Medical Professional Liability Exposure Bases – Is it Time for a Change?

Co-Authored by Jim Farley

For decades, medical professional liability insurance for health care providers has been rated using the same exposure bases with little change. The premiums for this line have been based on criteria such as provider-months (Bouska, 1999) and physician specialty classes, including surgical categories (Rice, et al., 2004). While these are certainly important considerations in determining a provider’s exposure to risk, they do not provide the full picture of exposure.

During our long history providing actuarial consulting services, we have seen little change in exposure bases for rating medical professional liability insurance. The healthcare landscape has evolved significantly in the last decade. When is the right time for a change? 

Evaluating Risk in Today’s Medical Landscape

Consider two general surgeons, Surgeon A and Surgeon B. Surgeon A and Surgeon B both work full-time in the same city. Surgeon A performed 150 surgeries in the past year, while Surgeon B performed 100 surgeries. Surgeon B did more consultations than Surgeon A, so the total amount of time working during the year is equal between the two surgeons. Which surgeon was exposed to more risk? 

It seems clear that Surgeon A, having performed more surgeries than Surgeon B, has a higher risk exposure; yet, based on what we know about the two surgeons, most medical professional liability policies would assign them the same exposure base, and likely the same premium.

This is not just a hypothetical scenario. During the COVID-19 pandemic, many elective surgeries were canceled. Surgical procedure volume in the United States dropped by 48.0% immediately following the March 2020 recommendation to cancel elective surgeries. Subsequently, surgeries in practice areas aside from otolaryngology rebounded to pre-COVID rates, but this initial decrease is still substantial (Mattingly, Rose, Eddington, et al., 2021). Thinking in terms of risk exposure, half of the usual number of surgeries should correlate to about half of the usual amount of insurance claims.

Other Emerging Risks

While the COVID-19 pandemic was a once-in-a-century event, there are plenty of other, more common occurrences that lead to canceled operations. Cyber-attacks are not uncommon in the Healthcare industry and have the power to cancel appointments and surgeries for extended periods of time. According to Ron Southwick, of Chief Healthcare Executive, “2023 [is projected to] be the worst year ever for cyberattacks aimed at healthcare organizations.” 

There are factors in many medical professional liability policies that discount premium for part-time providers, but this does not consider the full-time providers with changes in caseloads and appointments that are out of their control. Additionally, a premium determined solely based on provider specialty as an exposure base is unfairly favorable to providers seeing large caseloads (and taking on more risk) and unfairly discriminatory against providers working full time but seeing smaller caseloads.

A well-balanced book of business may see the premiums of providers with large caseloads and those with small caseloads offset. However, most insurers tend to write policyholders concentrated in certain geographic locations, which typically leads to a non-uniform book of business. Insurers writing policies with a higher-than-average number of patients may collect premium that is insufficient to address the increased risk of these large patient counts. 

Developing Appropriate Exposure Bases 

What can be done to develop more appropriate exposure bases and thus more closely link the premiums charged to the underlying risk of medical malpractice claims? Here are a few ideas from our actuarial consulting experts:

• Insurers could include patient count as a scheduled item in their new business and renewal policy applications . From there, insurers could develop a factor for patient count, or even develop a base rate matrix considering both specialty and caseload.

• Alternatively, insurers could maintain base rates and exposure bases currently in use and introduce a retrospective rating plan to address patient count. The number of operations and/or appointments for each provider during the policy period can be provided at the conclusion of the period and the insurance company could either charge additional premium or provide return premium, depending on the true exposure experienced by the provider.

In the realm of medical professional liability insurance, commonly acknowledged exposure bases like provider-months and physician specialty fall short of adequately representing an insured individual’s risk exposure. This is especially true for occurrence-based policies, but even claims-made coverage is susceptible to mispricing risks when not considering patient load.

Actuarially speaking, the number of insurance related claims a provider may face should logically demonstrate a positive correlation with the number of operations they perform or patients they treat. 

By not considering patient count – and, by association, its correlation with risk – a typical medical professional liability policy cannot fully account for an insured’s exposure to risk. In some manner, patient count must be included in the calculation of premium for medical professional liability policies, for the benefit of both insurer and insured. In short, it’s time to reevaluate how we calculate risk to cover today’s medical professionals.

Let the actuaries at Perr&Knight help you determine if your medical malpractice liability exposure base is appropriate given the class of business. Contact the actuarial consulting experts at Perr&Knight today.