Hospitals and long-term care (LTC) facilities will continue to be two of the most challenged subclasses in the healthcare market in 2022.
Over the past few years, several insurance companies have exited the medical professional liability market (MPL) for these subclasses. This has made it increasingly difficult – and sometimes impossible – for retail brokers to obtain coverage for their clients at their desired limits and rates.
Industry consolidation has also contributed to the decrease in MPL market participants. The remaining insurers are now trying to reduce their loss ratios by lowering coverage limits. This has made it even more difficult for retail agents to construct MPL towers that meet their clients' needs for larger coverage amounts.
Hospitals
A challenging MPL market is nothing new for U.S. hospitals. Academic and larger hospital systems have responded to the current market with their usual strategy of taking on more risk, through larger retentions, to keep MPL premiums manageable.
Now community hospitals are employing the same strategy in response to double-digit rate increases.
After years of thinly priced MPL coverage, 2021 hospital rate increases were in the 10-30% range, but that top number went higher in certain situations. While these rate increases largely depended on the insured's loss history and venue, the amount of capacity an insurance company offered, as well as what layer they occupy in a coverage tower, also matters.
"Though there are some differences with this market compared to the last one. Ultimately, insurance is cyclical," observed Margaret Jacobs, area senior vice president, Risk Placement Services (RPS). "While the higher rates and more restrictive coverage are in line with what we've seen in the past, what's different this time is exclusions related to COVID-19 and the opioid crisis."
While several insurance companies have exited the hospital MPL market, including one that had remained in the market through several insurance cycles, new insurers have also entered the market.
Although these new entrants may be new to hospital MPL, their management teams primarily comprise seasoned industry veterans. While they are replacing lost capacity, they are also being cautious in both their underwriting standards and policy limits.
According to Jacobs, these new market entrants could represent the light at the end of the tunnel for the hospital market.
Senior and Long-Term Care
In the LTC market, outdated underwriting standards, such as charging smaller facilities lower premiums based on the erroneous premise that they would have fewer claims, were to blame for the growing disconnect between premiums and loss ratios.
"Insurance companies that offered smaller LTC facilities a lower rate for the exact same coverage as a larger one got crushed by MPL claims," explained James McNitt, healthcare practice leader for RPS. "The original reasoning behind this underwriting decision was fewer beds, fewer claims. Eventually the data showed that the claim size was the same, they just happened less frequently."
Understaffing has been a chronic issue for LTC facilities for many years, and the correlation between staffing levels and resident care is widely recognized.
COVID-19 added to the pressures that overworked and underpaid caretakers were already facing and to the staffing pressures faced by the owners of these facilities.
Beyond insurance, the industry faces some institutional challenges that will affect the profitability – as well as the viability – of certain subclasses. For example, LTC facilities, already grappling with rising MPL rates and staffing issues, are now having trouble filling beds because of lingering COVID-19 concerns, though the availability of the vaccine has begun to reverse that trend. They're also facing competition from the growing array of home healthcare services, which make it easier to age in place. Even with a demographic pipeline, some facilities may need to close, which could create a healthcare crisis for an aging U.S. population in the decade ahead.
Learn more about the challenges faced by hospitals and long-term care facilities in the 2022 U.S. Healthcare Market Outlook.