Rising rates

What is the link between healthcare reform and rising D&O rates? HRMR reports on a Marsh briefing that gets to the root of the issue.

As the Affordable Care Act (ACA) takes effect, healthcare organizations’ business models and risk profiles are changing, creating new risks related to directors and officers (D&O) liability, according to a December 2013 briefing from Marsh.

“The ACA is changing the business environment,” the report’s author Mark Karlson, managing director at Marsh and Marsh’s national Financial and Professional Liability Practice (FINPRO) healthcare practice leader, told HRMR in an interview.

“One of the results of that is a significant increase in merger and acquisition activity in healthcare—and as a result of this there is the expectation of additional claim and legal activity,” he said.

Marsh’s briefing, As Reform Takes Effect, Healthcare D&O Rates Increase, states that insurers generally are seeking price increases for D&O liability insurance for healthcare companies, and many are reconsidering the scope of coverage offered. This is borne out by the figures: average primary D&O rates for midsize and large health systems increased 9.6 percent in the third quarter of 2013; median rates increased 7 percent.

The vast majority—73 percent—renewed with rate increases, while 13 percent underwent decreases and 13 percent remained the same. Total program D&O rates for midsize and large systems increased 7.9 percent in the third quarter. Nearly all organizations—91 percent—renewed with rate increases.

For smaller healthcare organizations—$150 million or less in assets or annual revenues and fewer than 1,000 employees—D&O rates increased 12.7 percent in the third quarter. Nearly all organizations in this segment—96 percent—renewed with rate increases.

Antitrust concerns

A key reason for these rises is antitrust concerns, writes Karlson. Since passage of the ACA in 2010, the healthcare industry has undergone rapid consolidation. Many healthcare organizations have formed accountable care organizations (ACOs), joint ventures, and loose alliances and networks aimed at coordinating services, reducing costs, and improving the quality of care.

“On the one hand you have the government pushing entities to work more closely together and then on the other hand you have the government saying it’s illegal to work too closely together—the healthcare industry is caught in the middle of this; it’s an ongoing debate,” he told HRMR.

Insurers’ concerns about the issue have been reflected in D&O rates. “Because the changes involve organizations working more closely together and sharing information, some insurers have expressed concerns about antitrust issues,” states the report. “Many healthcare organizations renewed their D&O programs in the third quarter with lower antitrust sublimits, higher antitrust-related coinsurance requirements, and higher antitrust retentions.”

Although not all insurers are seeking dramatic changes, some are pulling back on offering full policy limit defense coverage.

“In addition to seeking significant price and retention increases, one insurer that has taken a particularly aggressive stance has restricted availability of antitrust coverage to a maximum of $5 million across all financial and professional lines,” states the report. “This insurer has also imposed mandatory coinsurance of 20 percent to 30 percent, and will not sit excess of a primary market that does not impose its own significant antitrust restrictions.”

Regulators have made clear their intentions to continue pursuing antitrust cases in healthcare. On November 15, 2013, in testimony before a US House of Representatives subcommittee, Federal Trade Commission (FTC) chairwoman Edith Ramirez identified healthcare, technology, and energy as major areas of focus.

She also outlined the commission’s efforts to date to promote competitiveness in the healthcare industry, including several lawsuits that it has filed to block proposed hospital mergers.

The report points out that although the ACA provides for formal safe harbors for federally recognized ACOs, and the FTC has said it will generally recognize similar protections for such arrangements that are not federally recognized, this area has yet to be tested.

“Underwriters are also closely watching litigation alleging antitrust violations by a national health insurer and its member plans across the country,” states the report. “Approximately 50 individual cases have been consolidated into a multidistrict lawsuit in the US District Court for the Northern District of Alabama. As a protracted legal struggle is expected, the case will likely have no immediate impact on pricing—but it has added to the antitrust concerns for underwriters.”

When speaking to HRMR Karlson added that when they meet with the underwriters risk managers should make sure they have a complete story to tell about all of the ways they are trying to avoid any antitrust problems by using outside law firms, and doing everything they can as a company to avoid running foul of them.

Changing risk profiles

Beyond the potential for antitrust litigation, the industry’s shift to accountable care models can alter the risk profiles of healthcare organizations. For directors and officers, new risks include those related to establishing provider networks. The most basic decisions related to forming or joining an ACO, including which organizations to partner with, the ACO’s structure, and how to share payments and expenses, can carry substantial risk.

“In addition to antitrust allegations, potential exposures include contractual liabilities and lawsuits from customers, competitors, and regulators over such issues as errors in providing nonmedical professional services,” states the Marsh report.

Further new risks come from entering into payer contracts, it adds. “Depending on the structure of reimbursement agreements with the government and benefit plans, an ACO could assume higher risks related to the pricing of services, medical expenses in excess of agreed capitation levels, or contract mismanagement for its members.”

As organizations adopt new business models and responsibilities for patient care, many D&O underwriters are asking for significantly more detail about ACO formation and strategy.

“For example, they may ask for more information about the contractual terms and financial models of joint ventures, how data security will be coordinated across ACOs, and what insurance coverage is purchased by counterparties,” states the report.

In addition to adjusting to the changing D&O landscape, healthcare organizations will also need to address the managed care errors and omissions (E&O) exposures inherent to population management strategies, adds the report.

“Health plans will need to ensure that existing managed care E&O coverage can be extended to cover the operations of the ACO,” it states. “Health systems and providers that historically have not had such exposures will now need to purchase managed care E&O insurance.”

2014 challenges

The healthcare industry’s transition to accountable care will continue in 2014, keeping a focus on the potential implications for organizations’ D&O insurance. Ongoing merger and acquisition activity and the formation of ACOs and similar networks will create new exposures for many organizations, including antitrust risks.

“Risk managers and their insurance advisers should be prepared to face additional rate increases as they renew their D&O insurance programs in 2014, and should be ready to address underwriters’ questions about their strategies related to the formation of ACOs and other networks,” states the report.

“Those organizations that can provide detailed information about their response to healthcare reform—by engaging with underwriters early and often in the process—will be best positioned at renewal,” it concludes.