Urologists Partner with Medical Professional Liability Carriers to Navigate Increasing Operational Demands

Jonathan McKenzie
Head of Captive Management
Alterna, LLC, Seattle, WA

Increased operational costs coupled with decreased sources of revenue have created unprecedented fiscal pressures on the physician community; practices of all types have renewed their focus on reducing costs and increasing efficiencies to stay ahead in the marketplace. These pressures have accelerated the trend for medical practices to consolidate. With the growing trend of urology group consolidations, practices now face the substantial hurdle of successful integration of physicians, processes, and procedures.

Historically, practices have put most of their focus on revenue generation and little on changing physicians’ practice patterns to comply with a group standard; however, the need to manage physician behavior is critical to the success of the integrated care model. With the implementation of the Affordable Care Act , the emphasis is squarely focused on patient outcomes and satisfaction, which require more group resources on quality measures and standardizing urologic care.
Medical professional liability (MPL) insurance has always been a major component of practice costs; this remains true despite softening market rates over the last several years. Given the associated expenditure, it could be argued that a practice’s most significant business partner is its MPL carrier.

In the past, these entities could only provide insurance capacity and lacked the resources to provide any meaningful risk management support. Most national MPL carriers utilize a reactive risk management approach for their insureds, tying premium rating methodologies directly to claims activity. More progressive practices, however, have partnered with proactive MPL providers to create a new paradigm in which both parties have a mutual goal to reduce medical liability risk and improve patient safety, along with providing value-added resources to assist in quality metrics. With the consistent application of proper risk management procedures, practices and MPL providers are achieving their mutual goal of lowering the cost of MPL premiums even when tested in real-world environments, balancing patient satisfaction with increasing patient visits.

Supported by trends in the traditional marketplace and growth in the alternative insurance market, we have found that the optimal MPL partner for a physician practice has been to integrate a captive insurance facility (often referred to as a “captive” or “risk retention group”) into a practice’s insurance program. Captives are considered part of the alternative insurance market and have become increasingly viable for practices of all sizes over the past decade. The basic concept is simple: a practice interested in controlling claims and instituting effective, tailored risk management practices will form its own or purchase insurance from a captive insurance facility and share in the profit or loss of that facility.

From this baseline there are myriad insurance possibilities, including access to reinsurance markets. From an operational perspective, the captive also becomes a segregated business unit, assuming the year-to-year variability of risk and claims management costs. Not only will this provide the practice with consistent, level MPL premium charges, but it also incentivizes providers to participate in the practice’s quality management processes. Since the practice shares in the insurance facility’s loss or gain, physicians have a financial stake not just for their own behavior, but for the behavior of their partners as well. Practices enjoy the dual benefit of reducing operational costs while simultaneously creating a mechanism to leverage physician behavior.

Effective risk and claims management programs are the hallmarks of any profitable insurance facility, and they also form the cornerstone by which practices can use such facilities to modify physician behavior. This is why the relationship between the insured and insurer are of the utmost importance and require a proactive business approach. As such, the decision to join or form a captive insurance facility should be considered the same as any new business opportunity. Initially a practice should consider its appetite for loss. As a matter of practicing medicine, there is an inherent potential of incurring a claim; a practice needs to determine what dollar amount, if any, it is willing to assume from a significant loss or losses. This assessment is similar to evaluating the benefits of entering into a high-deductible or excess-of-loss coverage program.

Next, a practice should consider its risk profile. As with the traditional insurance market, a captive insurance facility will need to develop premiums based on metrics, including loss history, geographic area, specialty, and continuing education policies. In evaluating a practice’s individual risk profile against the marketplace, it will be able to develop a benefit matrix from the utilization of a captive insurance facility.

Finally, an evaluation of the opportunity costs of utilizing the alternative market should be conducted. A captive insurance facility is considered a long-term approach to lowering the cost of malpractice insurance. Unlike an annual policy renewal, the ultimate savings from a captive is realized over multiple years in the form of reduced premiums, reductions in overall claim counts through targeted risk management activities, and distributions of accumulated earnings. Unlike the traditional marketplace, a captive isn’t structured to slash premiums to gain market share, rather its focus is on the long-term benefit of its members through consistent, focused operations (Figure).

The needs and requirements of a practice will dictate the most viable solution. A properly structured and managed captive insurance facility has a number of advantages over the traditional marketplace by being able to offer coverage specific to an individual practice and risk environment, additional coverage limits and/or capacity, providing direct access to onshore and offshore reinsurance markets, flexible funding and underwriting criteria, and control over claims mitigation and resolution. When coupled with the ability to leverage changes in physician behavior, conversion to a captive insurance facility can convert MPL premiums from an operating expense to an investment that bears outstanding long-term economic and quality returns.

Mr McKenzie concentrates on the formation and management of alternative insurance vehicles and leads the captive management practice of Alterna, LLC, in Seattle, WA. He can be reached at jmckenzie@alternamanagers.com, or visit www.alternamanagers.com for more information.

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