The Potential of Captive Medical Liability Insurance Carriers for Malpractice Reform

Eleanor D. Kinney, JD, MPHHall Render Professor of Law Emeritus

Hall Center for Law and Health Indiana University School of Law – Indianapolis

Talk Outline

• The Universe of Medical Liability Insurers.• The Relationship of Medical Liability Insurers to

Provider Patient Safety Programs.• The Promise of Captive Malpractice Insurers

and State Damage Caps in Closing the Chasm in Medical Error Identification, Management and Compensation.

The Universe of Medical Liability Insurers

Government Accountability Office Report, June 2003

• The medical malpractice insurance market as a whole has changed considerably since the hard markets of the mid-1970s and mid-1980s.

• These changes have taken place over time and have been the result primarily of actions insurers, health care providers, and state regulators have taken to address rising premium rates.

-- For example, insurers have moved from occurrence-based to claims-made policies, physicians have formed mutual nonprofit insurance companies that have come to dominate the market, hospitals and groups of hospitals or physicians have increasingly chosen to self-insure, and states have passed laws designed to slow the increase in medical malpractice premium rates.

Government Accountability Office Report, June 2003

• Over the past several years, an increasing number of individual hospitals and consortia of hospitals and physicians have begun to self-insure in a variety of ways.

• Officials from the American Hospital Association estimated that 40 percent of its member hospitals are now self-insured.

US Jurisdictions Authorizing Captive Insurers

• Alabama • Arizona• Arkansas • Colorado• Delaware• District of Columbia• Florida• Georgia

• South Carolina• South Dakota• Tennessee• U.S. Virgin Island

s• Utah• Vermont• Virginia• West Virginia

• Hawaii• Illinois• Kansas• Kentucky• Maine• Montana • Nevada• New York• Rhode Island

Growth of Captives

Definition of Captive Insurers

A captive is generally defined as an insurance company that is formed by one or more non-insurance entities to write the insurance business of its owners.

9

Another Model

Characteristics of Captives• Captive insurance is a self-funded insurance mechanism that is

primarily supplied and controlled by its owners, which are also typically the principal insureds.

• The owners/insureds direct the underwriting, claim, and investment decisions of the captive insurance company.

• Essentially, captive insurance is a self-imposed financial pool which poses as an additional buffer for liability and, in name and incorporation, an additional insurance company.

Towers Watson, Captives 101: Managing Cost and Risk, available at: http://www.towerswatson.com/assets/pdf/2435/TW_Captives_101.pdf

BENEFITS OFCAPTIVES

CONTROL OVER RISK MANAGEMENT

The Relationship of Medical Liability Insurers to Provider

Patient Safety Programs

1990s: GREATER EMPHASIS ON PROBLEMS WITH PATIENT SAFETY

• In 1996, the American Medical Association established the National Patient Safety Foundation to address the problem.

• In 1999, the Institute of Medicine issues its report:

To Err is Human: Building a Safer Health System.

Institute of Medicine, To Err is Human:Building a Safer Health System (2000)

The IOM report states that medical "errors" cause between 44,000 and 98,000 deaths annually in US hospitals. Estimates were based on the following studies: • A 1984 study of New York hospitals

reported in 1991 (The “Harvard Medical Practice Study”)

• A 1992 study of Colorado and Utah hospitals reported in 1999.

THE IOM REPORT’S MESSAGE

The report called for reduced emphasis on human errors and greater effort to address system-based error, e.g., "fixing the system, not fixing blame."

A FUNDAMENTAL SHIFT IN PERSPECTIVE

• Moved from a model of viewing the problem of error through the legal lens of medical liability.

• Moving toward an industrial engineering model of viewing the problem of error as a product production problem.

Required Patient Safety Measures

In 2001, the Joint Commission published patient safety accreditation requirements, which included a requirement to disclose the occurrence of a medical error.

The Promise of Captive Malpractice Insurers in Closing the Gaps among Medical Error

Identification, Risk Management and Compensation

Lethal Overdose Claims Third Baby

(AP)  A third premature infant has died after being accidentally given an adult-sized dose of a blood thinner medication at a hospital last week. * * *The baby girl, named Thursday Dawn Jeffers, died late Tuesday at Riley Hospital for Children, where she was transferred after being born at Methodist.

Two other girls, D'myia Sabrina Nelson and Emmery Miller, both less than a week old, died Saturday at Methodist's Neonatal Intensive Care Unit.

They and three other babies were given too-strong doses of heparin, which is often used to prevent blood clots that could clog intravenous tubes, after a pharmacy technician accidentally stored adult doses in the neonatal unit's drug cabinet..

Inspiration for this Talk

Inspiration for this Talk

On September 9, 2009, President Obama’s Statement to a Joint Session of Congress:

Now, finally, many in this chamber -- particularly on the Republican side of the aisle -- have long insisted that reforming our medical malpractice laws can help bring down the cost of health care…Now, I don't believe malpractice reform is a silver bullet, but I've talked to enough doctors to know that defensive medicine may be contributing to unnecessary costs. So I'm proposing that we move forward on a range of ideas about how to put patient safety first and let doctors focus on practicing medicine. I know that the Bush administration considered authorizing demonstration projects in individual states to test these ideas. I think it's a good idea, and I'm directing my Secretary of Health and Human Services to move forward on this initiative today.

Opportunities for Resolving Disputes Internally and Expeditiously

• Increasingly, many providers are forming organizations modeled after the Cleveland or Mayo Clinics – and now IU Health -- in which physicians are employees of the institutional provider.

• These efforts provide an opportunity to resolve medical injury claims and also events internally and expeditiously.

Realigning the Incentives: Conventional Medical Liability Insurers

• Conventional medical liability insurers are incentivized to contest medical liability claims in pursuit of profits or revenue.

• In their effort to control their liability, conventional liability insurers have little incentive to work with provider patient safety programs in compensating patients for medical injury.

Realigning the Incentives: Captive Medical Liability Insurers

• Captive medical liability insurers are incentivized to limit medical liability claims to protect the provider.

• Because they are acting in the provider’s interest without another incentive such as serving shareholder, they have greater flexibility to compensate patients for medical injury as part of a provider’s patient safety program. compensating patients for medical injury.

The Potentially Beneficial Role of Caps

Caps can be useful in facilitating the resolution of medical injury claims by captive insurance companies in that they provide more certainty about maximum exposure in a given case.

Caveats

• A captive that insures a corporate entity may be covering physicians and other professionals on a theory of vicarious liabiltiy, may not adequately protect the interests of professionals.

• The legitimate interests of physicians and hospitals need to be sorted out because settled claims against physicians are reported to the National Practitioner Data Bank.

REMEMBER HIPPOCRATES’ ADMONITION:First do no harm!

I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice.

-- Hippocratic Oath