New pressure to plan: Tail coverage

As mid-career gastroenterologist Christopher J. Magiera, MD, and his wife, general surgeon Pamela G. Galloway, MD, can attest, tail coverage isn't just for retirement.

The two moved to Wausau, Wis., from Cleveland in February 2003 so they could afford to continue practicing after their liability premiums in Ohio went up. But the transition came at an unexpectedly high price. They had to buy a tail coverage policy because their Ohio carrier did not offer coverage in Wisconsin and the new insurer did not offer retroactive coverage.

"It's not every day you write a check for $147,000 for the privilege of leaving Ohio," Dr. Magiera said.

Dr. Magiera said the Ohio insurer told them they had to pay the full amount up front or risk going without tail coverage, and unprotected against any claims their Ohio patients might file after that insurance policy ended.

An increasing number of doctors are finding themselves in similar situations, given today's unstable medical liability market. Physicians who are moving to another state, leaving a medical group, or switching carriers could be faced with having to buy tail coverage sooner than planned. And, as in Drs. Magiera's and Galloway's case, tail coverage often comes at a painfully high price.

Tail coverage, also known as extended reporting endorsement coverage, typically costs between 150% and 200% of the price of a mature claims-made policy. With liability premiums holding at unaffordable levels for many doctors, particularly those in high-risk specialties, purchasing tail coverage can be a problem.

Altoona, Pa., orthopedic surgeon Andrew W. Gurman, MD, and his group practice got hit with a $500,000 tab in November 2003 when their liability insurer said it would not renew their policy.

"Not only did we have to go scrambling for a new carrier, which cost $340,000 for six of us, but we had to come up with $500,000 for tail coverage on less than two months notice," Dr. Gurman said. The doctors had to take out a loan because they did not have the option of paying for the tail policy over time.

With a number of insurers in the state going bankrupt, shopping around for retroactive coverage was not an alternative, Dr. Gurman said.

"The only other option was to leave," he said.

In the 1970s, a number of lawsuits were filed longer after an incident than insurance actuaries expected, so a majority of medical liability insurers began favoring claims-made policies over occurrence policies. Under an occurrence policy, a doctor is protected from incidents that happen during the coverage time, even if the doctor is no longer paying premiums when a lawsuit is filed. Under the now-favored claims-made policies, insurers only pay for costs related to a lawsuit when the incident and the filing both occur while the doctor is insured by that company.

Thus, more physicians are finding they need tail coverage to extend a claims-made policy.

"There was almost a universal realization that it was impossible to predict a lifetime of liability in the year you sell a policy," said retired oncologist Richard E. Anderson, MD, chair and CEO of The Doctors Company, a national physician-owned medical liability insurer.

About 80% of today's market is claims-made coverage, according to the Physician Insurers Assn. of America, a trade association of more than 50 physician- and dentist-owned medical liability insurance companies.

Because claims-made policies are not as open-ended, insurers could offer cheaper premiums, usually in the first four years of coverage. But the early savings with these policies are offset by the costly tail component that replaces occurrence coverage, experts said.

"Doctors need to be aware up front that they are saving these premiums in the beginning, and some day they are going to have to pay them," said PIAA President Lawrence E. Smarr.

The shift in the environment has grabbed the American Medical Association's attention. The AMA is trying to help doctors plan for the costly eventuality by advocating for a change in the tax code that would let doctors set up pre-tax savings accounts toward purchasing the insurance.

Tail coverage is expensive, insurance executives say, because it covers future claims that take an average of two to four years to surface. A state's statute of limitations can influence that average and influence a tail policy's cost.

"[Insurers] collect two years' premiums [for tail coverage] because they are going to give you an unlimited amount of time now, and those first two years are really problematic," said Matt Gracey, an insurance broker specializing in medical liability with the Delray Beach, Fla.-based firm Danna-Gracey.

Preparing for the worst

So what can doctors do to be ready for the possible cash flow shock of purchasing tail coverage?

A physician often can qualify for free tail coverage under certain circumstances, such as death or disability, or by keeping a claims-made policy with the same carrier for a number of years.

The Doctors Company, for example, offers free tail coverage in most situations to retiring doctors who are at least 55 years old and have been with the company for at least five years, Dr. Anderson said. Other insurers have similar age criteria but might require that a physician be insured continuously for up to 10 years, according to the PIAA.

If retirement isn't on the horizon, doctors should start thinking ahead, experts say, because it can make a financial difference. For example, doctors should avoid bouncing from carrier to carrier so they can take advantage of any free tail policy when they do retire, said Frank Dodero, senior vice president of the health care division of Aon Corp., a national insurance brokerage firm. "If you're not moving around and use the same carrier, then it's not as much of an economic burden."

If doctors are planning to move before retirement, they should find out if their present carrier is in their new state so they can keep their policy history, Gracey recommended. They also should ask if they are eligible for free tail coverage options to see if it is worthwhile staying with the same insurer, he added.

If a doctor must switch companies, insurance executives recommend that a physician first ask the new insurer about "prior acts" or "nose" coverage, which serves as a continuous claims-made policy without having to purchase separate tail coverage at an additional premium.

The new insurer does that by establishing a retroactive date, generally going back to the initial date of coverage under the doctor's previous carrier. The doctor then pays a rate under the new policy similar to that of the the old one instead of the less-expensive first-year rate. For example, if a doctor was with a previous carrier for three years, the new insurer will charge its third-year premium and cover any claims that come forward, factoring in any prior risk.

In places where market competition is thriving, insurers are more likely to offer prior-acts coverage. In Florida, Gracey said, "We've seen new startups and companies who virtually left now aggressively wanting doctors again and offering retroactive coverage much more often."

In spite of its availability, however, not all doctors may be able to purchase coverage.

"The problem is your new carrier may not want to pick up your history when you might have been practicing in a more litigious environment," Dodero warned.

If doctors find themselves stuck footing the bill for tail coverage, one option is to ask for a payment plan, suggested retired neurosurgeon Jeffrey Segal, MD, founder and CEO of Medical Justice, which provides legal insurance policies to protect doctors from frivolous lawsuits.

Dr. Segal said he was able to pay off his tail coverage quarterly over a period of two years with The Doctors Company.

Physicians who are part of a group should make sure their contract spells out who will pay for tail coverage, "and in the best of all worlds, make sure the employer will cover it," he said.

On the other hand, he does not recommend going bare.

"Every doctor scratches his head, thinking he can wing it," Dr. Segal said. But, "the likelihood of being sued is not insignificant."

Having been through the tail ordeal once, Drs. Magiera and Galloway are budgeting for their next tail policy, which they hope doesn't come until retirement. Otherwise, Dr. Magiera said, "It can be a hidden expense you don't plan on."