Kristin H. Monopolis
Erik Johnson 

Collecting and benchmarking targeted claim data can help hospital systems manage risk. 

At a Glance    

  • Managing the total cost of professional liability should be a top priority for health systems as professional liability costs will increase in coming years.  
  • The frequency of hospital professional liability claims has entered a period of modest growth.  
  • The severity of claims continues to grow, with claim severity projected to increase 4 percent in 2011.  
  • The combined effect of frequency and severity indicates HPL loss rates are expected to increase 5 percent in 2011.   

Hospitals should prepare for increases in professional liability costs, according to findings of a recent study.a The study disclosed that the frequency of hospital professional liability (HPL) claims is growing at a modest rate and will increase at a 1 percent annual rate in 2011.

The results confirm an emerging change in the liability environment: The frequency of claims against hospitals has entered a growth phase. Combined with continued claim severity growth, this uptick is expected to drive liability costs up at a rate higher than general inflation.

Uncertainties associated with healthcare reform and difficult economic conditions represent significant cost challenges for many hospital systems. Many hospitals have grown accustomed to declining professional liability costs due to reductions in claim frequency and the resulting soft professional liability insurance market. Given the signs of a shifting environment, however, managing the total cost of professional liability should be a top priority for health systems, as hospitals and physicians, whether commercially insured or self-insured, can expect to see increases to their professional liability costs in the coming years.

Health systems that strategically collect and analyze professional liability claim data are well equipped to effectively manage this risk. Targeted benchmarking is a business intelligence strategy that can help systems identify and manage the most significant drivers of their total cost of risk. In particular, benchmarks for employed physicians, hospital service lines, and healthcare-acquired conditions can help health systems effectively allocate costs and evaluate clinical and risk management investments. 

Key Finding: Claim Frequency 

The first key finding of the study is that the frequency of hospital professional liability claims has entered a period of modest growth. The analysis projects that the frequency of HPL claims will increase at a 1 percent annual rate for 2011. 

In the early and mid-2000s, healthcare organizations experienced reductions in the frequency of liability claims for six straight years. This time period was marked by industry initiatives and environmental factors that led directly to the reduction of claims. 

Organizations that self-insure professional liability and insurers benefited from the "upside" of this risk and experienced reductions in reserve levels and budgeted claim costs. Due to the delayed nature of claim reporting and resolution, the benefits associated with the frequency decline continue to flow through 2010 to both self-insurers and insurers. On an actuarial basis, however, the underlying claim frequency bottomed out in 2006 and has been growing at a steady rate. 

Influences on Claim Frequency 

The emerging increase in claim frequency is modest compared with the magnitude of trends observed from 2000 through 2006, when claim frequency declined at a 5 percent annual rate. In the early part of the decade, several forces merged to uniformly reduce the number of HPL claims. Tort reforms had a direct impact on the number of claims occurring in many states. Patient safety initiatives also indirectly influenced the number of liability claims by reducing the number of adverse medical outcomes. In some locales, there was a perceived "availability crisis" where providers threatened to leave the area due to the high cost of liability insurance. The public, concerned about maintaining access to quality health care, was sympathetic to healthcare providers and supportive of their efforts to control claim costs. 

Exhibit 1


In the current environment, influences are no longer uniformly reducing frequency, but are mixed and tend to affect liability claims indirectly. The net effect of these influences is the observed slow and steady increase in claim frequency. On the positive side, there continues to be an emphasis on investment in patient safety initiatives, including the implementation of new technology. In fact, the healthcare reform bill includes appropriation of funds for grants aimed at demonstrating reductions of healthcare errors through the collection and analysis of patient safety data. 

However, in the current environment, there are also several influences potentially giving rise to greater claim frequency. Tort reforms have been successfully challenged in several jurisdictions, and this activity has potential to reverse the declines observed from 2000 through 2006. In addition, the U.S. economic recession has led to financial stress on household income levels. When affected by an adverse medical outcome, financially stressed individuals are more likely to file a claim. 

Key Finding: Claim Severity 

The second key finding of the study is that the severity of claims continues to grow. For claims limited to $2 million per occurrence (indemnity + expense), the analysis projects claim severity to increase at a 4 percent rate in 2011. This trend has been stable for the last 10 years. In fact, claim severity remains relatively unaffected by many of the environmental changes affecting claim frequency, such as tort reforms and the economic environment. 

Exhibit 2


Implications for Total Cost of Risk 

The combined effect of frequency and severity is termed the "loss rate" and is equal to the annual indemnity and expenses incurred per occupied bed equivalent. It is a measure of the total cost of HPL claims to the system (excluding commercial premiums) and is a metric that is comparable across organizations. The combination of the projected frequency and severity trends indicates that HPL loss rates are expected to increase 

5 percent in 2011. As a result, hospitals can expect to incur $3,280 of HPL claim costs (indemnity and expense limited to $2 million) for each occupied bed equivalent that they operate during 2011. Occupied bed equivalents are calculated using actual beds, visits, procedures, births, and employed physician counts, if applicable. 

From 2000 through 2004, HPL loss rates were declining due to reductions in claim frequency. These decreases in total claim costs on an accident year basis may still be benefiting many healthcare organizations due to the delayed nature of HPL claim reporting and payment. Due to the long-tailed nature of professional liability, accident-year results are recognized by insurers and self-insurers on a lagged basis. Since 2005, continued increases in accident year claim severity and modest increases in claim frequency indicate that hospitals should be prepared to recognize increases in the HPL financing expense. 

Targeted Benchmarks: Tracking Employed Physician Data in a Changing Environment 

In recent years, community hospital systems have been strategically employing more physicians for a variety of reasons. This trend is expected to continue due to several factors, particularly the development and growth of accountable care organizations. Typically, employed physicians are covered to some extent by health systems' risk-financing programs and can contribute significantly to a system's exposures and claims costs. 

Study findings suggest that one employed class-one physician (internal medicine) is equivalent to operating 2.75 acute care beds for a year. 

High-risk specialists, such as OB/GYNs or neurosurgeons, contribute significantly more exposure. A health system that significantly increases its number of employed physicians runs the risk of dramatically increasing its exposure to professional liability losses relative to the number of beds it operates. Quantifying both the number of physicians and the associated loss dollars (claims) will enable health systems to monitor this exposure as it changes. 

Excluding university respondents to the study, the average number of employed physicians per hospital bed increased from 0.243 in 2005 to 0.384 in 2009. This finding implies a 12.1 percent annual growth rate in the number of employed physicians per bed and points to a significant shift in the hospitals' liability exposures. University hospital systems have traditionally employed high numbers of physicians and have maintained a relatively constant ratio of employed physicians per hospital bed. 

Exhibit 3


As more physicians are employed by health systems and are insured through the system's risk-financing program, some claims might shift from physician professional liability to hospital professional liability. In other words, health systems might absorb some of the claims that previously would have been settled or defended in the physician's name. 

This shift is highly dependent on the health system's claim tracking and reporting practices. Many health systems explicitly establish separate claim files and case reserves for all individual parties named in a suit. However, claims against employed physicians are often not identified separately in the loss runs. Health systems that clearly identify which claims are attributable to employed physicians will be better equipped to manage the cost of this risk. Tracking physician claims separately from entity claims becomes imperative if the organization is seeking to employ more physicians as a growth strategy. 

Developing a procedure or methodology to track employed physician claims can benefit health systems in several ways. First, tracking physician claim data can enable a health system to make more informed decisions regarding self-insurance versus commercial insurance. This information can be particularly useful in evaluating different program structures (limits and retentions) for employed physicians separately from the hospital coverage. 

Tracking physician claim data also allows for more accurate allocation of costs to physician specialties, practice groups, or individuals. This information can be used to monitor risk management practices aimed specifically at reducing the physician liability risk. Essentially, by separately coding and monitoring physician claims, the health system can make more informed decisions with regard to physician liability financing. 

Exhibit 4


Targeted Benchmarks: Tracking High-Cost Areas

Health systems can also benefit from robust tracking of claim data by hospital service department. The study's review of trends in the emergency department (ED), obstetrics unit, inpatient surgery, and outpatient surgery found that the ED and obstetrics unit, in particular, are significant drivers of a health system's total professional liability cost. Findings were that 11.3 percent of reported HPL claims and HPL unlimited loss dollars (indemnity + expense) were attributable to the ED, and 6.4 percent of claims and 16.7 percent of total loss dollars (unlimited indemnity + expense) were attributable to the obstetrics department. These two departments account for almost 18 percent of the claims incurred against hospital systems and 28 percent of the total loss and expense dollars paid. The projected 2011 loss rate for obstetrics is $214 per live birth, while the projected 2011 loss rate for the ED is $6.60 per ED visit. 

Because these high-risk departments account for such a significant portion of the total HPL cost, targeted risk-management activities are likely to have a positive effect on the total cost of risk. Health systems that can track and analyze claims by clinical department can use these targeted benchmarks to track improvements over time and measure their relative performance compared with industry averages. In larger health systems, hospital leadership can track the ROI for risk initiatives within certain departments, such as tracking experience relative to the benchmark before and after implementing new fetal monitoring software or protocol. For small health systems in particular, it may be difficult to measure OB claim frequency improvement because the number of claims experienced by the health system may be very low, perhaps only one claim every other year. In such a case, measuring the cost of OB claims over a five-year period relative to the number of births may be an appropriate comparison to the benchmark. 

As an example, a health system with 4,000 annual births and 100,000 annual ED visits can expect to experience $856,000 of OB losses and $660,000 of ED losses in 2011. 

Targeted Benchmarks: Healthcare-Acquired Conditions 

The study findings suggest that one out of every four claims and 24 percent of total HPL claim costs are attributable to five specific healthcare-acquired conditions: infections, injuries (e.g., fractures, burns, and falls.), medication errors, objects left behind within the body cavity after surgery, and pressure ulcers. Hospital executives have devoted increased attention to these conditions in recent years due to changes in Medicare payment procedures. Health systems that can track claims attributable to these conditions (and others not specifically studied in the analysis) will be able to quantify the relative liability cost to their system and how this cost compares with an industry average. This information can provide additional insight when implementing new protocols or identifying risk-management priorities. 

Exhibit 4 shows the percentage of total loss dollars (where indemnity and expense are limited to $2 million per occurrence) attributable to each condition. 

Prompt Action Required 

The underlying cost drivers of HPL costs, claim frequency, and claim severity, have been increasing. These increases may still be under the radar for many health systems due to the delayed recognition of results that is inherent to medical malpractice insurance claims. However, the time is right for hospitals to keep a close eye on their own data and to be responsive to changes in the environment. Prompt funding and budgeting adjustments may help hospitals to avoid the potential compounding effect that could result if, for a long time, prior steps have not been taken in preparation for these trends. Health systems with robust loss run coding are well positioned to proactively implement, manage, and evaluate cost-saving investments in risk management. 

Kristin H. Monopolis, FCAS, MAAA, is a senior consultant and actuary, Aon Global Risk Consulting ( 

Erik Johnson is associate director and actuary, Aon, Raleigh, N.C. ( 


a. The 2010 Hospital Professional Liability and Physician Liability Benchmark Analysis, Aon Risk Solutions in conjunction with the American Society for Healthcare Risk Management. 



About the Study   

The Hospital Professional Liability and Physician Liability Benchmark Analysis examined trends in frequency, severity, and overall loss rates related to hospital and physician professional liability for the past 11 years. The 2010 analysis includes 119 health systems and more than 1,800 facilities, representing 23 percent of the total U.S. hospital industry. 

For more information on the study, visit



Publication Date: Friday, July 01, 2011

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