Tag Archives: incurred but not reported

5 Questions on Telemedicine Coverage

Teleradiology and telemedicine have increasingly become popular as hospitals and other healthcare providers outsource their radiology and other specialty work to independent practitioners. These practitioners often operate from remote locations, with some based in the same city but many based in distant states or even overseas.

Telemedicine organizations provide diagnostic and clinical medical services to urgent care facilities, hospitals, trauma centers, imaging centers, mobile imaging units, jails, nursing homes, corporate health departments and outpatient medical facilities. As many physician practices enter into this dynamic field, they will find that their current malpractice carrier and the insurance coverage they offer cannot provide them with the pricing and coverage flexibility they will need.

The most common problems encountered will include:

  • Inability to cover reads that come from states outside of where the practice is located.
  • Lack of premium pricing flexibility to base premium on exposures (number of reads or revenue).
  • Lack of portability of coverage and “tail” issues for departing physicians.
  • Inflexibility in underwriting requirements for pre-approval of new or last-minute physicians reading for the group.

Any one of these issues can trigger the need to seek alternative coverage tailored for these exposures. Physicians in the telemedicine field will need to recognize their changing medical malpractice insurance needs and, with the help of their brokers, find insurance coverage that is designed for these types of practices and exposures.

When it comes to covering the telemedicine provider with professional liability insurance, here are five important questions you should ask when searching for the right coverage for this unique risk:

#1: Does your current policy allow for additions of employed or contracted physicians automatically or with a minimum amount of information about them up front?

Just about every telemedicine company will have a situation where it needs to add a provider quickly. Many carriers require a completed application and loss history prior to their approving additions to the provider roster. This creates an unnecessary logjam when telemedicine groups need to fill a spot in a hurry.

#2: Does your policy cover contracted services provided in any state?

As a growing telemedicine provider, you want to be able to obtain contracts in any state. Many carriers cannot cover exposures in all states.

#3: Does your current policy have continuous coverage for terminated/departed physicians after they leave the group?

It’s called Rolling IBNR coverage (Incurred but Not Reported), and having this coverage in place is critical for many telemedicine groups because of the transient nature of the physician labor force in this area. Having the coverage affects up-front negotiation of contracts as well as provides for a much smoother transition when a physician leaves the group as it eliminates the problem of having to purchase a tail for each departed doctor.

#4: Does your current policy provide individual limits for each employed or contracted physician?

Many carriers can provide only “per event” limits for the employed and contracted physicians. In a lot of cases, this is completely acceptable, and many telemedicine groups operate fine with this coverage. However, some groups encounter situations where the healthcare entity or governmental body they’re contracting with requires individual limits, not just per-event limits, for each employed or contracted doctor providing services on their behalf.

#5: Can your insurance carrier provide you with limits up to $5 million or more if statutes or contract clauses require it?

Many healthcare systems and governmental bodies are requiring higher limits from their contractors.

Physicians specializing in the areas of teleradiology or telemedicine should discuss these questions with their insurance broker to be sure they are adequately covered. As the healthcare landscape changes, so will the potential liability of the healthcare professionals. Finding the right malpractice insurance program can benefit these companies in many ways.

Splitting California Into 6 States? Crazy

If a million people say a foolish thing, it is still a foolish thing.

Anatole France

Maybe that quote should be, “If 1.3 million people. . . . “ That’s because Tim Draper, having spent $5 million, secured 1.3 million signatures and put a measure on the 2016 California ballot that would split the Golden State into six states.

Calling himself the “risk master,” the 56-year-old, billionaire tech investor expresses his quirky desire to “reboot and refresh our state government” by creating separate areas that would be more governable – think “Hunger Games.”

California is the largest state by population, with 38 million people (12% of the U.S.’s total of 316 million), and third largest by area behind Alaska and Texas. It is the world’s 8th-largest economy. If Draper’s measure were approved, the new state of Silicon Valley would be the wealthiest in the country. Central California would be the poorest.

No state has been created from an existing one since West Virginia split from Virginia in 1863. But California has had at least 30 serious proposals to divide it into multiple states since its statehood in 1850, including a proposal passed by the state senate in 1965 to divide California into two states with the boundary at the Tehachapi Mountains, near Bakersfield. In 1992, the state assembly passed a bill to allow a referendum to partition California into three states: North, Central and South. Pundits referred to these proposed states as Log Land, Fog Land and Smog Land.

It is said that the area of the state adjacent to Oregon, long known by the fiercely independent locals as Jefferson State, produces 60% of the U.S. marijuana crop. Three years ago, ex-Google engineer-turned-political-economist Patri Friedman came up with a goofy proposal to build his own floating libertarian nation 12 miles off the coast of California – Googleland?

Assuming the current state legislature and Congress both approve of Draper’s nonsensical measure, the area we currently call California would have 12 senators in Congress, not two. As much as Texans like their beer, I’m not sure they’d like to see California get a six-pack of senators.

Among the serious repercussions that Draper fails to address are vital state infrastructure issues. These include water distribution, transportation systems, state prisons, the University of California system of 10 campuses and two national laboratories – and the largest and most progressive workers’ compensation system in the country.

Workers’ compensation laws in the U.S. are promulgated on a state-by-state basis. Besides a myriad of workers’ compensation laws, each state’s bureaucracy must produce and enforce a plethora of complex regulations, licensing procedures, collateralization requirements and other rules. States have choices to make about self-insurance, including about workers’ comp pools of smaller employers.

Perhaps one or more of the new six California states would be monopolistic – where workers’ compensation coverage is purchased through the state (as in North Dakota, Ohio, Washington and Ohio). Another possibility is an “opt-out” program (as in Texas, Oklahoma and Tennessee) that allows employers to litigate injuries in the civil system, as an alternative to the “exclusive remedy” system.

As if this weren’t enough to be concerned about, the legacy of the current active California workers’ compensation claims would be an issue.

Three key institutions were created by the state legislature and are operated like private companies: the State Compensation Insurance Fund (SCIF); the California Insurance Guaranty Fund (CIGA); and the Self-Insurers’ Security Fund (SISF). SCIF is the state’s largest workers’ comp insurer and provides an insurance alternative to those companies doing business in California that are unable or unwilling to: (1) purchase workers’ compensation coverage from private competitive insurance carriers, or (2) self-insure. CIGA provides insolvency insurance for property casualty insurers admitted to doing business in the state. SISF provides protection to the state and taxpayers for non-public, self-insured entities by taking over workers’ compensation obligations from entities that have defaulted (79 since its formation in 1984).

These three entities combined cover billions of dollars of known and incurred but not reported (IBNR) workers’ compensation with open claims going back as far as World War II. Their combined assets total in the billions.

How would those three entities be broken up into six pieces and reestablished?

Financial Reporting Of Medical Malpractice Self-Insured Losses

Healthcare entities, or groups of physicians (through a captive), may self-insure losses to better control the costs of medical malpractice insurance, particularly when insurance premiums rise. Self-insured losses are typically estimated by an actuary, who will provide an unbiased estimate of the loss reserves and can also forecast losses for the next policy period for purposes of budgeting and assessing the feasibility of self-insuring, while an auditor will ensure full compliance with accounting and financial reporting standards. The following will provide background information and points to be discussed with the actuary and auditor.

Common Coverages

In a self-insured program, losses are retained by the program up to the self-insured retention amount, while losses greater than the retention amount are the responsibility of the excess or reinsurance policy. A claims-made policy provides coverage for claims that are reported within the policy period; claims reported after the policy expiration date are not covered. Most programs continually purchase claims-made policies for reportings in subsequent years. Occasionally, when a program changes excess carriers, it may purchase a tail policy for prior acts that have yet to be asserted. Physicians that purchase commercial claims-made coverage may also purchase a tail policy when leaving an organization or ceasing to practice.

When following guidance in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), most of these same entities record the self-insured liability in their financial statements on an occurrence basis. An occurrence basis is determined by when the incident happens, or occurs, regardless of when it is reported. An occurrence year can also be viewed as the combination of claims-made losses and tail reportings for claims occurring during a year that are unreported. It is important to note that if the physicians are covered on an occurrence basis by an entity (hospital or captive), but the entity purchases claims-made coverage from a commercial carrier for its physicians, then the entity is liable for the tail reportings.

Unpaid Claim Liability And IBNR

The self-insured liability recorded in financial statements has two main components: 1) case reserves on known claims and 2) an incurred but not reported (IBNR) provision for unknown losses. The case reserves are determined based on the most current available information about the known claims while IBNR losses are usually estimated by an actuary. The IBNR losses account for case reserve development on known cases, pure late reportings, reopened cases, and pipeline claims (reported but not yet recorded in the system as a claim). Liability is simply losses that have occurred but are unpaid.

Actuarial Theory

Actuaries utilize models, centered on the theory of consistency and the assumption that the past is predictive of the future, in order to project losses of a program. This includes similarities in reserving strategy, payment philosophy, homogeneous risk management exposures (same types of procedures, same mix of specialties and maturities of physicians), and other program design characteristics. Any intentional change in a program by management should be reported to the actuary to avoid redundant or inadequate estimations.

Financial Reporting Discussion Points

Five key financial reporting items to discuss with both the actuary and the auditor are listed below.

  • Discounting
    Currently, guidance in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide Health Care Entities permits, but does not require, medical malpractice reserves to be recorded in the financial statements on a discounted basis. In order to discount a malpractice liability: 1) the amount of the liability must be fixed or reliably determinable; 2) the amount and timing of cash payments for the liability, based on the healthcare entity’s specific experience, must be fixed or reliably determinable; and 3) the expected insurance recoveries, if any, must also be discounted. If discounted reserves are presented, management must disclose the discount and be able to support the discount rate, which may include 1) the return on investments used to pay claims expected to be realized over the period the claims are expected to mature; 2) a risk-free rate; and 3) highly rated corporate bonds with maturities matching the average length of a malpractice payment, all of which may need to be periodically adjusted for future expectations.
  • Percentile
    Some healthcare entities record malpractice liabilities and fund for these losses with a contingency margin, such as at the 75th percentile, selected by management based on the nature and loss experience of the entity. ASC 954-450-25 provides that the liability recorded is independent of funding considerations. ASC 954-450-30 states that an entity should use all relevant information, including entity-specific data and industry experience, in estimating the liability.
  • Gross vs. net presentation
    FASB Accounting Standards Update (ASU) 2010-24, Healthcare Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, requires healthcare entities to report medical malpractice and similar liabilities on a gross basis, separately reporting any receivable relating to anticipated insurance recoveries. One of the outcomes of such gross presentation is to more clearly reflect the entity’s exposure to credit risk from the insurer, as the healthcare entity generally remains primarily liable for payment of claims until the insurer makes payments. ASU 2010-24 must be applied to all policies, including ground-up commercial policies, where the entity has a gross liability even though the net liability is $0.
  • Tail liability
    As addressed in ASC 720-20-25 and ASC 450-20-25, entities that maintain claims-made coverage must accrue for incurred but not reported claims and incidents as of the reporting date if the related loss is probable and reasonably estimable. Some believe the tail should be estimated based on an unlimited basis while others assume a limit based on the entities’ historical loss experience (also known as the “working layer”). Regardless of the limit assumed, the entity cannot assume that claims-made coverage will continue to be purchased in the future.
  • Conservatism in estimates
    Management should understand the amount of conservatism in the actuary’s estimate. Understanding the impact of large losses, where estimates fall within a range, and how actual loss experience is used compared to relying on industry information is important.

Working With The Actuary And Auditor

Management should set a goal to have frequent conversations and in-person meetings with both the actuary and the auditor. Although actuarial analysis and financial reporting can be complicated, it is critical for management to have a full understanding and the ability to effectively communicate its program and story. Finally, management should not be afraid to ask questions of both the actuary and auditor as this often leads to a better understanding for all parties and supports a collaborative working relationship between management, the actuary, and the auditor.

Authors

Richard Frese collaborated with Pat Kitchen in writing this article. Pat Kitchen is an assurance partner in the Chicago office of McGladrey LLP’s Great Lakes health care and not-for-profit practice. Pat leads McGladrey’s health care practice in Chicago and in its Great Lakes region. He has more than 24 years of experience serving a variety of health care organizations, including hospitals and health systems, specialty hospitals, academic medical centers and faculty practice plans, physician practices, and continuing care retirement communities. Pat assists clients with financial statement audits and reviews, compliance audits, accounting consultation, internal control reviews, acquisition-related due diligence, agreed-upon procedures and debt and equity financings.