Risk Management

Competing Laws Boost D&O Costs for Health Firms

Health-care companies are a casualty of the cross purposes of the Affordable Care Act and antitrust laws.
David McCannDecember 19, 2013

Competition among federal statutes is likely a key factor in the skyrocketing cost of liability insurance for the directors and officers (D&O) of health-care companies. The price tag spiked again in the third quarter, continuing a trend that began two years ago after years of declining D&O rates for health-care providers.

For midsized and large health systems, the average cost increase for D&O insurance renewals in the sector was 9.6 percent higher than in the second quarter. That’s according to an analysis by insurance broker Marsh of renewal rates for its thousands of health-care D&O clients. For smaller health-care organizations ($150 million or less in assets or annual revenue and fewer than 1,000 employees), the rate climb reached 12.7 percent.

A major cause of the costly trend is the rapid consolidation the health-care industry has undergone since passage of the Affordable Care Act (ACA) in 2010, Marsh says. Many health-care provider organizations have come together in Accountable Care Organizations (ACOs), joint ventures and loose alliances and networks aimed at better coordinating services, reducing costs and improving the quality of care.

The health-care reform law promoted such cooperative behavior among health-care providers by, among other things, providing financial incentives to ACOs for reducing duplicative care to individual patients and otherwise holding down costs. To accomplish that, the affiliated entities share patient data and pricing information, says Mark Karlson, a Marsh managing director and leader of the firm’s FINPRO health-care practice.

But in a case of government initiatives with conflicting agendas, those activities expose health-care providers to potential violations of antitrust regulations and laws. Indeed, the Federal Trade Commission and the antitrust division of the Justice Department have made clear that they intend to step up pursuit of antitrust cases in the health-care field. In Nov. 15 testimony before a House of Representatives subcommittee, FTC chair Edith Ramirez identified health care as a major area of focus and outlined the commission’s efforts to promote competitiveness in the industry, including several lawsuits it has filed to block proposed hospital mergers.

“The antitrust regulators are saying that they don’t care what the Affordable Care Act says, their job is to enforce antitrust regulations and they’re going to continue to do that unless ACA regulations are changed [to stop incentivizing antitrust behavior],” says Karlson.

The Affordable Care Act provides safe harbors for federally recognized ACOs with respect to antitrust matters, and the FTC has said it will generally recognize similar protections for such arrangements that are not federally recognized. That statement of intentions has yet to be tested, though. “There’s a real question about whether [those protections] apply only to the formal, federally sponsored ACO models, or to the many private entities as well,” Karlson says. “And there are any number of things they can do with antitrust implications — business practices and arrangements with insurers and doctors that allow them to dominate a marketplace and keep competitors out.”

Not only are D&O insurance rates shooting up for health-care outfits, the coverage is being watered down. Insurers are providing lower policy limits for antitrust-related claims, establishing higher deductibles or covering only a portion of any claim, says Karlson.

Beyond the potential for antitrust litigation, the new health-care cooperatives are creating new risk profiles for providers. For example, the most basic decisions related to forming or joining such an entity, including which organizations to partner with, the structure of the entity and how to share payments and expenses can carry substantial risk, Marsh says. And given the increasing number of contracts among hospitals, doctors, clinics and insurance companies arising from such arrangements, the potential for breach-of-contract suits where those relationships aren’t going well is multiplied.

Another risk for the health-care cooperatives comes from their assumption of patient case-management reviews formerly done by insurers. Whereas before an insurer would intervene to say that a patient, for example, did not require a procedure or diagnostic test because it was duplicative, now the cooperatives are doing that in many cases, creating a new type of liability.

The changing environment means that D&O insurance rates for health-care companies will keep inflating for the foreseeable future, Karlson says: “On the heels of a marketplace where D&O rates had been getting cheaper for five to eight years, it’s going to take several years of significant increases before underwriters get their book priced where they’d like to see it.”