Healthcare companies face ‘perfect storm’ of liability challenges in wake of pandemic | Insurance business America
How private equity and higher salaries affect the market
Insurance News
By Emily Douglas
The following article was written in collaboration with Amwins.
As the healthcare liability insurance market grows at an unprecedented pace, ever-increasing healthcare spending, including higher employee wages, is driving the sector’s expansion.
According to Health Affairs, healthcare spending reached $4.5 trillion in 2022 and is expected to continue increasing annually.
Additionally, the depletion of COVID-19 funding, coupled with further increases in inflation, has caused director and officer (D&O) and employment practices (EPL) claims to rise, even in the typically quieter states.
With so much change, what underlying issues and factors in the healthcare liability market are keeping professionals awake? And what can insurers expect in the evolving industry in the coming years?
Private equity in the healthcare industry
Yajaira Villegas (pictured), SVP of the Healthcare Management Liability Program at Amwins Program Underwriters, said these changes and challenges present a unique opportunity for private equity firms to invest in the healthcare industry.
“All of this is due to COVID-19,” she told Insurance Business. “In 2020, President Trump enacted the CARES Act – Coronavirus Aid, Relief, and Economic Security Act. One of the most important provisions of the law was the Provider Relief Fund.
“The stimulus money distributed by the Centers for Medicare and Medicaid Services had two purposes. First, to provide additional money to cover COVID-19-related expenses, such as the cost of PPE such as masks, gloves and respirators incurred by hospitals and health systems. [Second], to cover lost revenue from election services. For example, plastic surgery procedures became unavailable, resulting in a decline in sales and patient volume.”
This created a funding problem for hospitals. Costs rose while revenue dried up, making the Provider Relief Fund critical to the health care system’s survival. But with the Provider Relief Fund no longer an option, hospitals and health systems were left to fend for themselves.
Without continued financial support from the federal government, hospitals and other healthcare providers faced significant financial challenges. These included increased operating expenses (through higher wages and benefits), rising inflation (as higher interest rates made borrowing more expensive), and a decline in investment income (as health care providers relied on investment income to support operations and offset declines). net profit).
“[Hospitals] “I need staff,” Villegas said. “Their biggest expenses are salaries and benefits for their employees. [While] Some hospitals have excellent credit ratings and could borrow, with interest rates increasing, additional debt costing them much more.”
After the stimulus money disappeared, the spending remained. They could no longer borrow money, there was no relief fund to access, and investment income declined.
“It was the perfect storm,” Villegas said. “Private equity firms view healthcare as a very mature industry where the need to innovate, expand and deliver technology-enabled healthcare can lead to significant growth and profitability opportunities.”
Negative Impact of Private Equity in Healthcare
According to an NBC study, more than 40% of American hospital emergency rooms are overseen by for-profit healthcare staffing companies owned by private equity firms.
The appeal is also strong for employees: Research from the Physicians Advocacy Institute finds that nearly 80% of doctors now work for hospitals or other corporate entities, while the number of private practices continues to decline.
However, Villegas warned that the FTC will likely conduct extensive investigations and audits, particularly regarding mergers and acquisitions.
“The Department of Health and Human Services (HHS) and the Office of Inspector General (OIG) oversee various regulatory components of health care policy and regulation,” she added.
“We also have the Centers of Medicare and Medicaid, which years later can re-audit a particular healthcare organization or facility and fine them for misappropriation of funds, billing errors or non-compliance.”
Private equity investments could negatively impact the healthcare industry in other ways. Villegas noted that for some PE firms, profits may take precedence over the quality of patient care. They are more likely to cut costs by cutting staff, replacing doctors with less experienced nurse practitioners or physician assistants, or cutting services overall to increase profits.
“PE firms invest in various industries, and if they are unfamiliar with the healthcare industry and regulatory environment, compliance violations can occur, which can lead to deeper investigations and ultimately costly fines,” Villegas said.
High salaries and high litigation costs
Aside from the role of PE firms in the healthcare system, another issue insurers are currently grappling with is the impact of high salaries and rising litigation costs.
“I am aware of a recent claim involving a physician,” Villegas told Insurance Business. “There was a CEO change at the hospital. The new CEO had a conflict with a leading anesthesiologist who earned over half a million dollars annually and was part of a group of contract specialists. The CEO informed the group that this person [continued] to be part of the leadership team, [they would] do not renew [their] Contract.'”
Faced with the potential loss of a significant contract, the anesthesiology group decided to comply. However, this led to a lawsuit.
“A lawsuit has been filed against the CEO and the hospital,” Villegas said. “The person also sued the medical group. The costs of settling and defending the lawsuit were well over seven figures. If someone earns such a high salary, it’s a matter of principle: they won’t just disappear.”
These super-high salaries lead to similarly high demands. Villegas told IB that she is increasingly seeing more of these high-severity, seven-figure losses.
“As an underwriter, when I see a claim involving a CEO, CFO, executive or physician, I anticipate that settling those claims will incur significantly higher costs,” she said. “We are pushing for higher deductibles because we understand that high-value claims typically do not involve frontline workers, such as those reviewing your medical records at the hospital emergency room reception.
“For these employees, we may apply lower deductibles or deductibles. However, we now recognize the need for higher retention levels for those with higher salaries in specialized roles. And the market is geared to this need.”
Staff shortages and burnout
Due to COVID-19 and its impact on healthcare workers, Villegas has observed the profound impact these challenges have on healthcare workers, particularly when it comes to stress.
“For many healthcare workers, burnout was very real. This is another challenge and another cost for hospital systems,” she said. “Yes, their business is patient care [yet] I don’t think they anticipated how much support their own staff would need due to increased patient volume and longer working hours, which left many feeling overworked and undervalued.
“The good news is that many hospitals have made efforts to improve employee assistance programs [EAPs] for their employees by offering behavioral mental health support online.”
The pandemic has also exacerbated the shortage of staff, particularly nursing staff.
“Most hospitals have had to hire nurses due to the shortage,” Villegas added. “Many nurses left their facilities and joined staffing agencies in search of higher wages. Salaries remain high because employers want to retain good employees and have not been able to reduce salaries since COVID.”
To combat these staffing challenges, hospitals are getting creative with their recruiting strategies.
“Healthcare doesn’t seem to be an attractive industry for many of the younger generation,” Villegas said. “Hospitals are reaching out to local high schools and universities, offering internships and even helping to fund some of their schooling as a recruiting strategy.”
In summary, the healthcare liability insurance market is deeply concerned about the increasing influence of private equity firms in the industry, capitalizing on the opportunities for profit in the face of regulatory scrutiny and potential impact on the quality of patient care.
Insurers can expect continued scrutiny and potential legal challenges, particularly with regard to high salaries and rising litigation costs that are shaping new underwriting strategies and market dynamics in the evolving healthcare sector.
Learn more about Amwins’ healthcare management liability program.
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2024-06-28 15:06:13
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