Do-It-Yourself
Malpractice Insurance
Malpractice Insurance
Is self-insurance for professional
liability a healthy investment?
Depending on your specialty, the state or
region in which you practice, and your claims history, you may
have considered alternatives to a standard commercial
malpractice insurance policy, or at least heard of some
alternatives from other physicians. There is a multitude of
factors to consider when you’re deciding whether to go
with this system, and professional advice is certainly in
order. There is a tremendous amount of risk involved in
undertaking such a program, and I cannot emphasize strongly
enough that you should not undertake it lightly or without the
guidance of insurance, legal, and accounting professionals with
experience and expertise in the medical malpractice field.
Following is a guideline for initial discussion of a
self-insurance program for professional liability.
What is self-insurance?
Self-insurance is the most commonly used
term to describe alternatives to commercial insurance. It is
not the same as having a deductible apply to the claims covered
by your commercial malpractice insurance. A deductible applied
to your policy only means you share in the risk of having a
claim or defense cost. Self-insurance means that you not only
assume the entire risk of a claim or its defense, but that you
also become your own insurance company. Other terms you may
have heard are alternative risk financing, captives, risk
retention groups, and variations of each. These alternative
terms and methods can all be loosely grouped in the category of
self-insurance but are distinct from the basic self-insurance
that I will discuss here.
In further defining
self-insurance it may be beneficial to contrast self-insurance
with “going bare.” If a physician group “goes
bare,” it typically does not take any precautions or have
a contingent program for responding to claims or suits. In the
event it is sued, it refers the case to an attorney and writes
a check out of operating funds when the claim is settled and
the defense costs are billed. Going bare is not self-insurance;
it is foolish and irresponsible.
Self-insurance, in
contrast, is the establishment and professional operation of a
proactive mechanism for the funding, investigation, management,
defense, and payment of claims with the purpose of minimizing
the entity’s exposure to loss of assets. In other words,
a self-insured entity assumes the mentality and roles of a
commercial insurance company for the purpose of protecting, to
the extent possible, the entity’s assets.
Self-insurance comes
in numerous forms that vary in complexity and expense. Which,
if any, is best suited to your situation depends on many
factors. They all have certain similarities, however.
Why self insure?
There has been much written about
self-insurance, both inside and outside the health-care
industry. Most often you will hear about the benefits of
self-insurance, including:
• Control of claims handling and
claims payment by the entity
• Ability to benefit from good claims
experience, or in the worst case, only be responsible for
one’s own losses and not unknown others’ losses
• Escape from the continually rising
malpractice premiums charged by commercial insurers
• Use of investment income from the
self-insurance fund
• Flexibility of coverage through
design of the self-insurance plan document
• Responsiveness to changes or
opportunities in the soft commercial market
The overwhelming
consensus is that once an entity chooses to become
self-insured, it very rarely re-enters the primary commercial
insurance market. The high level of satisfaction with
self-insurance probably stems from the fact that the entity
gains independence from the cyclical pricing and availability
of the commercial insurance market, as well as the fact that a
self-insured client can operate more economically than its
commercial insurer, as there is no profit margin built into the
cost. Also, the initial investment in creating the plan is the
biggest drawback to becoming self-insured. Once the plan is in
place, most groups elect to stay
with it.
with it.
With all these
benefits, why would a physician group NOT opt to self-insure?
The greatest reason is that creating a self-insurance program
is no simple matter. There is an extensive investment in time
and money to set up the self-insurance plan. A successful
self-insurance plan contains the following components:
• Risk management system
• Incident reporting/claims
investigation/claims management system
• Self-insurance plan document
(self-insurance policy)
• Actuarial study
• Self-insurance fund (cash or other
liquid investments pool)
• Trustee for self-insurance fund
• Management/practitioner commitment
• Personnel education regarding the
self-insurance plan
• Self-insurance program manager
Other factors to consider
Aside from the significant start-up
investment, there are other factors to consider when evaluating
the viability of self-insurance for your group. The acceptance
of your self-insurance program by hospitals and third-party
payers is crucial. Since most hospitals and payers have a
malpractice insurance requirement as a condition of privileges
or participation, it is imperative that they approve in advance
your substitution of self-insurance for commercial insurance.
The hospitals and payers will likely only consider your
self-insurance program as compliant if it includes all of the
components listed above—it’s likely their own
self-insurance programs will include some of the same
components.
You also will want to
consider whether or not you have an interest in protecting the
assets of the fund from predators other than claimants, and
whether the group wishes to purchase commercial
“excess” insurance for protection from catastrophic
single losses or combinations of losses, either of which may
deplete the fund and significantly impair the financial
condition of the program. I will again emphasize that the
decision whether to self-insure should be made only after
consulting with knowledgeable and experienced insurance, legal,
and financial professionals. If your prime motivation is to
save money in the short-term (one to two years), then
self-insurance is probably not for you. If you are
uncomfortable with or cannot afford to even assume deductibles
of $100,000 or more per claim under your medical malpractice
policy, again, self-insurance may not be a good idea. Finally,
if your group has the attitude that “we will never settle
a claim regardless of fault or circumstance,” then
self-insurance is probably not for you.
However, if you
understand and accept that self-insurance is a long-term
approach to medical malpractice, that there are tremendous
risks involved, and you can subscribe to and appreciate the
need for adapting an insurance company mentality when running a
self-insurance program, then such a program may be well suited
to your group.
In a sequel to this
article, I will discuss who performs the various tasks
associated with the self-insurance program as well as the costs
of implementing such a program. I will also discuss in greater
detail the alternative types of self-insurance vehicles. 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.
