How to Innovate Under Obamacare

Now that the implementation of the Affordable Care Act (ACA) is well underway, opportunities for insurance product innovations are emerging. The ACA, or Obamacare, has been accelerating the changes that have been occurring in the last decade in how healthcare is delivered. A large portion of this change has manifested itself in the consolidation of healthcare institutions, physician medical practices and the employment of physicians by hospitals. As a result, the ACA is contributing to blurring lines that have separated those providing, managing and coordinating care. All those changes create opportunities for innovative carriers to thrive over the next decade. As an example, look at the trend of hospitals and hospital systems directly employing physicians, which Obamacare is encouraging, to seek greater efficiency and lower costs. Healthcare organizations are adding physicians, either by hiring them or by purchasing practices that employ them, and this shift has substantially increased demand for a seldom-used feature of a product known as the extended reporting period (ERP). An ERP endorsement, as part of what is known as a claims made product, addresses medical incidents that have occurred during the period of a policy that is about to expire but that are not yet known or made as a claim. Using ERP coverage can help insulate a new employer from any lingering medical incidents that occurred before it employed the physician but that become claims during his time with the new employer. Claims of malpractice can take months or even years to surface and then resolve, and a facility employing a new physician wants to be sure it isn’t inheriting a host of problems. The ERP carries an additional premium that is sometimes 250% of the expiring annual premium. Historically, ERP was largely purchased by physicians as a last resort – if they were leaving a claims made carrier, and the new carrier wouldn’t honor the prior carrier's retroactive date (the date after which any medical incident must take place to potentially be covered under a policy). This situation requiring the purchase of ERP was relatively infrequent, and pricing the risk was a challenge, because exposure can be carried for an unlimited time under an ERP. Typically, the physician’s only option was to buy it from her incumbent carrier, which is generally required to offer an ERP endorsement. Few carriers developed a separate ERP product to compete with the incumbent carrier’s endorsement approach, so there was little competition. In 2012, though, there was an opportunity to provide a competitive stand-alone ERP policy. The ACA was accelerating consolidation in the industry and boosting interest in purchasing ERP. At the same time, ERP pricing was still based on the hard market that began in the late 1990s even though claims frequency was showing an unprecedented decline in more recent years. In other words, premiums were substantially more than adequate for the risk. For quick-acting carriers, there was a chance to offer a stand-alone policy at generally a better price, but one that was still adequate in a small but rapidly expanding market. This also opened up the opportunity to innovate on product features, including providing options of different limits, various levels of risk-sharing and a variety of durations for the ERP. The market welcomed these pricing and innovations. Here is an example of how the ERP issues play out: A physician enters into an employment contract with a hospital, coming out of private practice. She may have done most or all of her work at that very same hospital, and, as part of standard guidelines for credentials in most states, she needed to provide proof of insurance of at least $1 million/$3 million to maintain privileges there while working as an independent contractor. Options for the prospective hospital employer are:

1. Ask the physician to obtain a quote from her existing insurance carrier for an ERP. That amount could become part of negotiations about her compensation.
2. Assume the exposure for the physician’s prior acts as part of the hospital’s self-insured retention, its captive insurance program or its balance-sheet obligations. After all, the physician practiced at this hospital almost exclusively, and the hospital may consider that it has the exposure to the physician's incurred but not yet reported liability obligations anyway.

Under option 1, there can only be one quote for the ERP, because there is only one existing insurance carrier. If the carrier provides ERP coverage, it is increasing the time period within which claims can be brought under its policy, which increases uncertainty and requires, in the actuarial vernacular, "risk load" or “rate load” (defined as rate needed to account for the potential adverse claims fluctuation inherent in the extended time frame for claim reporting) or, from the perspective of a cynic, increases the fat, the fudge or the cushion, which creates an opportunity in option 2. Given that ERP rates are based on historical losses and that claims frequency has declined, it’s a good bet that – with the added risk load and without the challenge of competition – the quote may be, as an actuary or a lawyer might say, “disproportionate to the risk.” Moreover, with the existing carrier, there oftentimes are no options for a deductible that has a different (lower) limit or shorter duration as a means of lowering the cost to the physician and her new employer. Option 2 introduces a wrinkle: When a hospital grants a physician privileges as an independent contractor, the hospital potentially has a stronger defense than when it employs the physician. If the physician’s prior acts as an independent contractor are covered under the hospital’s insurance program, the lines between independent contractor and employee blur, and the hospital may become more vulnerable. Additionally, the hospital’s coverage would not generally provide a specific individual limit for the physician, meaning the hospital exposes its entire tower of insurance to a claim against the physician. With an ERP covering the period before she became an employee, a $1 million policy might suffice, and the hospital could maintain its defense against claims for her time as an independent contractor. There is an opportunity for stand-alone ERP policies to provide a third option – one that can carry a better price than in Option 1 and that allows for the opportunity to provide a better defense against claims than Option 2. ERP is just one of many opportunities to innovate that ACA will provide. There could be, for example: --A blurring of the lines between different aspects of healthcare and of health insurance products. --An explosion in the power of telemedicine – and for new thinking about coverage. --A need to be far more careful about data breaches and other cyber issues – perhaps even leading to a decision to confiscate physicians’ phones. My colleagues and I will tackle these and other topics in subsequent articles.