Financial Strength, Reserves Discipline, Premium, Patient Safety and Tort Reform

November 08, 2011

Recently, I was honored to be asked to join a panel to discuss important, ‘real world’ issues that will be more ‘real’ in a matter of months to Third and Fourth Year Residents in Psychiatry at the UCSF Facility in Fresno.  he message that I wanted to convey during this talk (during my portion of the talk) was: you have to, it is your financial responsibility to, ask the hard questions about the reserving practices of the company that is taking your medical malpractice insurance risk.

The Doctors just preparing to leave their Residency Programs are planning to join private practices, practice in large group settings and even start out on their own.

Regardless of the new situation,it is important for all physicians to know about tail, tort reform and reserves.

Tail is the insurance policy that everyone sort of defines differently.   The term can be used interchangeably, to refer to the new company picking up claims based on events occurring in the past, or to the company providing coverage going forward after the cancellation date into the future indefinitely.

Reserves are what lend tail its credibility.  A company without adequate reserves that makes claims about tail is simply wishing.  Just wishing don’t make it so.

A medical malpractice insurance company, like an asbestos, or large property or life insurance company, they must simply  must have adequate and conservative reserves in order to handle the eventuality of a claim coming into the future.

Nobody knows who is going to be sued, or how, or for how much, until it happens. And, when it happens, there is just one insurance policy, one company in charge everything, from defense, to research to expert witness to your comprehensive defense and payments is dependent upon the management and posting of reserves.

The Doctors’ Company carefully records, reviews and reserves each phone call which includes reporting of an incident that might reasonably be expected to give rise to a claim.  Incident reporting policies provide flexibility to the physician because once you detect anything, the moment you are even uncomfortable with an outcome or a consultation, you can report it and essentially give responsibility for the future of that claim to the insurance company.

At this point, at the ‘hand off’ to the insurance company by way of your reporting of the incident, you are now relying on the proper and practiced reserving of the insurance claims representatives, the careful financial stewardship of the company to maintain enough money to pay for the claims,

and the professional training and management of the claims department to work with the experts, team with the attorney and develop the aggressive, successful strategies that it takes in order to defend the claim.

Lately, I’ve heard some physicians actually dismiss the importance of proper reserving;  to which I exclaim, you have got to be kidding. Managing the ‘ins and outs’ of money is the primary function of an insurance company. Not planning to pay to minimize the ‘outs’ is not a strategy that will succeed in the long term.

Each time a medical malpractice insurance company takes on a new policyholder, there is a financial responsibility, a certainty, in fact that they will be making a payment, even if just a payment to defend, a certain payment accompanies each new policyholder.

More specifically and easier to measure is the science of reserving when the claims have already been reported.

As soon as the phone call is made to the company, we set money aside, proper reserves.

This is the number that you should ask about when you consider joining a malpractice insurance company.

1)       Question, how much do you have in reserves?

2)       how do the reserves measure vis a vis Surplus?

My feeling is, that if you understand the importance of Reserves,

if you understand that tail insurance pays for past claims and the company you’re with must have the ability to pay for claims not only now but also into the future, and if you understand that those reserve amounts must be regulated and fall within the standards set by the independent financial raters (Fitch, A.M. Best, etc.), then you have taken important steps to secure your assets.  Choosing an insurance company is as important as making smart, diversified investment choices.  Just throwing money into a Trust, a Risk Retention Group or relying on the representations of a medical Group administrator can lead to financial disaster.

Secondarily, not as directly related to your choice of an insurance company, and still important to know as you progress throughout your professional career as a physician in any state.  You should know something about Tort reform,

the basic tenets of tort reform are :  A real, hard CAP on non economic Damages, allowing evidence of collateral payments into the court room during a medical malpractice trial,  allowing insurance companies to make periodic payments, rather than forcing one lump sum payment and enforcing attorney fee limits are the keys to tort reform.

Over the years, these limits and basics will erode and perhaps, these will change,

but it is important to know that Northern California has built years and years of stability in the medical malpractice insurance industry, lowering premiums and encouraging medical facility and practice investment by lowering first, the amounts of settlements and judgments levied against physicians and their partners.