Self-Insurance

The high cost of malpractice insurance has caused many providers to seek an alternative to standard commercial insurance. Before discussing these alternatives, it is important to review what is actually being purchased in a malpractice insurance policy.

An insurance policy is more than just an agreement to pay certain types of claims. The insurance company also supplies forms on which to submit claims, personnel to process the claims, adjustors to determine how much should be paid out on the claims, and attorneys to fight unjustified claims. These services require the efforts of a large number of trained personnel. A major part of the premium dollar goes to pay for these administrative services. When a provider considers alternatives to commercial insurance, the total cost of the package must be considered, not just the cost of paying claims. In many situations, a provider will hire an insurance company to provide the administrative services, while retaining for retaining for itself the risk of loss. The provider pays all claims that the insurance company determines should be paid, and also pays the cost of processing the claims. In this situation, the provider would realize a net savings only if the level of claims could be reduced below the level used by the insurance company in estimating the premium. The provider usually maintains the ultimate responsibility for deciding to fight a claim. If the provider decides to fight a claim, the entire cost of the legal proceeding will be borne by the provider rather than by the insurance company.

A provider who anticipates contesting a large number of unfounded claims may find the legal services provided by the insurance company to be more valuable than the actual dollar limits of the policy. In this situation, the provider may pay the insurance company a premium that exceeds the limits of the policy. It may seem outrageous to pay $100 thousand for a $75 thousand policy, but the legal services involved in fighting claims may make this a good business decision. The problem arises when the cost of the policy is raised because of unrealistic future claims projections. When this happened in the mid-1970s, health care providers with good claims experience found themselves paying very large premiums that could not be justified by increased administrative costs or claims paid. These providers were forced into other risk-spreading mechanisms.

The basic risk-spreading alternatives to standard malpractice insurance are:

ounfunded self-insurance, either on a single-provider or multiple-provider basis

ofunded self-insurance (1) on a single-provider basis, (2) on a multiple provider basis, (3) with "captive" or limited-purpose insurance companies, or (4) as a combination of any of these with commercial insurance, usually for excess coverage