Sharing liability: A growing way to handle the risk

When Lancaster, Pa., neurosurgeon John A. Gastaldo, MD, saw his medical liability insurance premiums double through his regular carrier, he searched for alternatives. With a limited number of insurers doing business in the state five years ago, options were scarce.

Dr. Gastaldo, though, found a way. In 2003, he and some colleagues in the same predicament decided to self-insure by forming their own risk-retention group: Central Pennsylvania Physicians Risk Retention Group Inc.

"It was getting increasingly expensive, and we saw what was coming down the road," Dr. Gastaldo says. "We saw this as an opportunity to protect ourselves and our patients for the future."

An increasing number of doctors are coming to the same conclusion.

Congress passed the Federal Liability Risk Retention Act in 1986 to create another source of insurance at a time when many traditional carriers across various industries went bankrupt or stopped writing policies in regions where claim costs had skyrocketed. The measure enabled professionals and commercial groups in a related field -- from health care to autos to education -- to form their own insurance companies and pool their risk.

Since the first boom in the late 1980s and early 1990s, insurance industry experts say physician risk-retention groups are again steadily on the rise. This is particularly true in states where tort reform efforts have stalled and premiums are still at high levels.

Of 130 new medical liability insurance companies that entered the market between 2002 and 2006, 65% were risk-retention groups, according to a study conducted for the National Risk Retention Assn. by actuarial consulting company Milliman Inc. Statistics from the Risk Retention Reporter, a leading journal that tracks the industry, show that through September, 43% of the 23 risk-retention groups formed this year across various sectors are doctor-owned. In 2001, no new physician risk-retention groups joined the market, the publication said.

In it for the long haul?

Some doctors say risk-retention groups are a viable alternative to traditional insurers. Without them, physicians say they couldn't afford -- or in some cases even find -- coverage. States such as Pennsylvania, Florida and New York have proven to be particularly fertile ground for the companies, experts say.

Because members must be owners, proponents say physicians have more control over best practices and litigation issues. In the long run, that translates to fewer chances of getting sued and more stable premiums, they say.

"What we see is once doctors self-insure, all of a sudden the priority of risk management goes way up the list because now it's their money," says lawyer Paul A. Greve Jr., senior vice president of the health care practice at Willis Group, an international risk management firm that advises risk-retention groups.

Dr. Gastaldo says his risk-retention group continually reviews members' practices, looking for ways to improve. That's something traditional carriers often don't follow through on or may not approach with the same insight, he says. Central Pennsylvania Physicians' initiatives have helped keep rates relatively flat, Dr. Gastaldo says.

Though price and availability were issues, preventing lawsuits in the first place was the primary goal of Florida-based Applied Medico-Legal Solutions Risk Retention Group Inc. when it launched in 2003. "Our focus is helping doctors implement a long-term solution for reducing their risk," says Steven M. Shapiro, MD, founding partner and chief medical officer of the firm, which insures doctors nationally across various specialties.

Applied Medico-Legal studied and developed a host of patient safety measures before writing policies. A doctor must continue to meet the underwriting criteria to be a member, says Dr. Shapiro, a pulmonologist and intensivist in Fort Lauderdale, Fla. Since the company began, members in Florida have seen a 10% drop in premiums, while doctors' rates in New Jersey and Ohio are down about 20% and 30% respectively, he says.

Because risk-retention groups are licensed only by the state in which they are headquartered, companies such as Applied Medico-Legal can offer broader coverage more easily, experts say. In addition, despite some startup costs, overall management expenses are lower than those associated with a typical national carrier, leaving more money for doctors in the form of premium credits and savings to cover future claims, insurance executives add.

Read the fine print

Still, some doctors and industry experts warn about the drawbacks of this insurance and question whether the physician-run companies -- most of them relatively young -- can survive future claims payouts and tough market cycles.

If a risk-retention group struggles financially or goes out of business, doctors do not have access to state guaranty funds to back up their coverage should a claim arise.

Maine otolaryngologist Michael Makaretz, MD, knows what that's like. He had a lawsuit pending against him when Tennessee-based Doctors Insurance Reciprocal Risk Retention Group became insolvent in 2002. Dr. Makaretz joined the company in 1993 while practicing in Virginia. He ultimately won the case, only after going through a trial and an appeal and incurring $200,000 in legal bills. Had the case gone the other way, Dr. Makaretz says he would have been bankrupt.

At first, he didn't think twice about joining a risk-retention group. Now, "it's a matter of buyer beware and know what you are getting into," he says.

Pennsylvania Medical Society Immediate Past President Mark A. Piasio, MD, MBA, says most of the new players entering his state are risk-retention groups, and many doctors are concerned that the companies haven't been around long enough to see their claims go through the legal system. If the companies can't pay the claims, a number of doctors would be left personally responsible for any judgments against them.

"That's a major worry," says Dr. Piasio, an orthopedic surgeon in DuBois, Pa.

According to the Pennsylvania Dept. of Insurance, health care risk-retention groups comprise 30% of the state's medical liability market. In a July report, the agency cautions that the self-insurance businesses, on average, might be underfunded compared with traditional carriers.

Some experts also worry that the lack of regulatory oversight in areas outside the risk-retention group's charter state makes it more difficult to assess their true financial health.

A 2005 U.S. Government Accountability Office report concludes that risk-retention groups do help fill a void in the medical liability and other insurance markets -- but that greater member protections and more uniform regulatory standards are needed.

The federal risk-retention act precludes insurance regulators from imposing any authority on the out-of-state companies, notes Gisele Norris, national director of the health care alternative risk practice at Chicago-based Aon Corp., an insurance brokerage firm. But the National Assn. of Insurance Commissioners has contemplated stricter model guidelines for states to follow, she says. Meanwhile, some states are considering passing tougher captive laws, which govern risk-retention groups that operate in their state.

Proponents of risk-retention groups, however, argue that there is actually more rigorous scrutiny, because doctors are invested in the company's success.

"Our insurers are our colleagues and have a responsibility to each other and consequently [to] their patients," Dr. Gastaldo says. "There's nothing that's unasked, and [doctors] ask hard questions."

Dr. Shapiro says members as owners are closely involved in the business, as well as in developing preventive tools. "That's really what it comes down to, so you're not just reacting to a claim."

He also says his company chose to set up in Arizona because the requirements there more closely mirror those for commercial insurers. Experts also point to other states known for stringent captive laws, including Vermont and South Carolina, where Central Pennsylvania Physicians is based.

In addition, Karen Cutts, managing editor of Risk Retention Reporter, says federal law still requires risk-retention groups to comply with unfair trade practice statutes. Anecdotally, she says, the physician self-insurance companies have failed at no greater rate than traditional carriers in recent years.

What to consider

Joining or creating a risk-retention group can be an expensive and time-consuming endeavor.

Initial funding for a risk-retention group can range from $120,000 to $500,000, depending on the home state's requirements, experts estimate. Startup operation costs -- which include fees for registration, management and actuarial studies -- can run between $60,000 and $100,000. To join Applied Medico-Legal, for example, Dr. Shapiro says member-owners contribute the equivalent of 10% of a mature policy for the first three years, in addition to paying premiums. Combined fees, though, are still competitive with traditional carriers' rates, he says. Member-owners must stay with the company for three years. If they do not, they lose half of their shares.

In the end, risk-retention groups still are not immune from the same medical liability climate that traditional insurers confront, Greve says. "Claims experience is the ultimate determinant" of premiums and the company's viability, he says.

Greve recommends that doctors looking to join or form a risk-retention group should make sure it is supported by an experienced claims management and litigation team that is familiar with the local medical liability environment.

Doctors also should ask what the company's plan is in the event of deficient funds, he says. Some groups might require members to contribute more capital.

Norris warns that rates that appear too good to be true could mean that the company is not charging sufficient premiums.