Cost of liability coverage jumps 51% for nursing homes.

On average, nursing homes paid 51% more for medical-malpractice premiums in 2003 compared with the previous year, according to a new study by Aon Risk Consultants Inc., which said the industry is a key target for litigation as frequency and severity of claims have risen during the past 10 years.

The average increase in annual premiums was lower than in previous years, but the cumulative effect of the past three years has been staggering, said Theresa Bourdon, managing director and actuary with Aon Risk Consultants, a unit of Aon Corp. Premiums on average increased 143% in 2002 and 131% in 2001, the study found.

Aon Risk Consultants did its actuarial analysis on data collected from nursing homes that represent 24% of the industry in the United States. The American Health Care Association, a long-term-care industry trade group, sponsored the study.

The study found that liability costs are skyrocketing:

* On average, the annual general liability/professional liability cost for each occupied bed jumped to $2,290 in 2003 from $310 in 1992, which means $6.27 a day goes to cover litigation-related costs for each long-term-care resident, on a cost-of-care basis.

* The size of an average liability claim more than doubled to $150,000 in 2003 from $65,000 in 1992.

* Throughout the nation, nursing homes have 15.3 claims a year for every 1,000 nursing-care beds, which is three times higher than in 1992, when the frequency rate was 4.8 for every 1,000 beds.

* Nearly half of the amount paid for liability claims in the industry goes directly to attorneys.

"I find the data staggering, especially the crossover and diversion of funds away from Medicaid to pay for liability costs," said Jeff Smokier, deputy director of communications for the American Health Care Association. Nursing-home care largely is paid for by the government, and 5% of the total Medicaid reimbursement is going toward liability costs, he said.

Nursing homes in Florida and Texas are being hit the hardest. In Florida, costs peaked at $11,000 a bed in 2000 before dropping to $8,200 a bed in 2003, the study said. In Texas, loss costs were $5,500 in 2003 but are projected to go down in the future because of new tort reform that included a $250,000 cap on noneconomic damages.

Other states are heading in the direction of Florida, particularly Arkansas, Mississippi, Alabama, Tennessee and California, the study found.

This expansion of the crisis into multiple states is fairly new, Bourdon said. Aon has conducted the study for three years, and each year the company is finding more states with dramatically increasing costs, she said.

Liability costs began rising nationally during the mid-1990s and have been escalating ever since. A 1999 study by Conning & Co. said the medical-malpractice line of insurance ended a 12-year streak of outperforming the property/casualty industry as a whole that year, as insurers' reserve deficiencies grew to $1.7 billion. Nursing homes represented only 10% of the premium in the late 1990s but were expected to contribute 30%, or more to the eventual accident-year losses.

"Frequency continues to climb almost universally across all states," Bourdon said. "We were hoping we might see frequency flattening out." At the same time, the national numbers show severity becoming flat, but she said that's misleading, because as severity in high-cost states stabilizes, other states are showing an increase in severity.

Also, small to medium-size nursing homes are carrying lower liability limits because of lack of availability, which has the effect of lowering severity, the study said.

Between 1992 and 2003, the nursing homes surveyed reported $3.1 billion in liability claims, with an expected ultimate cost of claims during the period of $5.2 billion after considering what's in the pipeline and open cases, the study found. In 2004 alone, the group of long-term-care facilities included in the study is projected to incur $1 billion in liability claims.

Skyrocketing Liability Costs
The annual general liability/professional liability cost
for each occupied nursing home bed jumped
to $2,290 in 2003 from $310 in 1992.

1992     $310
1993     $400
1994     $610
1995     $570
1996     $830
1997   $1,300
1998   $1,690
1999   $1,730
2000   $2,080
2001   $1,980
2002   $2,050
2003   $2,290

Source: "Long Term Care, General Liability and Professional Liability
2004 Actuarial Analysis, by Aon Risk Consultants Inc.

Note: Table made from bar graph.