D&O Insurance: Health Care Organizations Face Increasing Rates, Tightening Terms

 Largely as a result of changes in the industry following the enactment of the Affordable Care Act, health care organizations have seen their D&O insurance rates increasing and the available terms and conditions tightening, according to a December 10, 2013 report from Marsh. Moreover, these changes are likely to continue in 2014, according to the report. A copy of the Marsh report, entitled “As Reform Takes Effect, Health Care D&O Rates Increase,” can be found here (registration required). Marsh’s December 11, 2013 press release about the report can be found here. Hat tip to Claire Wilkinson at the Insurance Information Institute blog (here) for the link to the Marsh report.

According to the report, since the 2010 passage of the ACA, health care organizations have been undergoing rapid consolidation, as they seek to form accountable care organizations (ACOs), which are joint ventures or affiliations “aimed at better coordinating services, reducing costs and improving the quality of care.” Because the formation of these ACOs expressly contemplates that the participating organizations will collaborate and share information, “some insurers have expressed concerns about the antitrust issues.”  

Among the insurers’ concerns is that, while the Federal Trade Commission and the Department of Justice have developed antitrust safe harbors for federally recognized ACOs, the extent of protection available under the safe harbors is “untested,” particularly in connection with private antitrust litigation.

As a result of these concerns, D&O insurers have been raising their rates for health care organizations, as well as restricting the coverage available under their policies for antitrust claims. According to the report, average primary D&O rate for smaller health care organizations (those with assets of $150 million or under and fewer that 1,000 employees) increased by 12.7% in the third quarter of 2013. 96% of organizations in this sector renewed their insurance with rate increases. Average primary D&O insurance rates for midsize and large health care organizations increased by 9.6%, with a median increase of 7.0%. 96% of all midsize and large health care organizations renewed with an increase during the third quarter.

Graphical information in the report shows that for all health care organizations, both primary D&O premiums and overall premiums have been increasing steadily since the fourth quarter of 2011.

Along with these rate increases, some insurers have been restricting the coverage available under their policies for antitrust claims. These restrictions include in some instances the introduction of sublimits and/or coinsurance for antitrust claims. According to the report, at least one insurer has taken “a particularly aggressive stance” by restricting availability of antitrust coverage to a maximum of $5 million across all financial and professional lines, and imposing a mandatory coinsurance of 20% to 30%.

The article notes that in addition to the antitrust concerns, the health care industry’s shift to the accountable care model entails a number of other liability risks. For example, the establishment of provider networks raises the possibility of “contractual liabilities and lawsuits from customers, competitors, and regulators over such issues as errors in providing nonmedical services.” An ACO also could assume “higher risks related to the pricing of services, medical expenses in excess of agreed capitation levels, or contract mismanagement for its members.”

As a result of these changes and heightened risks, D&O insurers are seeking a great deal more renewal underwriting information, particularly with respect to ACO formation and strategy. Among other things, they are seeking additional information about contractual terms, data security, and indemnification and insurance relationships between counterparties.

In addition to the D&O issues, another concern ACOs will face are the “managed care errors and omissions (E&O) inherent in population management strategies. These issues may arise as efforts to control costs lead to quality of care concerns. These kinds of issues will require many organizations that in the past may not have purchased managed care E&O insurance to add the coverage to their professional liability insurance program.

The article concludes with as the industry continues to transition to accountable care, risks and exposures will continue to emerge. As a result, health care organizations “should be prepared to face additional rate increases as they renew their D&O insurance program in 2014” and to address underwriters’ questions about their strategies for the formation of ACOs.

The article notes that D&O insurers will be closely monitoring developments in the consolidated Blue Cross Blue Shield antitrust litigation pending before Judge David Proctor bin the Northern District of Alabama (about which refer here). The report notes that “as a protracted legal struggle is expected, the case will likely have no immediate impact on pricing – but it has added to the antitrust concerns for underwriters.”

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

For more information about LexisNexis products and solutions connect with us through our corporate site.