Long-term care liability and its changing landscape: liability insurance continues to go through ups and downs. Here are the latest trends.

The landscape of long-term care liability has never been more varied. Recently, there have been some sizable seven-figure awards and settlements, but a notable portion of these relate to legacy years of companies that have since changed ownership, corporate structure, or both. Law firms specializing in nursing home cases have continued to expand beyond the notoriously litigious southern states, and for most states the frequency of claims is still on an upward trend. While the insurance crisis of only a few years ago has evolved into a far more stable commercial and alternative risk financing environment, concern remains that this could just be the calm before the next storm.

The relatively stable liability insurance picture for long-term care providers is driven by several factors. The run-up on insurance premiums that occurred in response to the litigation crisis has resulted in favorable underwriting results for commercial carriers of both primary and excess layers of insurance. Additionally, many long-term care operators have aggressively invested in patient safety, claims management, and other risk mitigation strategies that have directly reduced their exposure to costly lawsuits. Significant tort reform in several states (most notably Florida and Texas, previously two of the most litigious long-term care liability states in the country) has helped reduce claim frequency and severity. Changes in insurance programs, including providers purchasing lower limits of liability and using claims-made policy forms, are also contributing to the improvement of insurance availability and affordability. Last, but not least, the growth in risk retention groups (RRGs), often implemented with aggressive risk management requirements for participants, has provided an attractive (and often cheaper) alternative to commercial insurance programs.

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While the trends above are encouraging, there are some threats on the horizon. Nursing home litigation has not gone away. A Google search on "nursing home abuse" yields more than 2.2 million links, the first several pages of which are dominated by trial attorneys. Although the movement toward restructuring large, multifacility nursing home companies into separate operations and management companies for each facility might have temporarily reduced the number and size of lawsuits, the long-term viability of this strategy (which is generally accompanied by much lower limits of liability for each facility) is threatened by the risk that the liability will eventually be pinned on the deep pockets that ultimately own the buildings, the management company, or both. Thus, the plaintiffs bar is aggressively seeking to ensure that all nursing home residents have access to compensation in the event of liability, and it is in discussions with policymakers in several states to create patient compensation funds, mandating a certain level of liability limit for all nursing home operators.

The multitude of RRGs that have popped up over the past few years have yet to mature into active insurance programs, and the relatively long-tail nature of this coverage (approximately 11 years for all claims from a particular year to be closed and actual costs known) means they have likely not closed on many claims as yet. As a result, there remains uncertainty regarding the appropriate pricing of insurance and allocation of premium and profits to members. With competition in the commercial insurance market heating up, RRGs will be challenged to demonstrate that they are the best longer-term alternative for their members while paying claims and funding for years of incurred but not reported losses.

The Aon Study

Aon regularly tracks the trends in long-term care liability through an annual benchmarking report sponsored by the American Health Care Association (AHCA). The current report, published by AHCA in January 2007, is based on approximately 15% of the long-term beds in the United States.

Preliminary findings indicate that trends for long-term care liability are generally good, but some troubling trends remain. The following are some of the findings from Aon's 2006 "Long Term Care General Liability and Professional Liability Benchmark Analysis."

Countrywide, the study identifies both positive and negative trends:

* Since 1999, general liability and professional liability loss costs have decreased by approximately 20%.

* Since 1998, average severity of claims has decreased by approximately 44%.

* Despite these positive trends, frequency of claims continues to climb. Since 1995, the number of claims incurred per 1,000 beds has doubled.

The study also looks closely at several states--Florida, Georgia, Louisiana, Mississippi, Ohio, Texas, and West Virginia--that passed tort reform in the past several years, and positive changes have been documented in these states:

* Since 1998, these states have experienced a more than 75% reduction in liability costs.

* Despite frequency continuing to increase countrywide, the study shows that tort reform not only reduces severity but frequency. In fact, the number of claims for these states has dropped to 12.3 per 1,000 beds in 2006 from a high of 18.7 in 2001. The average size of a claim for these states also dropped nearly 72% from 1998 to 2006.

For states in which no effective tort reform has been passed, the study shows negative trends:

* For all states except the seven listed above, frequency is increasing at an annual rate of 9%.

* The 2006 average severity of claims in these states is 60% greater than the seven tort reform states.

* Trends for some states in particular continue to escalate faster than in others; for example, Arkansas reports a loss cost (total annual cost of claims per occupied bed) of nearly $10,000. The steepest increases are seen in Arizona and Tennessee, which both saw 71% jumps from 2001 to 2006.

* Defense costs continue to increase, as well. Over the past seven years, the average amount spent to defend a general liability or professional liability claim for long-term care has nearly quadrupled--from less than $14,000 to nearly $53,000! This development actually means that more than half of claims paid for this industry sector go to attorneys, not patients and their families.

Besides tort reform, the study also recognizes positive effects from other developments, such as stronger defense strategies and the increased use of arbitration, as well as operational changes that focus on quality of care initiatives (e.g., patient safety programs, family education plans, increased staffing ratios, and investment in safer homes and equipment).

The report also provides some good news regarding commercial insurance premiums. While these costs continue to rise, the 2006 benchmarking study indicates that commercial premiums increased only 3% between 2005 and 2006, compared with 16-143% hikes between 2001 and 2005.

Looking Ahead

As providers of long-term care navigate the liability landscape, they should equip themselves with knowledge about their organizational loss history, operational improvements (including management changes, risk management strategies, and patient care and family initiatives), and the risk financing options available. When possible, providers should meet with their commercial underwriters and share any positive steps they've taken, such as family education plans, increased staffing ratios, durable medical equipment purchases, or quality of care initiatives. While underwriters have traditionally emphasized loss experience, they are more likely to view positively any risk reduction strategies facilities implement. Indeed, good things come to those that take action and address patient safety and quality of care head-on.

Theresa Bourdon is Managing Director and Actuary for Aon Risk Consultants. In addition to other actuarial services, she and her research team produce the "Long Term Care General Liability and Professional Liability Benchmark Analysis" each year to measure liability trends in the industry. Kymberlee Keefe is Senior Vice-President of Aon Healthcare and its National Elder Services Practice Leader. She helps clients manage their risk profiles by assessing their needs and delivering solutions and tools in a customized, collaborative manner. To send your comments to the authors and editors, e-mail [e-mail].