Risk Management

Choosing the Right Professional Liability Carrier for Your Integrated Practice

By Paul Weber, JD, and Jillian Brandt, CIC

Administrative Eyecare, Winter 1997

Some ophthalmology practices are currently being sought after by payers, hospitals, networks, practice management companies (PPMs), and other managed care organizations. Solo practitioners and small groups are forming larger groups. The dilemma for ophthalmic practices is easy to state but hard to resolve: Which prospective partner should they integrate with to effect economies of scale and face the uncertainties of a dramatically changing health care marketplace?

Prudent decision making about the professional liability insurance needs of any prospective partnership is a critical first step for a practice to take in the initial stages of any consolidation. It is important to carefully evaluate a prospective insurance carrier to make sure it is knowledgeable of and comfortable with the eyecare industry can write policies in all states (if the group will operate in more than one state) is financially strong with an excellent reputation for service desires a long-term relationship with the new venture.

In the rush to form a new group or join a new entity, don’t ignore these basic characteristics. They reveal whether or not the new group understands the importance of selecting the best insurance carrier or program for the individual physician and the entity.

After you have confirmed the general characteristics of a prospective insurance provider, ask the following:

• What kind of coverage will be provided (claims made or occurrence) and who will pay for it?
• What provisions will be made for tail coverage and who is going to pay for it?
• Will there be 24-hour coverage for physician services?
• Which activities are excluded from coverage?
• Who will handle the investigation and defense of claims? Will the physician have the right to withhold consent to a settlement?
• If managed care duties are delegated to the physician practice, will managed care errors and omissions (E/O) and directors and officers (D/O) liability coverage be purchased?
• Does the purchase agreement contain fair indemnification, insurance, and limitation of liability provisions?

You should also review past, present, and planned activities and past and current insurance policies in light of the new venture to determine specific insurance coverage needs. Your present professional liability insurance carrier or insurance agent should be able to assist you at this juncture.

The Current Liability Insurance Market

At present, the competition is fierce among professional liability insurance companies to provide coverage to new ventures being formed by ophthalmology and other specialties. Not only are the physician-owned professional liability insurance companies competing for this new business, commercial companies, which are owned by shareholders, are also bidding to provide insurance to the new enterprises. Thus, malpractice premium prices are dropping for large accounts because of aggressive bidding by carriers to a level that in some cases borders on predatory pricing, which can best described as buying the business for short-term profits.

For the immediate future, physicians and new ventures will benefit from the stiff competition among insurance carriers. In fact, some practices affiliated with PPMs report having reduced their malpractice insurance costs by 30% to 50%. However, selecting a malpractice carrier based solely on price without considering the carrier’s long-term commitment to underwriting the practice can be risky. For instance, if an insurance company has underpriced the coverage (premiums charged do not cover future claims) to get an account, it will eventually have to increase rates to counter the years in which the pricing was too low. It is not uncommon for carriers to try to increase rates by 30% to 50%, as recently happened in the Texas market. Some carriers will opt for simply abandoning their insureds.

Look for a company that already has competitive rates. These companies do not need to drop rates to get the business, allowing them to focus on providing long-term, affordable coverage with an emphasis on risk management and personalized service. They are also less likely to sacrifice their smaller clients (e.g., solo practices, small groups) to provide coverage for large accounts.

The Impact of PPMs

The formation of PPMs presents a number of opportunities and challenges to professional liability insurance companies that want to provide insurance to PPM-affiliated practices. Depending on the agreement a practice has with the PPM, the physician may not actively participate in or have input into the negotiations with prospective professional liability insurance carriers. The PPM, or an insurance broker bargaining on behalf of the PPM, may do all the negotiating with the prospective insurance carrier. Also, the PPM may not only be seeking professional liability and general liability coverage for the physicians affiliated with the PPM but also D/O and E/O coverage and property coverage for the PPM itself. The broker is charged with putting together the best overall insurance package for the PPM and affiliated practices and is commonly paid a commission by the insurance carrier to do so.

Because physicians usually do not sell their practices to the PPM, they are still responsible for the malpractice coverage of their practice, its associated physicians, and the technical staff. The advantage of being affiliated with a PPM is that it can lower the practice’s malpractice insurance costs by requiring volume discounts from the insurance carriers. However, even though an insurance carrier negotiating with the PPM or broker will review the affiliated practices as a whole to determine the overall premium, each practice is underwritten on an individual basis. Therefore, an affiliated practice should be aware that it could be subject to additional surcharges, deductibles, and underwriting restrictions.

Large commercial carriers can underwrite broad coverage for a variety of risks and offer a package to PPMs in which malpractice coverage is only one item. The commercial carrier’s profit is not based on one line of coverage (e.g., professional liability) but rather several lines of coverage. For instance, any future losses from professional liability claims may be offset by good loss experience for general liability, property, D/O, E/O, and other coverage. In effect, the large commercial carrier is spreading its risk over a large number of products.

Physician-owned companies also offer a number of insurance products (e.g., D/O and E/O, employment practices liability) and will associate with commercial carriers to put together a similar package with reasonable volume discounts for the PPM. There are advantages and disadvantages for the PPM in entering into a package with one large carrier rather than a partnership of carriers bidding on an account. From the standpoint of the PPM or its broker, it may be easier to administrate a package through one large commercial carrier rather than a number of different carriers acting together. However, a partnership of carriers may offer better service on the specific products they are providing.

Some large commercial carriers may offer a variety of insurance coverage, but that does not necessarily mean they offer service on each product. When carriers form a partnership, they combine their strengths and products.

Use Your Experience

Physician practice management companies are not the only path to practice integration and mergers. Ophthalmologists have a wide range of options to achieve greater operating efficiencies and access to patients. Before entering into any agreement, whether with a newly formed IPA or a publicly traded PPM, consider the ramifications it will have on your relationship with your current professional liability insurance carrier.

Those who have been in the eyecare profession for some time have seen how volatile the professional liability market can be and know that professional liability carriers can and do precipitously increase their rates. When entering into a new venture, realize you may have more experience than those responsible for forming the new venture. Trust your instincts, and use this experience to your advantage.