1. June 23, 2015 Timothy C. Mosler, FCAS, MAAA Arthur R. Randolph, II, FCAS, MAAA Medical Professional Liability Five Years into the Affordable Care Act

2. 1 Disclaimer Hospital Employment of Physicians Defensive Medicine Transition to EHRs Impacts on Healthcare Captives Market Observations Impacts on Physician Insurers Agenda

3. 2 Throughout this presentation, we will discuss the potential impacts of changes in health care. We can only speculate as to the impacts and, as we are in the initial implementation phases of the Affordable Care Act (ACA), it is too early to discuss the impacts with certainty. Ultimate long term impacts will depend on many factors including the actions of claimants, lawyers, insurers, regulators and health care providers. Disclaimer

4. 3 Recognition of scale advantages Control of quality Revenue advantages Smaller administrative load Corresponding decrease in solo practitioners Increasing number of accountable care organizations (ACO) Increased Hospital Employment of Physicians

5. 4 Number of ACOs has Quadrupled Since Q1 2012 Source: Health Affairs Blog (www.healthaffairs.org/blog)

6. 5 Increasing Number of Physicians / Declining Independence Source: Accenture

7. 6 Favorable Consistent risk management approach Focus on patients, not on managing the practice Motivation to succeed: ACOs that succeed in both quality care and lower costs can share in savings that may result Unfavorable Physicians may take less responsibility as hospital employees than as independent practitioners Poor performers could take longer to be detected in large health care systems Effects of Doctors Becoming Part of a System

8. 7 Improvement in claims handling with multiple defendants sharing a common employer Different claim handling practices between hospital programs and physician insurers What happens when the hospital wants to settle and the doctor wants to defend Higher limits Closed claim reporting to regulators Effects of Physician Employment on Claim Resolution

9. 8 Given the statement: Hospital employment of physicians is a positive trend likely to enhance quality of care and decrease costs. Physicians Foundation 2014 Survey – Hospital Employment 2014 Mostly Agree Somewhat Agree Somewhat Disagree Mostly Disagree

10. 9 Given the statement: Hospital employment of physicians is a positive trend likely to enhance quality of care and decrease costs. Physicians Foundation 2014 Survey – Hospital Employment 2014 Mostly Agree9.3% Somewhat Agree27.8% Somewhat Disagree28.8% Mostly Disagree34.1%

11. 10 Given the statement: Hospital employment of physicians is a positive trend likely to enhance quality of care and decrease costs. Physicians Foundation 2014 Survey – Hospital Employment 20142012 Mostly Agree9.3%4.6% Somewhat Agree27.8%19.9% Somewhat Disagree28.8%32.8% Mostly Disagree34.1%42.7%

12. 11 There is evidence that some tests and procedures are run unnecessarily The standard of care may, in many cases, be above the reasonable person standard What will be the effect on medical professional liability (MPL) if there is a reduction? Defensive Medicine

13. 12 US Health Care Costs Based on CMS reports

14. 13 Trends in Indemnity Claim Frequency Based on multiple editions of AMA’s Physicians Characteristics manual and the National Practitioner Data Bank

15. 14 ACA offers incentives for “meaningful use” of EHRs An individual’s EHR is a digital record of their health information and can include Medical history Allergies Prescriptions Test results Radiology results Vital signs Can potentially be shared by all of the individual’s health care providers Viewed as a key component in achieving quality outcomes EHRs

16. 15 Better access to information Include a complete history which will allow for detection of conditions that are growing worse Can be shared across health providers EHRs are Expected to Reduce the Number of Bad Outcomes

17. 16 MPL claim payment requires four steps Bad medical outcome Filing of a claim Settlement or finding of negligence Damages awarded Use of EHRs moves the latter three out of four toward higher costs Also Potentially higher standard of care given that more information is available to the doctor Privacy concerns But, How Will the EHR Affect Costs once There is a Bad Outcome?

18. 17 Given the statement: How has EMR affected your practice? Physicians Foundation 2014 Survey – Electronic Health Records 2014 Improved Quality of Care Detracted from Quality of Care Improved Efficiency Detracted from Efficiency Improved Patient Interaction Detracted from Patient Interaction Has had Little to No Impact on the Above

19. 18 Given the statement: How has EMR affected your practice? Physicians Foundation 2014 Survey – Electronic Health Records 2014 Improved Quality of Care32.1% Detracted from Quality of Care24.1% Improved Efficiency24.3% Detracted from Efficiency45.8% Improved Patient Interaction4.6% Detracted from Patient Interaction47.1% Has had Little to No Impact on the Above7.6%

20. 19 Provisions of ACA encourage consolidation – Likely to be more hospital captives – Definitely more physician group captives Coverage/Pricing Considerations – Possible higher retentions – Tail Liability – Per-Occurrence retentions – Batch Claims Growth in the Number of Captives

21. 20 Tail Liability 2010201120122013201420152016201720182019 2010 CM1CM2CM3CM4CM5 2011 CM2CM3CM4CM5 2012 CM3CM4CM5 2013 CM4CM5 2014 CM5 2015 2016 2017 2018 2019 RY AY Assumes the doctor’s practice began 1/1/2010 and shut down on 1/1/2014 when the doctor went to work for a hospital/physician group Claims reported 10 – 14 are covered by the doctor’s insurer Accidents in 2015 and after are covered by the hospital/physician group’s policy Who insures these cells?

22. 21 Per-Occurrence Retention All defendants named for a particular occurrence are subject to one retention Different from each physician having their own retention

23. 22 Per-Occurrence Retention (cont’d) In all of the above cases, it’s possible that the amounts could also be equal with a per-defendant and per-occurrence retention Helpful for physician groups Harder to estimate funding – But certain relationships should hold relative to a per-defendant retention Relative to per- defendant Claim CountAverage Severity Total Losses Below the retentionLessGreaterLess Above the retentionLessGreater Total LimitsLessGreaterEqual

24. 23 Doctor A: - Performs a particular type of surgery - They are not fully trained to perform this surgery - 40 surgeries in a year - 5 meritorious claims are filed by patients - They are a solo practitioner Is this a batch claim? Batch Claims Doctor B: - Performs a particular type of surgery - They are not fully trained to perform this surgery - 40 surgeries in a year - 5 meritorious claims are filed by patients - They are a hospital employee Is this a batch claim?

25. 24 Favorable Patients will have access to affordable healthcare More frequent interactions with health care providers Unfavorable Access to health insurance won’t change individuals’ behavior regarding their health A larger number of insureds could actually increase the delay in getting a doctor’s appointment Higher deductibles on health insurance policies could delay visiting the doctor until the condition is more severe Effects of Greater Access to Healthcare

26. 25 Study conducted by ACAView New-patient volumes – Increased physician workloads - no evidence – Increased proportion of comprehensive patient evaluations – More patients with acute conditions – no evidence Increased insurance coverage – Significant decrease in uninsured patient visits – Stable provider relationships – Elimination of age disparities 2014 ACA Observations – Operational

27. 26 Shrinking exposure base Concern with premium revenue Reinsurance considerations Focus on diversification strategies – Acquisition – scale and geographic penetration – New class of insureds – rural health systems – New, complementary lines of business – WC, CMP, cyber – Non-risk bearing services – TPA, advisory, captive management – Alternative markets – captives, RRGs, E&S Impact on Physician Insurers

28. 27 Commitment Beyond Numbers Thank You for Your Time and Attention tmosler@pinnacleactuaries.com 678-894-7254 Tim Mosler Art Randolph arandolph@pinnacleactuaries.com 678-894-7258