Healthcare Professional Liability Loss Costs Driven by Claims Severity’s Continued Rise
Healthcare professional liability loss costs continue to rise, fueled by increasing claims severity, while claims frequency remains fairly stable, according to a just-released, 14th-annual study by Zurich North America.
In the 2019 Benchmark Study of Healthcare Professional Liability Claims, Zurich draws data from the more than $16 billion in losses contained in its claims database of around 90,000 actual and ultimate claims between 2008 and 2016. It examines claims frequency and severity trends for different types of organizations, facilities and communities. The study also includes an in-depth analysis of claims reporting times — from accident to reporting as well as from reporting to settlement — identifying a strong correlation between severity of claims and settlement lag.
Claims Severity: A Steady Ascent
According to the 2019 Benchmark Study, year-over-year changes in loss cost appear to be severity-driven, given a relatively benign movement in frequency. The implied annual trend in loss costs on an unlimited basis is approximately 4.6 percent from 2008 to 2016, consistent with industry views of increasing trends for healthcare professional liability.
Average claims severity rose at an annual rate of 5 percent between 2008 and 2016. However, that trend is not uniform across all territories. Some — like Illinois, Maryland, New Mexico and Pennsylvania — are witnessing a significant increase in severity. While these states exhibit both high severity and volatility, they are each trending in line with the national average.
In the Zurich dataset, there are almost 3,400 claims with an ultimate loss value greater than or equal to $1 million. While these claims represent just over 4 percent of total ultimate claims, in terms of loss dollars, these large losses amount to almost 60 percent of developed losses. With further breakdown, 63 percent of the claims fall into the bucket from $1 million to $2.5 million — however, the percentage of loss dollars in this category is only 31 percent. In contrast, losses greater than $5 million account for only 15 percent of the number of losses above $1 million, but represent almost 44 percent of the ultimate loss amounts.
The study’s authors found that nonprofit hospitals experience a higher severity trend than for-profit hospitals. Zurich theorizes that aggressive claim management, differences in case mix index and patient populations could be contributing factors driving the lower average severity of for-profit hospitals.
The study also found that average claims severity for children’s hospitals and teaching hospitals remains significantly higher than for other facility types, despite the lower frequency of claims at children’s hospitals. In past Benchmark studies, Zurich emphasized that providing lifetime care is potentially driving the higher severities in children’s hospitals; teaching hospitals may be experiencing this as well, due to their exposure to high-risk obstetrics cases, which can result in lifetime care for injured neonates.
Looking at Zurich’s raw counts of claims greater than $1 million as a proportion of total ultimate claim counts helps shed light on severity drivers. The high severity of claims from teaching hospitals is driven by a large quantity of large claims per year, rather than skewed by just a few very large claims. Teaching hospitals represent only 16 percent of the ultimate claim counts in the Zurich database, yet represent 26 percent of claims greater than $1 million. For acute care, the relationship is just the opposite, where acute care ultimate claims represent 72 percent of claim counts in the Zurich database, versus 65 percent of claims greater than $1 million.
Claims severity continues to be higher for facilities in urban areas than those in rural and suburban areas. The spread between the two groups in terms of actual dollars has changed over time, but on a relative scale they are mostly stable, hovering around a ratio of 1.15. In other words, on average, urban claims are approximately 15 percent more expensive than rural/suburban claims.
Average Time from Reporting to Settlement
New to this year’s Benchmark Study is an analysis of the time lag from reporting of a claim to settlement and how it affected severity.
Analyzing closed claims only, and comparing the average time from reporting to settlement versus the average severity, Zurich found claims that settle quickly have a significantly lower severity than those that take longer to settle. The average severity for claims settled in less than one year steadily increases from $33,000 to $560,000 for claims that take longer than five years to settle.
Zurich also studied the distribution of the average time from reporting of a claim to settlement of a claim, delay between accident and reporting of a claim and the difference by facility type versus severity. According to the data, outpatient facility claims settle faster, with 49 percent settling within the first year with an average severity of $94,000. In line with their significantly higher severity at $430,000, only 39 percent of children’s hospital claims are settled within the first year.