The Great Coverage Shift

Written by Todd Dashoff, ACAS, MAAA, ARM

In the last few years, the numbers of individual-owned physician practices covered by commercial property-casualty insurance companies has been shrinking. For the period 2005- 2008, the percentage of hospital-owned medical practices grew from 25.6% to 49.5%, according to the 2008 Physician Compensation & Production Survey. In 2010, the number of physicians switching to hospital employment exceeded the number of first-year physicians in medical practices.

There are a number of reasons for the moves from individual physician practices to hospital-employed physicians. Of the major reasons is the looming uncertainty over the potential effects of the Patient Protection and Affordable Care Act on the individual physician practice. If the federal government’s program becomes effective as it is currently proposed, there will be a large jump in the demand for physicians in hospitals to serve the increased numbers of individuals who will be enrolled in health insurance programs and will take advantage of their newfound coverage to solve every problem that had gone undiscovered or ignored due to the inability of the patient to pay for the coverage, or because the condition was preexisting. However, since hospitals are no longer reimbursed for separate services but rather by diagnosis code, they will be seeking to have greater control over the patient’s entire treatment, and will therefore want to use employed physicians rather than those with operating privileges, in order to take advantage of economies of scale, joint defense, risk management programs and other means of obtaining the greatest positive return while still providing the patient with effective treatment. This will require that the physician switch the mindset of his or her practice from an independent attitude toward compliance with a corporate culture.

Other reasons for the decline in physician-owned healthcare practices include difficulties in collecting for services provided to individual patients, cuts in Medicare and Medicaid reimbursement policies, the difficulty of a sole practitioner to comply with the rapidly growing list of Federal and state regulations and the potentially large cost of switching over to electronic medical record systems. All of the above factors are resulting in a decrease in the business written by insurers whose primary focus is the coverage of individual or small group physician practices.

The insurers affected by these changes have responded with a number of actions designed to slow the decline in premium volume. They have instituted or expanded dividend programs to return some of the profitability from the current soft market back to their insureds. They have also implemented cuts in rate level, although these have generally been limited to single digit decreases. Insurers have also begun offering additional coverage to the individual insureds at no additional cost for risks such as cyber liability. In larger metropolitan areas, the companies have also begun seeking out physicians in higher rate classes, which are avoided by the hospitals due to the potential for extremely large claims, and are seeking to write medical students and first-year physicians. The commercial insurers are also emphasizing the value of consent to settle provisions, which require the company to obtain the insured’s consent before making an indemnity settlement to a claimant. Hospitals generally do not provide this option in their insurance policies or self-insured programs, since they want the freedom to assign the liability on a given claim at their option to any or all of the parties involved in the patient’s treatment.

While the insurance companies are battling to maintain market share against the switch from individual employment to hospital employment, the hospitals do not have an unimpeded path toward success. While they are better equipped to be able to profit from the introduction of federal healthcare legislation, there are other statutes that affect their freedom to attract individual physicians to become paid employees. Regulations such as the Stark laws prohibit hospitals from tying physician compensation to patient referrals. The doctrine of agency theory means that the hospital may even find itself being held liable for the actions of an independent physician if it can be shown that the patient had a reasonable belief that the physician was an employee of the hospital; as more and more individual physicians move over to hospital employment, this belief will become stronger in the minds of potential patients, who are aware of the change in physician practice. This potential liability is balanced by a possible decline in the chance of a claim for corporate negligence for the failure of the hospital to provide reasonable supervision of the services provided by outside contractors (individual physicians with operating privileges) as more physicians become employees of the hospital with presumably greater control by their employer over their actions. The switch from individual to hospital practice also raises the question of how to handle the exposure for prior acts for physicians covered under claims made policies when they switch to being covered under the hospital’s commercial insurance policy or self-insured program.

It is too soon to tell which side will end up as the victor in this battle over the physicians, but insurance professionals who work with either side need to be aware of the advantages and disadvantages of both types of service and be able to advise their clients as to the best way to continue to achieve profitability because of or in spite of the shift in employment.