robison explains. "I would never allow a hospital client to risk a Stark violation for paying top dollar to a doctor and then buying some really expensive tail coverage. The claim will be that the tail exposure was never a liability of the hospital's and so they only paid it to get those referrals."
The value of the insurance is a major determinant of whether the deal is too sweet, Robison says. In some states where doctors often go bare or have only minimal coverage, the malpractice coverage for physicians probably is not very expensive and so the tail market coverage is not, either. In those cases, a hospital might be able to include tail coverage without pushing the overall value of the acquisition past fair market value, Robison explains. The balance becomes more difficult to achieve as the cost of the insurance rises.
The evaluation must include all the factors that make up the total purchase price of the practice, such as relocation expenses and the purchase of assets. If other purchase factors are on the high end of the scale, that will leave you less room to maneuver with the cost of tail insurance before you break the bank, Robison says.
Another complicating factor is the physician's specialty. Tail coverage for neurosurgery, orthopedics, or obstetrics, for example, will be much more expensive than some other specialties because the potential for lawsuits and large awards is much greater.
The hospital also must evaluate the tail coverage policy to look for hidden risks and issues that affect the value of the insurance. The coverage period for the tail is the first question, of course. Does the policy cover any demand for care provided in the tail period up to the statute of limitations, or is there a more limited period when the policy will apply?
"You have to look at the total package of what you're paying for this acquisition and be comfortable that it is still within the fair market value," Robison explains. "Put all the numbers on the table and figure out how close you are to a violation. It might be the risk manager's job to put the brakes on and say, 'Whoa, there's a limit to what we can offer here, no matter how much we want this practice.'"