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Casualty Actuarial Society 2002 Seminar on Ratemaking
March 8, 2002
Medical Malpractice - Advanced TopicsHospital Professional Liability Rating
Prepared by:
Richard S. Biondi, FCAS, MAAA
Milliman USA
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Hospitals vs. Physicians Rating
• Hospital rating more complex
• More judgment required
• Market more competitive for large risks
• Hospitals less profitable than physicians
Milliman USA
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Largest Physician Writers
2000 2000Earned Incurred Loss Loss+LAE
Largest Physician Insurers Premiums + LAE Ratio
Medical Liability Mutual Ins Co 358,537 281,352 78%Medical Protective Co 258,354 173,760 67%The Miix Grp of Co & Affiliated P/C 213,787 309,467 145%Doctors Company Group 194,894 133,838 69%Illinois State Med Interins Exch 164,673 145,558 88%Scpie Indemnity Co 153,811 89,092 58%Norcal Mutual Insurance Co 142,417 108,524 76%Picom Group 134,107 171,295 128%Physicians Reciprocal Insurers 131,029 106,258 81%
1,751,609 1,519,144 87%
Milliman USA
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Largest Hospital Writers
2000 2000Earned Incurred Loss Loss+LAE
Premiums + LAE Ratio
St Paul Fire & Marine Insurance Co 620,857 923,954 148.8%Health Care Indemnity Inc 243,168 336,510 138.4%Continental Casualty Group 226,706 202,997 89.5%Pennsylvania Hospital Ins Co Grp 218,870 236,610 108.1%American International Group 167,352 195,163 116.6%Farmers Insurance Group 135,144 105,472 78.0%
1,612,097 2,000,706 124.1%
Milliman USA
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Rating Methods for Hospitals
1. Alternative Exposure Bases/Classifications
2. Experience and Schedule Rating
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Hospital Exposure Base
Four most commonly used systems:
1. Conventional System
2. Refined Conventional System
3. HIF System
4. Diagnosis System
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Exposure Base: Conventional System
Three Step Process:
1. Facility classified as:
• Clinic, dispensary, infirmary
(out-patient only)
• Convalescent or nursing home
• Hospital NOC (not otherwise classified)
• Mental institution
• Miscellaneous (blood banks, wellness centers, etc.)
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Exposure Base: Conventional System
2. Further classification:• For profit
• Not for profit
• Government
3. Given type of facility: 2 main exposure bases:• Occupied beds - average number of
occupied beds per year
• 100 outpatient visits (annual)
• 2000 outpatient visits = 1 occupied bed
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Exposure Base: Conventional System
4. Employed Physicians:• Share hospital limits
• Discounted rates
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Refined System
• Refined bed classifications: (1) neo-natal, (2) obstetrical, and (3) other
• Refined outpatient visits: (1) surgical visits, (2) emergency room visits, and (3) all other
• More responsive to risk characteristics of individual hospitals
Milliman USA
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HIF System
• 1986-87 - Large HPL insurers (Hospital Insurance Forum) commissioned actuarial study to analyze alternative rating loss
• Recommended Exposure Base:(1) Acute Care Occupied Beds(2) Psychiatric Occupied Beds(3) Extended Care Occupied Beds(4) Births(5) Inpatient Surgeries(6) Outpatient Surgeries(7) Emergency Room Visits(8) Other Outpatient Visits
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Diagnosis System
• 1994, St. Paul develops significantly different HPL exposure based system
• Inpatient exposures rated on a discharge basis by diagnosis type (elimination of length of stay)
• Outpatient visits rated by type (emergency visits, surgical visits, and all other)
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Diagnosis System
• Type of Diagnosis:
– 19 major categories (International Classification of Diseases, WHO)
– Eight Rating Categories– Examples: Group contains infectious
and parasitic disease, blood and bloodforming organic disease, skin andsubcutaneous tissue disease
• Conversion Factors
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Variables Not Measured by Exposure Bases
• Patient Demographics - Age, Education, Income
• Specialty Hospitals - e.g. Manhattan Eye & Ear
• Outsourcing of Hospital Functions - e.g. Emergency Room
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Experience Rating Plan
• Plan attempts to more accurately rate an individual insured by using insured’s own experience to the extent it is indicative of future experience
• Plan must balance experience and credibility
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Experience Rating Plan
Three step process:
1. An experience loss cost is developed using the actual loss experience of the insured
2. A premium is developed based on the manual rate, which is the experience of all insureds
3. The results of the first two steps are combined and any necessary adjustments are made
Milliman USA
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Characteristics of a Hospital Rating Plan
• Use mature limited losses
• Reflect Trend, Development, ILFs
• Recognize General Liability coverage, if applicable
• Adjust for Employed Physician’s Premium
• Credibility standard
• Schedule Credits/Debits
• Aggregate Limitation Factor
Milliman USA
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Employed Physician’s Premium (EPP)
• EPP computed using current rates for each rating class and territory.
• Give credit for EPP losses already included in loss experience.
• Give discount to reflect lower cost of insuring a hospital employee relative to a self-employed doctor.
• Add EPP to both manual rate and experience loss cost.
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Credibility Standard
• Dependent on hospitals’ size and length of experience period
• Typical Formula: Credibility = N/(N + 500)
where N: bed equivalents for all experience period years combined
= Occupied beds + Outpatient Visits
2,000
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Schedule Rating
• Credits or debits for (1) known characteristics of risk not reflected in the experience or rate, or (2) changes in the nature of the risk since the end of the experience period
• Usually subject to maximum credit/debit of 25%
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Examples of items used for Schedule Rating
• Compliance/non-compliance with insurance company loss prevention recommendations
• Existence or lack of continuing education programs for staff
• Accreditation or lack of accreditation by Joint Commission on Accreditation of Hospitals or American Osteopathic Association
• Existence or lack of effective patient incident reports and analysis system
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Aggregate Limitation Factor (ALF)
• Factor to reflect expected amounts of loss that would exceed aggregate policy limit on an annual basis
• Function of annual expected loss and selected aggregate limit
• Calculated using simulation technique
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ALF Simulation Procedure
• Calculate ultimate loss based on recent experience (limited)• Severity: 1. Select distribution (lognormal) and use limited
expected value functions to estimate parameters.2. Calculate limited average severity and trend to
policy effective period.• Frequency: 1. Calculate expected number of claims based on
ultimate loss and average severity.2. Select distribution (negative binomial) and solve
for parameters.• Simulate policy year number of claims and severity to calculate losses.• Calculate ratio of limited to unlimited loss = ALF.• Repeat until convergence.
• Adjust for ALAE
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Nursing Homes
• Once rated as class of hospitals• Free standing vs. part of hospital• Rate per resident was 5% - 10% of acute care
hospital bed rate• Today much higher: 50% + relative to acute
care hospital bed rate• Biggest increases in Florida, Texas, Southern
US
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• Nursing Home Classes:– Skilled Nursing Care– Intermediate Care– Residential Care– Independent Living
Nursing Homes
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