13 April 2011

Medical Malpractice Self-Insurance -- Is it right for your group?

One of the more painful elements of running a group practice is the ritual abasement before the god-like executives at the insurance company annual malpractice insurance re-bid. It's kind of like a visit to the dentist: guaranteed to be uncomfortable and with the potential for a very unhappy surprise. Also, it leaves your face numb and drooling. The only thing that matches it in pain is writing the check every quarter, year after year, and then looking back at your actual, you know, losses, and seeing that you have paid for insurance way way more than you ever lost in liability claims. It's got the all visceral satisfaction of lighting a pile of money on fire.

But what can you do? You need insurance. What if John Ritter walks into your ER and dies and you get sued for $65 million? So what if we are paying way more than we actually should cost. At least we have that peace of mind that we are covered, right?

There is an option, though. It's not for everybody, and it's not easy, but there is an option.

You can self-insure.

This is a concept that scares the bejeezus out of a lot of doctors, and perhaps for good reason. For one, it's way out of the comfort zone for someone who spent half a lifetime training in clinical medicine. There are lots of foreign concepts and terms and laws and regulations. It involves entrusting the health and future of your practice into the hands of some people that you barely know. It means taking risk onto your own shoulders and with your own money.

So, how do you know if it is right for you?

I look at this through the lens of the doctrine of comparative efficiency. You should not do something, in business, unless you do it better than anybody else can. Otherwise, pay someone better to do it and focus your attention on your core competency. Hopefully you have one. As an analogy, I pay my mechanic to fix my car because there's very good evidence that he can do it better and cheaper and faster than I could. He's probably ripping me off by overcharging for the oil filter, but that's a more or less inescapable friction loss for me. The overpriced oil filter is still cheaper than trying to do it myself. But -- if you happen to be handy with cars, then the equation shifts and maybe it is better for you to maintain your own car.

So, what is it that an insurance company does that you can do better? To answer that, you need to know what it is that an insurance company does in the first place. (Itself an education for many docs.) In short, greatly simplified:

  • They assume the risk inherent in your medical practice.
  • They navigate state insurance regulations and laws, and they employ actuaries to estimate risk and set premiums.
  • They shop and purchase reinsurance. Any decent broker can replicate that function.
  • They sit on a huge pile of money (loss reserves) and invest it. You probably are not going to be much better at investing than the typical insurer. (AIG may be an exception to this.)
  • They review and manage claims and litigation. YMMV, but you'll probably not do this much better or worse than a big insurer.

But there is one thing that a doctor (or group of doctors) can do that an insurer cannot: they can assess their practice internally and take steps to control their risk and create an organization that will have a lower risk profile than the industry average.

We hopefully all do this anyway. We all want to provide high quality care, better patient outcomes, and we want to not get sued. When we take steps to do this, we are generally making money for our insurer. Nothing wrong with that, but if your practice is well run, and if you really are better than the industry average, then maybe it might make sense to reap the financial rewards that come with a lower risk profile.

This is one of the big stumbling blocks for a group that is thinking about self-insuring. You need to apply some serious introspection and self-knowledge to your group before you embark on this sort of project:

Can you cold-bloodedly assess your practice and ask yourself if you are really a better risk than the actuaries think you are? Not all doctors are better than average, though most think they are. If you've had some runs of bad cases, maybe it's just bad luck, but maybe you would still be better off paying someone else to shoulder that risk for you. Get a professional to run the actual numbers to get a gauge on this. It may only make sense if you really have a superior loss history.

You also need to know your organization. Are you staffed with flexible docs who are willing to change their personal practice style, to adopt best practices and to minimize variability? Are your docs willing to adapt to the party line in documentation and use of new technology?  Or do you have a bunch of prima donnas who are not really receptive to suggestions on how they could do things differently?

 

Is your practice willing to enforce standards to the point of firing "Old Bill," the doc that everybody loves but who just isn't at the level of quality that you need? Every group has an "Old Bill," who keeps his job despite the bad outcomes (or whatever) because he's such a great guy and patients love him and he's so earnest about trying to improve. If you and your partners can't bring yourself to pull the trigger on Bill, you shouldn't self-insure.

What's your level of comfort with risk? Are your partners at the same place? There's a chance a self-insurance program could go bad. Are you prepared to face that possibility? Have you gotten a consensus from everybody that the benefits of self-insurance is worth this risk? The risk may be less than you think, and I'll go into that later, but better to worst-case it before jumping in.

How long is your time horizon and how robust is your cash flow? Are you willing to pay higher levels of premiums up front to reap lower premiums or return on your investment later? A short-sighted focus on this year's bottom line can lead to disastrously underfunded plans.

How comfortable is your group with a collectivist approach to equity? Some practices are loosely-confederated bunches of independent contractors, with an "every man for himself" mentality. A group which does not hold assets in common or have a means to calculate shareholders' relative stake might be poorly suited to this sort of collaboration. 

How stable is your contract? This is a medium-to-long-term endeavor. If your contract is up for renewal and the hospital CEO is rattling his saber, now might not be the best time for you to explore this sort of project. 

How deep is your bench? Do you have several partners who are bright and enthusiatic about a self-insurance plan?  Are they willing to dedicate a lot of time to learning about the various facets of how to run one, and then doing so? This will take a lot of administrative mind-space, and if there's just one person who will take responsibility for the administration of a self-insurance plan, it's probably not going to turn out well.

Finally, and perhaps most importantly, is your group big enough to support a self-insurance plan? There is an economy of scale, below which the internal costs of a plan may never really work out for you, financially. I've heard a lot of estimates, and there are too many variables in terms of how you construct the plan, but if your premium base is less than $500,000 a year, the numbers may not work out. (You definitely need professional advice in answering this question.)

 

I think I mistitled this post -- it should read "Medical Malpractice Self-Insurance -- Is your group right for it?" This is a hugely complex issue, so I am going to break it down into several separate posts. Tomorrow I will address "Self-Insurance -- why would you want to, and why not?"

11 comments:

  1. 65mil. anyone awarded an order of magnitude more than all the money i'll ever make in my entire life will see that money in their dreams.

    if all future earnings get confiscated, well that is some powerful incentive to stop earning anything.

    ReplyDelete
  2. A lot of the points you make here could be applied to larger healthcare delivery organizations, such as multi-specialty groups affiliated with hospitals, who could provide healthcare insurance for their employees, and also offer it to the community at large. In other words, at which point does it become a smart idea to become a Kaiser?

    I think this will come up more and more as we recognize that the value that insurance companies actually provide to patients is non-existent, and that the only way to align incentives for cost-containment is to involve providers and payors.

    ReplyDelete
  3. Whether or not you self insure, every medical practitioner should consult with a lawyer knowledgeable about asset protection laws in the state they live in. No matter how much insurance you carry, it's never enough to satisfy the malpractice lawyers out there. In fact, carrying too much insurance may make you a juicier target. My philosophy is to carry the minimal amount required by my contracts and hospital, and secure all other assets by any legal means necessary. Legal advice is mandatory, and a second opinion is a good idea if you have substantial assets to protect.

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