High malpractice insurance costs and tort reform are hot topics for all physicians, especially for orthopedic and spine surgeons. Here, Patrick Sedlak and Mark Aldous, both senior vice presidents with the healthcare practice of insurance broker and risk advisor Marsh USA, discuss insurance costs and recent responses by physician groups and some state governments to combat them.
Q: There are many types of insurance and risk management services available to orthopedic and spine surgeons and the practice groups in which they invest. What types of policies do you think are most critical?
Pat Sedlak: The primary insurance cost driver for any physician group is medical malpractice insurance. Although the cost of medical malpractice coverage varies greatly by state, this is almost always the largest expense for any physician group. In some states, such as those with enacted state tort reform legislation, physicians may obtain relatively inexpensive medical malpractice insurance as compared to peers in other states. Regardless of the state of domicile, medical malpractice insurance is a significant cost component for all physician groups, including orthopedic and spine practices.
Mark Aldous: As a specialty, orthopedic surgeons face some of the highest medical malpractice premiums. High premiums are associated with underwriters' perception of higher risk exposures involved with their surgical procedures.
Q: What is the average cost of medical malpractice insurance for orthopedic and spine surgeons?
PS: Average medical malpractice costs vary widely by state. In Indiana for example — one of a handful of states that limits medical malpractice damage awards — an orthopedic surgeon may still pay $20,000-$30,000 in medical malpractice premium. In states where no such limitations apply, premiums can be significantly higher.
Q: What kinds of trends are you seeing in terms of how physicians are insuring themselves against medical malpractice claims?
PS: Orthopedic groups are often frustrated with insurance costs as well as insurers' willingness to settle medical malpractice insurance claims. As a result, we are seeing groups consider self-insuring their medical malpractice coverage. Groups are also considering partnering with other orthopedic practices to collectively self-insure their malpractice exposure in a group captive or risk retention group. Essentially, these physicians form their own insurance company.
Q: How popular are captive and risk retention groups?
PS: They are a popular vehicle within the healthcare space, and I think their use will continue to grow.
MA: Right now the insurance market is relatively flat in that we're not seeing huge medical malpractice rate increases. However, when premium rates increase and availability of coverage decreases, the popularity of captives will absolutely increase.
Q: What are the benefits and risks of these alternative types of arrangements?
PS: Physicians must keep in mind that engaging in a captive requires a totally different mindset. You are no longer paying premium to an insurance carrier with the thought that they will cover losses. In a captive, you are essentially paying a premium to yourself, but now you are the one responsible if there is a loss. There are ways to limit ultimate losses; however, you must understand that you may sustain a loss under this type of arrangement.
Setting up a captive or risk retention group also does take some size. There needs to be enough physicians to finance the alternative risk financing vehicle. Although the number of physicians needed varies greatly by state, a good benchmark is that the group should generate $750,000 or more in medical malpractice premium.
Q: As insurance consultants, what advice would you give to physicians considering establishing or joining a captive or risk retention group?
PS: Physicians interested in a captive or risk retention group should engage an advisor with experience in medical malpractice captive/risk retention group creation and management. Physicians should also engage a tax expert experienced with captives and risk retention groups.
MA: You also must, as a group, agree to processes and best practices that reduce your risk of being entangled in a medical malpractice claim. It is imperative that these groups have proven risk management procedures in place. This is the absolute most important thing they can do to decrease risk.
Contact Patrick Sedlak at patrick.sedlak@marsh.com. Learn more about Marsh.