PHOENIX, Oct. 14, 2011 /PRNewswire/ -- Hospitals and hospital groups should seek clarity from their insurers on the loading applied to premiums to account for claims inflation, according to Lloyd's insurer Beazley. Applying an across the board annual percentage loading to hospital professional liability (HPL) premiums to account for claims inflation could result in some hospitals being overcharged by a large margin.
Beazley insures many of the most highly ranked hospitals in the United States, including a quarter of Healthgrades' top hospitals and 15% of US News & World Report's best hospitals (2011 rankings). The insurer's claims database is one of the most extensive in existence, covering more than 455,000 claims made against more than 1,400 hospitals since 1998.
In the absence of such data, it is likely that an insurer would have to apply a single percentage loading for anticipated claims inflation when renewing coverage, no matter where the hospital is located. The figure typically levied is 6% and Beazley's research did confirm that median inflation on claims of more than $500 in the period 2001 to 2010 was 6.0%. However, this concealed a wide divergence from the median in some states.
In Cook County, Illinois, for example, median claims over the period grew by 9.5% annually. That means an insurer charging local hospitals a burning cost premium (i.e. just sufficient to cover the actuarial expected cost of claims) and increasing that premium by only 6% annually, would be charging a sum that fell short of the expected cost of claims in Cook County by 25% a decade later.In contrast, hospitals in Cuyahoga County, Ohio, saw the median cost of claims actually fall between 2001 and 2010, by 5% annually. A hypothetical insurer applying a standard 6% claims inflation loading to the premiums paid by hospitals in Cuyahoga County would be charging over 2.5 times the burning cost after a decade. Across the state of Michigan, median claims inflation from 2001 to 2010 rose at only 2.5%, less than half the national rate. In this case, an insurer applying a 6% claims inflation loading over the period would be charging 35% more than the burning cost by the end of the period. Nat Cross, head of Beazley's healthcare team, said: "As in all markets, prices move over time towards an equilibrium that reconciles supply with demand. But in hospital professional liability insurance the information held by a number of the suppliers of insurance is very imperfect and can lead to lasting and widespread price distortions." "Clearly insurers do take some account of the impact of tort reform on anticipated claims inflation, which we can see has had a significant impact in Cuyahoga County, Ohio. But there are other, subtler differences between states and – even more so – between individual hospitals that mean that claims inflation can vary quite widely from the median. This puts new entrants to the insurance market at grave risk of adverse selection as they herd towards inadequately priced risks that better informed insurers avoid." "Hospitals are frequently better off insuring with well established, data-rich insurers for two reasons. If they are in a low claims inflation region, they are less likely to be penalized by a claims inflation loading that is based on a market-wide median. If they are in a high claims inflation region, they may benefit for a short while, but they will also run a far greater risk that losses will drive their insurer to pull out of writing HPL insurance altogether. When this happens, the claims that the insurer is still responsible for are unlikely to receive the care and service they require. Given that HPL insurance claims take an average of 2.2 years to be settled after the incident occurred, this is a real danger."