Medical Professional Liability Ratemaking Hospitals / Self-Insurance March 12, 2004

Milliman USA Today’s Objectives 1. Coverage Issues for Hospital Professional Liability (HPL) 2. Approach to Pricing or Establishing Funding Levels for Hospitals 3. Observations Regarding Recent Tort Reform Initiatives in PA and FL 4. Q&A

Milliman USA Coverage Issues for Hospital Risks Retentions have increased significantly in recent years ($10M per claim is not unusual). Retentions have increased significantly in recent years ($10M per claim is not unusual). The cost of commercial excess insurance has also increased significantly, despite the higher retentions. The cost of commercial excess insurance has also increased significantly, despite the higher retentions. If a hospital purchases ongoing claims-made coverage, it still needs to book a liability on its financial statements for the unfunded tail. If a hospital purchases ongoing claims-made coverage, it still needs to book a liability on its financial statements for the unfunded tail. For competitive reasons, many hospitals are starting to open their captives to offer coverage to physicians. For competitive reasons, many hospitals are starting to open their captives to offer coverage to physicians.

Milliman USA Data Needed for HPL Rating Model Historical and projected exposures Historical and projected exposures Historical loss data, limited to some per-claim limit (e.g., $500,000). Historical loss data, limited to some per-claim limit (e.g., $500,000). Loss development factors (at selected limit) Loss development factors (at selected limit) Increased limits factors Increased limits factors Industry loss cost information Industry loss cost information Trend factors Trend factors Discount factor Discount factor Expense assumptions Expense assumptions

Milliman USA HPL Exposure Data Traditional inpatient exposure base is occupied bed counts, which can be calculated as (# patient days ÷ 365). Traditional inpatient exposure base is occupied bed counts, which can be calculated as (# patient days ÷ 365). – Rates vary for Acute Care, Psychiatric, Neonatal, Nursing Homes, etc. Outpatient exposure is measured by numbers of visits × selected differentials Outpatient exposure is measured by numbers of visits × selected differentials – ER and Outpatient Surgical visits are considered higher risk than “Other” visits.

Milliman USA Estimating Historical Ultimate Limited Losses Loss development Loss development Frequency × severity Frequency × severity B-F using expected loss = industry loss cost × historical exposure B-F using expected loss = industry loss cost × historical exposure Experience Mod = compare actual losses to (expected loss × expected % reported). Multiply projected expected losses by selected Mod. Experience Mod = compare actual losses to (expected loss × expected % reported). Multiply projected expected losses by selected Mod.

Milliman USA Projecting Ultimate Limited Losses Divide historical ultimate limited losses by historical exposures Divide historical ultimate limited losses by historical exposures Trend the resulting limited pure premiums to the projection period Trend the resulting limited pure premiums to the projection period Select an ultimate limited pure premium for the projection period Select an ultimate limited pure premium for the projection period – May involve credibility weighting the indications based on the hospital experience vs. broader insurance industry experience Multiply by the projected exposures to estimate the projected limited losses Multiply by the projected exposures to estimate the projected limited losses

Milliman USA Projecting Ultimate Total Limits Losses Multiply selected limited loss estimate by an increased limits factor Multiply selected limited loss estimate by an increased limits factor – Review historical losses in the excess layer for consistency with selected ILF’s General Liability losses are sometimes included as a multiplicative factor (e.g., 1.10) General Liability losses are sometimes included as a multiplicative factor (e.g., 1.10) Adjust to reflect other coverage issues (e.g., aggregate limits). Adjust to reflect other coverage issues (e.g., aggregate limits).

Milliman USA Additional Issues to Consider for Self-Insureds Many self-insureds fund at a higher confidence level than the actuarial best estimate (e.g., 75%) Many self-insureds fund at a higher confidence level than the actuarial best estimate (e.g., 75%) – Need to select frequency (e.g., Poisson) and severity (e.g., lognormal) distributions Many self-insureds fund at a discounted level. Many self-insureds fund at a discounted level. – Need to select a payment pattern and discount rate.

Milliman USA Hypothetical Distribution of HPL Loss & ALAE Cumulative Distribution of Aggregate Losses -- $10 Million Per Claim Limit

Milliman USA Observations Regarding PA Tort Reform Elimination of Joint & Several liability Elimination of Joint & Several liability – Could be a big issue for hospitals if < 60% liable – Some say the law violates “single subject rule” Certificate of Merit Certificate of Merit – May reduce claim frequency, increase severity Collateral Source Offsets Collateral Source Offsets Elimination of Venue Shopping Elimination of Venue Shopping 7 Year Statute of Repose 7 Year Statute of Repose – No primary layer impact until Mcare is eliminated. Patient Safety Initiatives Patient Safety Initiatives – Requires written notification to a patient affected by a serious event

Milliman USA Observations Regarding FL Tort Reform $500,000 per physician cap on non-economic damages ($1 million aggregate for all claimants) $500,000 per physician cap on non-economic damages ($1 million aggregate for all claimants) – Exceptions for death, permanent vegetative state, or other defined catastrophic injury ($1M per doctor) – $150,000 / $300,000 cap for ER physicians $750,000 per hospital cap ($1.5 million aggregate) $750,000 per hospital cap ($1.5 million aggregate) – Exceptions for death, permanent vegetative state, or other defined catastrophic injury ($1M per hospital) D&T estimated a 7.8% “presumed factor” D&T estimated a 7.8% “presumed factor” – Caps = 5.3%; Bad Faith Provisions = 2.5% – Rates are still increasing in FL, but increases are 7.8% lower than they would otherwise have been.

Milliman USA Questions?