Don't let your hospital overlook insurance risks in physician practices
January 1, 1996 6 minutes read
Don't let your hospital overlook insurance risks in physician practices
Seven steps for avoiding unforeseen doctors' office insurance problems
Acquiring a physician practice can provide a strategic advantage to your hospital, but don't skim over unforeseen insurance risks in the race for the inside position.
When a hospital buys a physician practice, the risk manager should be part of the due-diligence team to identify all the potential liabilities before the acquisition, advise risk managers and insurance experts. Unfortunately, risk managers say they often are not consulted until after the purchase is complete, making the need for insurance coverage all the more important.
Complicating matters for the risk manager is the difference in how these physician-practice acquisitions are structured, says R. Stephen Trosty, JD, MHA, director of risk management for Michigan Physicians Mutual Liability Co. in East Lansing.
"Part of it is the question of what you are buying," Trosty explains. "Are you buying just the assets of the practice? Are the physicians to become employees? Are the physicians just going to be independent contractors? Or will it be joint ownership?"
Each of these models carries its own liability concerns. To cover the necessary insurance issues, keep the following framework in mind, insurance experts advise:
1. Identify what professional liability insurance is needed, and who will pay for it.
Most hospitals pay the professional liability insurance costs if they employ the doctor(s) as part of the acquisition. But before agreeing to provide the coverage, find out what goes on inside the doctor's office.
Many doctors perform in their offices minor procedures they are not credentialed to do in the hospital, says Robert Bean, vice president of risk management at MAG Mutual Insurance Co. in Atlanta.
"What kind of services are they providing in their office? Laboratory? X-ray? Are they giving allergy injections? Patients can have anaphylactic reactions from allergy shots and die," Bean cautions.
If the risk manager is involved on the front end of the purchase, he or she can exclude unapproved procedures from the hospital's coverage. If the practice already has been acquired and the insurance is in place, Bean suggests requiring the doctors to become credentialed by the hospital for all their in-office procedures, before allowing them to continue performing these procedures.
Should you buy tail coverage?
One of the more controversial areas of professional liability coverage to consider when acquiring a physician practice is whether to buy a tail policy for prior acts, says Mary Lynn Curran, RN, MHA, vice president at Premier Risk Insurance Services in Westchester, IL. Many doctors do not want to pay for the expensive policies, and many hospitals do not want to take on that liability. Disagreement over providing tail coverage can be a deal breaker.
Depending on the litigiousness of the part of the country in which the practice is located, hospitals may not want to assume this liability, Curran says. Look at the physicians' loss history, gaps in coverage, and their business practices, to decide whether the hospital will want to take on this liability, she suggests.
Mt. Sinai Hospital in Detroit does not provide tail coverage, as a matter of policy, says Margaret Rand, ARM, BS, director of risk management. Instead, she suggests including language in your contracts with the doctors, requiring them to maintain tail coverage.
If the physician maintains his or her own insurance, make sure the limits meet or exceed the hospital's requirements.
2. Check into needed coverage for the physicians' office staff, especially any paraprofessionals.
When a hospital purchases a physician practice, it often acquires staff to whom hospital environments are foreign, such as physician assistants and nurse practitioners.
Many doctors insure these paraprofessionals under their own professional liability policy, but these paraprofessionals can carry unique risks in a hospital's structure, which may need to be insured separately, Bean warns.
"Nurse practitioners can do certain things in the practice of medicine if they work under a protocol," he points out. "What we find is that the protocols often are not written or are not fully defined."
Find out what the office staff do, particularly paraprofessionals, before insuring them, Bean advises.
If the paraprofessionals are employed as part of the acquisition, this investigation will help you determine the appropriate policy limits needed to protect the hospital, Trosty says.
Bean also advises looking into the training and credentials of the physician's office staff when insuring them. Adequate training can help reduce insurance costs. He also recommends requiring paraprofessionals to continue their professional education, to keep the costs of their professional liability policies low.
3. Identify potential liabilities in real estate and office equipment.
Many hospitals also purchase office buildings as part of a buyout of a physician practice. Real estate needs special insurance consideration, including general liability insurance for accidents on the property.
Remediation can be costly
More problematic, however, are environmental concerns, especially if it's an older building. Investigate what is in and on the property, such as asbestos or underground storage tanks. Remediation of these problems is costly. Insurance policies can be purchased to insulate the hospitals from some liability, but at extremely high costs. The best protection is to investigate the office building and the land thoroughly, before agreeing to buy it as part of the acquisition, Bean says.
Office equipment also should be insured for loss and for general liability.
4. Protect your new employees, with workers' compensation and health insurance policies.
When acquiring office staff as part of a physician practice, extend workers' compensation policies to these staff. In addition, applicable employee benefits such as health insurance typically are extended to the physician staff. Work with your human resources staff to put this coverage in place in the newly acquired office.
5. Protect against business losses with business interruption insurance.
Checking a doctor's books before an acquisition can provide a measure of financial certainty about the value of the practice, but what happens if a fire ravages the office afterward and prevents the physician from working for several weeks?
Acquire business-interruption insurance for unforeseen accidents that would bring the newly acquired physician practice to a halt and send the hospital's financial projections into a tailspin.
6. Decide whether you need stop-loss policies.
As hospitals vie for managed care contracts, they need to consider the effect doctors' capitation agreements can have on the hospital's finances.
"If providers have done a good job of figuring out what their costs are, they can do well under a capitation agreement," Trosty says. But if a doctor or a hospital has to care for a patient with a catastrophic illness, it can result in financial losses.
Many doctors are purchasing stop-loss policies to protect against these catastrophic situations, Trosty says. The stop-loss insurance pays for all or a part of the difference between the doctor's costs and the capitation fee. "It is estimated by the year 2000 that this will be the fastest growing insurance component in the health care industry," he says.
7. Just managing the office? Protect the hospital with "errors and omissions" coverage.
Many Detroit-area hospitals enter into management agreements with physicians, instead of buyouts, Trosty says. A hospital still needs to be protected against its own managerial decisions in this structure. Trosty recommends buying errors-and-omissions insurance to protect the hospital against management decisions.
A carefully planned approach to risk financing of physician practices not only protects the hospital, it also can help lower costs. "A lot of insurance companies have discount fee structures that consider scheduled credits," Bean says. "If you have a system in place that we like that may reduce professional liability, they may give you a credit. The more systems in place to prevent loss, the more credits you may be able to get when buying insurance."
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