Do-It-Yourself
Malpractice Part II
Malpractice Part II
To create a solid self-insurance program,
follow the recipe carefully.
In the last edition of this department, I
described various aspects of malpractice self-insurance and I
briefly outlined the key components of a self-insurance program
(DIY Malpractice Insurance,
November/December 2005). I
promised to follow up with information about the performance of
the various tasks in a successful self-insurance program. I
give you the promised recipe.
Like the practice of
medicine, implementation and administration of a self-insurance
(SI) program usually involves a collaborative effort of both
generalists and specialists. The components of a formal SI
program in more or less chronological order are:
=
Management and practitioner commitment
=
Actuarial study
=
Self-insurance program manager
=
Risk management
=
Self-insurance plan document (self-insurance policy)
=
Self-insurance fund and fund trustee
Volumes could be written on the individual
components, yet understanding the basics of each piece should
give you a “taste” so you can know whether this
approach is palatable for your group.
= Management
and practitioner commitment
Without a doubt, securing the commitment
of both management and practitioners is the most important
aspect of any alternative risk program. Be it basic
self-insurance or any more sophisticated form, the program must
have the commitment of those who implement it. As the credit
card advertisements so eloquently wax, “priceless”
is the best way to value having everyone on board.
The attitude of those
in charge sets the tone and attitudes of those under them in
that organization. Without an attitude of sincere and
demonstrated support by management, a SI program and its
backbone, the risk management/claims management system, cannot
succeed.
Can I prove that? No,
unfortunately. The nature of risk management does not lend
itself to double blind experimentation, but logic dictates
that, “if the boss doesn’t care, why should
I?”
= Actuarial
study
The only empirical tool available for
evaluation of a group’s candidacy for medical malpractice
self-insurance is an actuarial study. Simply put, an actuarial
study is the evaluation of the group’s malpractice loss
history and using that data, a prediction of future claims.
This analysis will attempt to project the funds necessary to
pay for future losses along with the attorneys’ fees,
investigation and adjusting, and other costs related to the
defense and settlement of claims.
A word of caution is
in order: Actuarial science is a misnomer. It’s as
much an art as the practice of medicine, and is only a tool for
predicting the future based on the past. It has been compared
to driving a car forward while looking only in the rear-view
mirror.
There are inherent
problems related to actuarial studies that affect their
applicability to your group’s self-insurance program. A
certain number of historical events are required to achieve
statistical significance that will assure some semblance of
predictability of future events. One rule of thumb for medical
malpractice is that is takes 1,000 claims to provide
statistical significance to the derived numbers. No medical
group has that many claims. Hence, most actuaries blend a
specific group’s history in with databases of other known
physician claims information and apply a factor to the
group’s statistical credibility compared to the size of
the overall claims base.
It is important,
therefore, that the actuary (individual or firm) have access to
a sufficient number of creditable medical malpractice closed
claims databases to create a reasonable projection for your
group. I am not associated or affiliated with any actuaries or
actuarial firms so I can tell you objectively that it is in
your best interest to use an actuarial firm with a strong
background and sufficient closed claims data in physician
medical malpractice. The credibility of the actuary and the
database is critical not only to you, but to other entities
that may need to approve your SI program (i.e. third party
payers, government agencies, hospitals). The cost of an
actuarial study varies depending on the size of the group and
the number of different options you wish to consider. A typical
initial study may cost between $10,000 and $25,000 and slightly
less for subsequent studies, which should be done annually.
Make sure the cost includes a presentation and meeting to
discuss the report, as actuaries are not typically good
communicators. You must understand what the numbers are telling
you.
= Self-insurance
program manager
The self-insurance program needs a
designated manager. This person may be an employee, such as an
administrator, or a contracted professional. A contracted
professional would usually have either a medical malpractice
claims or health-care risk management background. This person
needs both a high profile and the support of management to be
effective. She will be the point person for the reporting and
investigation of potential claims. The success of your SI
program depends on the group’s entire staff respecting
and confiding in the program manager. The cost of the right
person to perform this function varies depending on the size
and complexity of your group, but getting the right person is
money well spent—penny-wise is pound-foolish when it
comes to the program manager’s qualifications.
= Risk
management
In broad terms, risk management means
identifying and evaluating the risk to loss of a firm’s
assets, determining how to best protect those assets, and
implementing, frequently re-evaluating, and amending the
risk-management protection plan.
The person charged
with risk management may well be the SI program manager. Known
as the risk manager, she must educate all existing and new
personnel regarding the self-insurance plan and the
risk-management plan. While it’s probably true that
everyone who works for the group is doing the very best job
they can, the success of the self-insurance plan is directly
linked to the very survival of the group. Every employee or
owner, from the janitorial staff to the medical director, can
affect the success or failure of the risk-management plan and
hence the group and their continued employment. Thus, the risk
manager must be effective at reinforcing the risk-management
policies in everyone’s mind.
An effective system
for reporting incidents, investigating claims, and managing
claims is an integral part of the risk-management program. This
function, generally referred to the “incident-reporting
system,” can be handled either by an employee (risk
manager, SI program manager, etc) or contracted to a third
party administrator (TPA). Either way, this individual is the
prime resource for the investigation of claims, development of
the claims file, and supervision of attorney services related
to the claims.
As is the case with
the self-insurance program manager or risk manager, this person
must have the support of management. When a group is
self-insured, the owners and management must think and act like
an insurance company. This means there may be times when some
tough decisions and actions are needed to assure the financial
wellbeing of the group. It is not unheard-of to curtail or
suspend the privileges of a high volume physician, employed or
equity based, if that person’s professional activities
become detrimental to the success of a SI program. If that
concept in not palatable for your group, then I suggest you
stay away from self-insurance.
The cost of the
risk-management system is also hugely variable. A typical
full-time risk manager has a $50,000 to $90,000+ salary,
depending on his background and experience and the scope of the
group’s practice. An outsourced program may cost less,
but also may be less effective at reducing and eliminating
claims.
= Self-insurance
plan document
The self-insurance plan document should be
written like a commercial malpractice policy. This document
provides an objective approach to the types of claims that the
SI program will pay for and the protocols used in the process
of claims handling, etc. A good medical malpractice insurance
broker or an attorney specializing in insurance contracts can
assist you in developing such a document. It is important to
have this document as part of the due diligence package you
would supply to the third parties who may need to approve your
self-insurance plan. You can expect to pay between $2,500 and
$5,000 to have the plan document prepared.
= Self-insurance
fund and fund trustee
The final ingredient in a formal
self-insurance program is a dedicated fund of cash or other
liquid investments from which the claims and defense costs of
your SI program are paid. Typically, a third party trustee
(such as a bank or trust department of a larger bank)
administers the fund, receives deposits, and makes
disbursements for covered events based on the trustee contract
and SI plan document. The actuary will recommend an amount to
deposit into the trust, which is then approved by the group.
The trust is usually interest-bearing and the interest is left
in the fund for compounding. The expected rate of return of the
trust fund is part of the actuarial calculation each year. The
objective of the trust fund and the SI program is that when the
self-insurance program is terminated and all claims and
expenses are paid, there should be a zero balance remaining in
the trust account. The trustee fee and cost to maintain the
trust fund are relatively low and are frequently a very small
percentage of the fund balance.
These descriptions are
very basic, yet the self-insurance program is extremely
important and a poorly constructed program may be fiscally
life-threatening. Insurance—including
self-insurance—matters are overseen and controlled by
State government and rules and regulations regarding medical
malpractice insurance vary significantly from state to state.
Those rules and regulations need to be considered when
evaluating SI as an alternative to commercial insurance.
Do not enter into a SI
program without the advice of specialists or experts in medical
malpractice self-insurance. Their objective opinions and
expertise are no less important than those of physicians whom
you would consult in the case of a life-threatening illness or
injury. Before you take the leap, be certain you are on solid
ground. g
Richard Vento is the president of Medical Risk
Management Services, Inc., a malpractice insurance wholesale
brokerage and consulting firm in Jamison, Pennsylvania. He may
be reached at rvento@medriskman.biz.
