““MANAGING THE MANAGED” MANAGING THE MANAGED” CHANGING LIABILITIES CHANGING LIABILITIES

WITHIN WITHIN THE HEALTH CARE THE HEALTH CARE

SYSTEMSYSTEM

Patient Physician/Hospital

Fee-for-service Insurer

PAST - Fee for Service Arrangement

Managed Care InsurerUtilization Review

CapitationProfit Sharing

Per DiemPatient

Physician/Hospital

PRESENT - Managed Care Arrangement

PhysicianInsurer

HospitalPatient

FUTURE - Integrated Health System Arrangement

Managed Care Organizations

• Staff Model HMO

• Group Model HMO

• Preferred Provider Organization (PPO)

• Physician Hospital Organization (PHO)

• Independent Physician Association (IPA)

Managed Care Organizations (Continued)

• Management Services Organization (MSO)

• Provider Sponsored Organization (PSO)

• Utilization Review Organization (URO)

• Credentialing Verification Organization (CVO)

• Physician Practice Management (PPM)

Damages Types

• Bodily injury (BI)

• Economic

Applicable Liability Policies

• Errors & Omissions (E&O)

• Medical Malpractice

• Directors & Officers (D&O)

• Blended or Integrated Products

Typical Managed Care E&O Exposures

• Negligent utilization review

• Vicarious liability

• Negligent credentialing

• Provider exclusion

• Antitrust

• Adverse financial incentives

• Provider contracting

Typical Managed Care E&O Exposures (Continued)

• Breach of fiduciary obligations

• Breach of contract, warranty, or guarantee

• Bad faith claim denial

• Misrepresentation

• Trademark/slogan infringement

• Advertising/marketing claims

• Medical malpractice

Typical Managed Care D&O Exposures

• Anticompetitive acts (claims by government or regulators, competitors, or providers)– Price fixing

– Monopolization

– Unfair competition

• Mergers and acquisitions

Typical Managed CareD&O Exposures (Continued)

• Mismanagement– Waste or neglect of assets

– Failure to manage properly/nonsupervision

– Improper delegation of authority

– Breach of duty or loyalty

• Securities actions

• Fraud; abuse; dishonesty

• Employment practices

Typical Managed Care Medical Malpractice

Exposures• Direct provision of care - Staff Model HMO

• Nurse call lines

• Demand management

• Negligent denial of care (Texas law, SB 386)

Managed Care - Changing Exposure Landscape

• Expanding fiduciary liability– Shea v. Esensten, 107 F.3d 625 (8th Cir, 1997), cert.

den. 118 S. Ct. 297 (1997) • HMO that administered an employer’s benefit plan had a

fiduciary obligation to disclose its financial incentive structure that may impact care provided to enrollees.

– Herdrich v. Pelgram, 154 F.3d 362 (7th Cir, 1998)• A managed care plan’s incentive program which paid employee

physician executives year-end bonuses for meeting utilization targets may constitute a breach of fiduciary duty under ERISA when such physicians make decisions about a patient’s care.

Managed Care - Changing Exposure Landscape

(Continued)• More direct medical malpractice exposure

– Shannon v. McNulty, 718 A.2d 828 (3rd Cir, 1998)• Advice provided by nurses constituted medical advice and

therefore the employer HMO could be found liable for medical malpractice if further proceedings prove the advice given deviated from the standard of care.

• State laws, like Texas and Missouri.

Managed Care - Changing Exposure Landscape

(Continued)• Punitive damages

– Goodrich v. Aetna, No. RCV 020499, January, 1999• California jury awarded widow and children $116 million in

punitive damages and $4.5 million in compensatory damages finding that an HMO acted with malice, oppression, and fraud in handling her husband’s treatment requests.

– Johnson v. Humana Health Plan, Inc., No. 96-CI-00462, KY. Cir., 1999

• A jury awarded more than $13 million in punitive damages to a woman who was allegedly denied coverage for a hysterectomy her doctor said would have cured her of her cervical cancer.

Managed Care - Changing Exposure Landscape

(Continued)• Erosion of ERISA

– Pappas v. Asbel, 1998 WL 892074 (PA S. Ct., 1998)

• Tort claims against HMOs under state law are not pre-empted by ERISA.

ERISA

• ERISA supersedes state laws that relate to employee benefit plans– HMO’s successfully argue cause of action is not

medical malpractice, but a claim related to an ERISA plan

• ERISA protection is eroding– Federal legislation proposals

– State court decisions

Managed Care E&OPercentage of Claim Counts

Credentialing13%

Other33%Utilization

Review37%

Vicarious Liability

17%

Managed Care D&OPercentage of Claim Counts

Credentialing11%

Employment36%Other

35%

Vicarious Liability

3%

Utilization Review

15%

““MANAGING THE MANAGED” MANAGING THE MANAGED” CHANGING LIABILITIES CHANGING LIABILITIES

WITHIN WITHIN THE HEALTH CARE THE HEALTH CARE

SYSTEMSYSTEM

Exposures and Exposures and RatemakingRatemaking

Medical Malpractice

E&O

D&O

Policies Exposed

Bodily Injury

Economic

Policy Interaction

Why does Type of Policy Exposed Matter?

• Policy types tend to have different deductibles / limits

• Policies may be provided by different insurers

• Policies may have different reinsurers

• Policies may have different ALAE limits and duty to defend (ALAE may be More Significant than Indemnity)

Typical Policy ALAE Coverage

Medical Malpractice• ALAE Outside the Limit• Duty to Defend

E&O• ALAE Included in the Limit• Duty to Defend

D&O• ALAE Included in the Limit• No Duty to Defend

Policy Interaction

• Liability may Tend towards Policy with Greatest Coverage

• Quality of Healthcare Provider’s Underlying Medical Malpractice Coverage affects Potential MCO E&O Exposure

• Depends on Relationship Between MCO and Healthcare Provider

MCO/Provider Integration Spectrum

• MCO’s Position on Spectrum Depends on Program Design

Facilitator Provider

Low High

IPA Network- Model HMO

Staff- Model HMO

Managed Care Liability Ratemaking

• Coverage Generally Offered by Traditional Medical Malpractice or D&O Writers

• Insurers use Their Own Ratemaking Expertise/Data Combined with Judgment– e.g., A Medical Malpractice Writer may Develop a

Rate that is a Multiple of the Medical Malpractice Rate

• Wide Range of Rates on the Market

MCO E&O Exposure Bases

• Per Member Per Month– Reflects Size of Insured Population

– Does Not Work for MCO’s that Handle a Portion of a Covered Population (e.g., IPA)

– Does Not Consider Physician Specialty of Case Mix

– Does Not Reflect Economic Damages Exposure

MCO E&O Exposure Bases

• Gross Revenue– Reflects Economic Damages Exposure

– Does not Reflect Bodily Injury Exposure

– Does not Reflect Territorial Variations

• Medical Malpractice Premium– Reflects Bodily Injury Exposure

– Reflects Territorial Variations

– Does not Reflect Economic Damages Exposure

Suggested Exposure Bases

Separate Medical Malpractice Policy or No Bodily Injury Exposure (e.g., Staff Model HMO or TPA):

Economic Damages: Gross Revenue

Bodily Injury: N/A

Suggested Exposure Bases

No Separate Medical Malpractice Policy and All Member Services (e.g., Network Model HMO or PPO):

Economic Damages: Per Member Per Month

Bodily Injury: Medical Malpractice Premium

Suggested Exposure Bases

No Separate Medical Malpractice Policy and a Portion of Member Services (e.g., IPA):

Economic Damages: Per Provider

Bodily Injury: Medical Malpractice Premium

Ratemaking Procedure

• Judgmental Determination of MCO/ Provider Integration

• Pure Premium Approach

• Contingency Load

• Consideration of State ERISA Laws

• Consideration of Punitive Damages

Pure Premium Approach

• Select Appropriate Exposure Bases

• Data Sources:– Company Medical Malpractice Data and D&O data

– Industry Medical Malpractice Data and D&O data

– Jury Verdict Research Data

Contingency Load

• Actuarial Standard of Practice No. 30 - Treatment of Profit and Contingency Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking– Section 3.7: “...include a contingency provision if

the assumptions used in the ratemaking process produce cost estimates that are not expected to equal average actual costs.”

Contingency Load

• Costs are Likely to be Higher than Historical Averages:– “Patients Bill of Rights” Passed with Bipartisan

Support in House and Senate - Allows Consumers the Right to Sue

– Supreme Court Rulings Since 1995 Have Expanded States Ability to Regulate Healthcare - Increasing Litigation and Legislation

Contingency Load

• Costs are Likely to be Higher than Historical Averages (Cont.):– Recent Lawsuits Seeking “Class-Action” Status

(Tobacco Plaintiff Attorneys - Awarded ~ $10B in Fees - are now Pursuing MCO’s)

• Blacklisting Physicians or Groups

• Retaliation Against Physicians who put Patients First

• Violate State Anti-Trust Laws

• Violate RICO (Racketeer Influenced, and Corrupt Organization) Act

Contingency Load

• Costs are Likely to be Higher than Historical Averages (Cont.):– Recent Laws in California and Other States

Increase Patients Ability to Sue - Supreme Court Decision in Illinois Allows Patients Right to Sue

– Public Opinion

Punitive Damages

• Treatment of Punitive Damages in State where Rates Apply

• MCO’s Public Image May Lead to More Severe Punitive Damages Awards

• Key Punitive Damages Exposure:– Denial of Benefits

– Failure to Refer

Punitive DamagesComponent - Example

• JVR Medical Malpractice Data:– a. Median Award: $600,000

– b. Awards with Punitive Damages: 2%

– c. State Recovery %:30%

– d. Partial Severity: (a)x(b)x(c) $3,600

Rate Calculation Example

• PPO - A Large Organization, Uniquely Rated

• Underwriter has Determined through Conversations with the Insured that the Organization is in the Middle of the Economic Integration Spectrum

• Assume no ERISA Exemption

• Assume Punitive Damages are Insurable

Rate Calculation Example

Premium =

[(Economic Damages Rate) x (# of Members)] + [(Bodily Injury %) x (Med Mal Premium)]

• Economic Damages Components– Pure Premium Based on Company or Industry Data

– Judgmental Contingency Load

– Punitive Damages Load

– Other Profit and Expense Loads

Rate Calculation Example

Premium =

[(Economic Damages Rate) x (# of Members)] + [(Bodily Injury %) x (Med Mal Premium)]

• Bodily Injury Component– Based on Degree of Economic Integration, and Other

Plan Parameters

– Medical Malpractice Premium Determined through Existing Rate Manuals

– Punitive Damages Load

– Other Profit and Expense Loads