1 November 2011Re/insurance

An increasingly challenging landscape

Healthcare has, arguably, been the leading political and social issue in the US for several years. Since the passage of the Patient Protection and Affordable Care Act (PPACA) in March 2010, the future of healthcare structure, delivery and economics has been overshadowed by uncertainty. The major goals that this bill seeks to accomplish are: a reduction in the number of uninsured people, increased access to primary care, a reduction in the overall cost of the system and an improvement in the quality of care. Whether or not the Act as it stands will accomplish these objectives is the subject of great debate.

What is of relevance is the undeniable impact that this legislation will have on healthcare providers and, consequently, their insurers. Several elements of the legislation, notably the incentives for implementation of electronic medical records (EMR) and the increased collection and dissemination of data, are already influencing the landscape as healthcare organisations seek to ready themselves for the various deadlines that have been imposed. Two current issues stand out and they are the subject of much discussion and focus from the medical malpractice insurance community: consolidation and the creation of a new healthcare paradigm—the accountable care organisation (ACO).

Consolidation is evident at all levels within the healthcare industry: hospital systems acquiring not only other systems and standalone hospitals, but also outpatient facilities and physician practices (primary care and specialty).

The Medical Group Management Association recently published statistics demonstrating that the percentage of medical practices owned by hospitals (versus physicians) increased from 20 percent to 50 percent between 2002 and 2008. Meanwhile, Allied World Bermuda book statistics indicate that physician exposure growth is outpacing institutional growth by a ratio of nearly four to one in the period from 2008 to 2010.

Hospitals are seeking out physician practices for a number of reasons: to bolster their referral base and capture admissions and market share; to obtain greater leverage with payers; to improve quality through clinical integration, performance management and the coordination of care; and in preparation for ACOs and bundled payments.

Physicians are partnering with hospital organisations for parallel reasons: as with hospitals, healthcare reform issues such as ACOs, bundled payments and readmission penalties are certainly a driver; the opportunity for a greater role in the management and governance of hospitals offers career opportunities; and changing priorities as regards quality of life and a renewed focus on the practice of medicine are leading physicians to opt out of the ‘business side’ of medicine that comes with running a practice.

In short, healthcare reform and the economic downturn have created an environment that lends itself to size and scale and so to mutually beneficial closer ties between physicians and hospitals. This trend presents a considerable challenge to malpractice underwriters. Brian Atchinson, the new president of the Physician Insurers Association of America (PIAA), noted this, saying: “The migration of doctors moving into large groups and hospital systems is shifting the paradigm. It could potentially change much about the way medical professional liability insurers do business, and we do not know where this evolution will end up.”

In order properly to assess the exposure and risk that this trend presents, underwriters should be aware of and focus on a few key areas as a starting point for discussions with insured clients:

1. Medical malpractice insurers should take great care in evaluating whether hospital risk management departments are involved in the due diligence process of physician practice acquisitions/joint ventures and the degree to which clients are ‘pre-underwriting’ the risks they are about to assume. The risk management department should have a seat at the M&A table in order to determine jurisdictional considerations, scope of service, claims history, credentialling procedures and compensation structures.

2. It is often assumed that rolling physicians into a hospital insurance programme can lead to better control over the outpatient exposures. However, healthcare institutions and insurers alike should becognisant that physicians do not automatically buy in to the risk management process and can require significant investments in both time and resources. Underwriters should evaluate current physician alignment strategies to assure buy-in and adherence to patient safety and quality procedures, including compensation models, committee structures for governance and leadership opportunities and the engagement of physician ‘champions’ of patient safety and quality.

3. The focus of healthcare reform on efficiency and quality is also leading to a change in the compensation structures of employed physicians. Compensation is currently based on a ‘fee-for-service’ model. Some hospitals are switching to productivity/efficiency and quality measuresbased compensation. This adjustment in compensation models has obvious behavioural implications. Indeed, the very purpose is to shift the behaviour of physicians away from a focus on quantity, volume and defensive medicine that FFS models inherently reward. Given the direct link that exists between compensation structures of care providers and the volume and quality of care that is provided, it is vital for medical malpractice underwriters to understand the nature of the revised structures and the repercussions for the patient population, whether they are bona fide or perceived.

The dynamics of consolidation within the healthcare arena are leading to changing structures and relationships. Providers and insurers alike must be diligent in their evaluation of the risks that these changes pose.

Against a backdrop of considerable consolidation within the industry, healthcare providers also have to grapple with the development and formation of ACOs—healthcare reform legislators’ structural answer to the primary goals of cost containment and high quality care.

"Changing priorities as regards quality of life and a renewed focus on the practice of medicine are leading physicians to opt out of the 'business side' of medicine that comes with running a practice."

The Centers for Medicare and Medicaid Services define an ACO as “an organisation of healthcare providers that agrees to be accountable for the quality, cost and overall care of Medicare beneficiaries who are enrolled in the traditional fee-for-service program who are assigned to it”. The key purpose of ACOs is to create a vehicle for shared accountability for the patient, by providing collective responsibility for quality, costs and performance measurement. In exchange for their investments in the ACO, providers will be able to share in the resulting savings that are generated by the coordination of care and service.

PPACA has very little guidance on the structure of ACOs— discussion takes up fewer than 10 pages of the legislation—and the Department of Human and Health Services (HHS) has wide latitude on the specifics of the structure. The very flexibility of the potential structures and combinations of providers creates a quagmire of risk for underwriters to evaluate. Simply, when it comes to ACOs, if you’ve seen one, you’ve seen one.

Despite this uncertainty and the limited amount of specific guidance from the HHS, healthcare liability insurers would be remiss if they didn’t prepare for the entrance of ACOs into the healthcare landscape.

First and foremost on insurers’ lists should be the development of product solutions for this new healthcare entity. ACOs represent a combination of risks that present an additional challenge to medical malpractice insurers, who, by virtue of their product line expertise, are being thrust to the forefront of troubleshooting the insurance solution. At their core, ACOs seek to coordinate care and the delivery of healthcare to patients. A side-effect of that coordination of care is a convergence of liability, often overlapping to the point of inextricability.

Within the framework of an ACO, managed care and medical malpractice liability intertwine with directors and officers, employment practices liability, fiduciary and regulatory liability issues. The IT infrastructure that is required for the coordination of care and communication also speaks to a significant potential cyber/privacyexposure that will need to be addressed. There are existing healthcare products that can serve as a starting point, but they will need to be refined to address the unique ACO structure. The marketplace will likely see the introduction of standalone products for ACOs, with package multi-product line coverage being a theme.

A number of areas are of great interest to liability insurers, although they have yet to be fully fleshed out by HHS:

1. Credentialling of ACO providers. It is evident that in order to participate in an ACO, physicians will have to be credentialled. What will the process look like? Who will do the work to gather performance data, report on and liaise with the physician population? These questions and more, will be posed – and should be posed – by liability insurers and ACO investors from the outset.

2. Lack of ERISA (Employee Retirement Income Security Act) preemption. Managed care organisations (MCOs) have historically borne the burden of tension between cost-containment and the provision of medically necessary care. When disagreements arise between MCOs and providers as to what is medically necessary (and thus insurable) and what is not, MCOs have historically been able to tap into ERISA protections to insulate themselves from medical malpractice liability. Not only will ACOs probably not have the benefit of ERISA pre-emption, but they also have not completely provided a solution for the alignment of treatment decisions. Their infrastructure still inherently allows for the coexistence of the (at times) duelling goals of what is best for the patient versus what is best to contain cost. While there is still uncertainty about the application of vicarious liability through apparent agency and/or implied authority theories, the imposition of some form of liability on ACOs for the negligence of ACO providers is something that insurers must evaluate and consider to be likely.

3. Regulatory implications: given the potential for excessive market power due to consolidation, the increasing alignments between hospitals and physicians and the integration of service across the entire healthcare industry spectrum, the ACO structure clearly has the potential to conflict with anti-trust, anti-kickback and Stark laws. Currently HHS guidelines have not offered a solution to address these issues (eg, an outright exemption for ACOs or case-bycase waivers), all of which pose significant liability issues for ACOs and their potential insurers. Without more clarity and guidance the way forward is at best uncertain.

Healthcare reform presents a major challenge for healthcare providers and their insurers, with wide-sweeping implications for both. Consolidation is the first major response to the stresses that reform is placing on the system. This dynamic will only pick up pace as more providers seek to be better positioned to implement and launch ACOs. Providers and liability insurers have to stay current with, and responsive to, ever-changing market, legislative and regulatory forces. One thing is certain—there is more to come.