For some time now, market economics and the goals of health reform have induced hospitals to employ more physicians, as well as collaborate with them in establishing accountable care organizations. The hoped-for consequences of these arrangements include quality improvement, cost controls and a healthier population.

Virtually all participants in the health care sphere support these goals. However, questions have surfaced about unintended consequences that these tighter provider relationships could have on medical liability, and how hospitals should position themselves for what lies ahead. For example:

  • For hospitals and health systems, what are the risks and benefits of ensuring greater numbers of employed physicians?
  • What's the best kind of malpractice insurance coverage for hospitals to obtain in this changing environment?
  • How might the different insurance options impact hospital bottom lines?
  • How will legislation at the state level affect hospital liability?
  • Based on information now available, what kinds of strategies and solutions are hospitals implementing?

Hospital executives say their institutions also must continue to make improvements in quality and patient safety to hold down the cost of liability insurance.

Industry experts say the complexity and evolving nature of medical liability make it impossible to formulate solutions that will fit the needs of all providers at this juncture. But there is widespread consensus that hospitals must study their options carefully to be able to choose the strategy that's right for them.

Even then, it likely will take several years before the impact of health reform on medical liability is fully understood.

"It's going to be a work in progress," says Bruce Johnson, an attorney in the Denver office of Polsinelli Shughart PC and a member of the American Health Lawyers Association. "Each market is going to be unique and have its own dynamics. But I see a number of different ways that health reform and the changes in provider relationships, doctors and hospitals working together, are likely to affect medical liability issues."

The devil is in the details

Aon and the American Society for Healthcare Risk Management looked at the topic in the 2012 Hospital and Physician Professional Liability Benchmark Analysis. It notes that physicians increasingly are being employed by hospitals and, in most cases, are being incorporated into the hospitals' self-insurance programs."Hospitals have taken on significant risks," says Erik Johnson, the report's author and health care practice leader for the Aon Actuarial Group. "In many cases, they've abandoned the commercial market and they've brought these physician risks in-house."

The AON report says the self-insurance of employed physicians gives rise to administrative issues that are handled in a variety of ways by risk managers. At the same time, opportunities exist to elevate risk issues to higher levels of strategic planning and decision-making.

Johnson says tighter affiliations between hospitals and physicians yield a variety of benefits from a liability standpoint. "From a risk point of view, hospitals can jointly defend claims, rather than a situation where there is fighting between the hospital's point of view vs. the physician's," he says. "That's a big benefit."

Another benefit is the ability of hospitals to promote uniformity in physician practices.

Integrating the liability costs of hospitals and physicians can yield cost-savings. While commercial insurance currently is priced aggressively, hospitals still, in many cases, can self-insure a physician cheaper than it costs in the commercial market, Johnson says.

Despite such benefits, hospitals are at risk of choosing options that could raise their liability coverage costs. Indeed, "the devil is in the details" for systems choosing to integrate professional liability, the Aon report states. "In implementing self-insurance for employed physicians, hospitals must address significant administrative issues revolving around coverage and cost."

For example, hospitals must decide if they will insure a physician for "prior acts," or events that occurred prior to the physician's employment by the hospital.

Hospitals also must decide if they will offer "tail coverage," or coverage for malpractice claims brought forth after a physician is no longer employed by a hospital.

In addition, hospitals are challenged to come up with a system for cost-allocation for physicians. "In many cases, a system might have hundreds or thousands of physicians now employed," Johnson says. "The number associated with their malpractice coverage is millions of dollars. How will we allocate that to the individuals, and what behavior does that modify when we allocate to each individual physician?"

For example, if hospitals allow claims that are made against a physician to affect his or her allocation, the hospital essentially is acting like an insurance company and influencing physician behavior. And educating physicians on risk-management practices and coming to a unified approach is a more challenging task if the hospital owns a large number of physician practices.

More insurance options

The majority of hospitals — 80 percent — use the self-insurance model to provide liability coverage for employed physicians, Johnson says. "They're seeking those benefits of joint defense and uniformity of risk management — and cost-savings."

However, a number of large health care systems are proceeding down an alternative route: creating captive insurance agencies or insurance companies. "As consolidation of providers continues, whether it's hospitals with hospitals or doctors with hospitals and health systems, it makes sense in some communities and some markets to think differently," attorney Bruce Johnson says. You don't just go out and buy malpractice coverage in the traditional way. You actually think about how you can provide that necessary coverage in insurance through a different means."

This alternative thinking is causing a migration from traditional, physician-oriented insurance carriers to captive insurance carriers or hospital-affiliated insurance carriers. Johnson says hospitals creating captive insurance agencies is a good strategy. "If you can do it right, it tends to result in cost-savings. Reimbursement is unlikely to go up. So any area of cost-savings that can be achieved in terms of the actual cost of providing that insurance is going to be beneficial as [hospital] margins continue to get thinner."

Mary Anne Hilliard, chief risk counsel for Children's National Medical Center in Washington, D.C., says health provider risk managers now will be managing hospital- and physician-related liability together.

That arrangement has benefits, Hilliard says. "One is that you end up having a unified defense, so you're not pointing fingers at each other. The second thing is you have close management with the physicians in terms of risk management and setting expectations that go throughout the health care team. And third, you have better management of the claim itself."

Changes occur at the state level

Several states decided the legal system for resolving claims for medical injury needed reforming, which resulted in a wave of legislation meant to promote goals such as patient safety, fairness and cost-reduction, and focus on restructuring the patient-provider relationship after a medical error or injury occurs. The Aon-ASHRM report gives the following examples:


One element of the omnibus law passed by Massachusetts in August 2012 is referred to as the "Disclosure, Apology and Offer" approach to medical malpractice. The idea is that an apology by a health care provider can avert a lawsuit, but providers often remain silent because of the threat of litigation. Legislators believed that requiring open communication between providers and patients during a 180-day cooling-off period would discourage the use of defensive medicine and improve the quality of care. After the cooling-off period, patients have access to courts to pursue tort action. However, a provider's apology will be inadmissible as evidence in any judicial or administrative proceeding and will not constitute an admission of liability.

New Hampshire

In June 2012, New Hampshire legislators overrode a gubernatorial veto to pass an act establishing an early-offer alternative in medical injury claims. The early-offer alternative provides patients the option to engage a provider in an expedited fashion. This is similar to Massachusetts' cooling-off period, but patients can bypass the early-offer alternative, so access to the court system is not in any way restricted.


Gov. John Kitzhaber has made medical liability reform a 2013 legislative priority. The governor's advisory group engaged stakeholders to develop an innovative approach that includes early discussion and resolution, mediation and litigation. The mediation stage is a new development unique to the Oregon proposal. Mediation would provide a forum for all sides to discuss issues candidly with a neutral third party in a confidential environment. In the event subsequent litigation is necessary, no information regarding use of mediation or efforts to resolve would be admissible at trial.


While legislators in Massachusetts and New Hampshire have been successful in creating alternative paths to resolution while preserving access to the courts, Florida House Bill 1233 (filed in 2011) proposes a patient compensation system that would replace the current malpractice litigation system. The proposed system approach is modeled after the workers' compensation system, and includes:

1 | a patient advocate to help navigate the system;
2 | an independent medical review panel to examine claims on their merits;
3 | a compensation department to recommend appropriate compensation amounts;
4 | an administrative law judge to ensure fairness in the process;
5 | a quality-improvement counsel to develop root-cause analyses of medical errors and establish best practices.

Effective leadership, better care

One of the best ways for hospitals to reduce their medical liability costs in the changing environment is to improve patient care and safety, says Lee Norman, M.D., chief medical officer of the University of Kansas Hospital in Kansas City."We work on the quality side of things, he says. "It's the blocking and tackling, communicating well with patients and their families, and working through the evidence-based practices that lead to the safest patient care."

And if hospitals demonstrate to insurers that they are attaining better patient outcomes, insurers will reciprocate with lower liability coverage rates, Norman says. "That's what we can control. As much as I'd like to be able to control Wall Street or the global markets and insurance rates, we can't control that. But we can provide the best-quality care and safest environment for patients to be in," he says.

Julius A. Karash is a freelance writer in Kansas City, Mo.

Health courts: Part of the solution?

Philip Howard, chair of Common Good, a nonpartisan reform coalition, advocates for health courts, in which judges preside over health care disputes full time. The judges would write rulings that provide guidance on proper standards of care. There would be no juries, but rulings could be appealed to a Medical Appellate Court.

Why health courts?

"The need is not mainly to reduce insurance costs or medical malpractice," Howard says. "The need is to be able to manage health care risks in a way that better aligns both safety and efficiency with providers."

How does the current system impact efficiency and cost?

"Every patient today is a potential plaintiff. As a result, risk managers and hospitals think about the worst thing that could happen and then set up defensive procedures. This situation dramatically reduces the efficiency of health care delivery and adds to the cost."

How much extra cost are we talking about?

"The estimates of defensive medicine [costs] range widely, but the credible range is between about $45 billion and $200 billion a year."

How does defensive medicine compromise patient safety?

"In any complex service delivery system you need openness and transparency. And what the Institute of Medicine has found is that defensiveness encourages professionals not to use their peripheral vision, not to speak up — 'Are you sure that's the right dosage?' — because they're fearful of taking legal responsibility. They're afraid of speaking up when it's not their patient; you can't get into trouble if you don't do anything. Tragic errors might have been caught if people were simply being spontaneous and acting on their best judgment."

How do health care providers generally view the current system?

"They distrust it, because the system of justice does not aspire to reliability. It aspires to neutrality. So if there's a dispute, you go to a jury picked at random that makes a decision, but it has no obligation to make a decision in accord with accepted medical practice. It has no obligation to follow what a jury or decision-maker did in the last case of similar facts. The classic case that shows this system is unreliable is a baby born with cerebral palsy. Almost nothing the doctor or hospital did could have caused cerebral palsy, and yet these cases generally settle for on the order of $5 million to $10 million, even though there's no fault."

Executive Corner

Look out for more litigation

Tighter relationships between hospitals and physicians could lead to more malpractice suits, says Bruce Johnson, an attorney in the Denver office of Polsinelli Shughart PC and a member of the American Health Lawyers Association. "As you have organizations trying to do things differently, and are engaged in a broader continuum of care, mistakes and problems will happen, which is just part of dealing with human beings."

Coverage costs are stable now, but …

Medical malpractice coverage costs are quite stable right now, but such stability won't last forever, says Erik Johnson, the health care practice leader for the Aon Actuarial Group. "Our annual trends are among the lowest they've been — 2.5 percent annual trend on severity of claims is actually the flattest we've estimated in the history of our study." However, Johnson says he would advise his clients that the market for malpractice coverage is likely to be highly cyclical in the long term.

Support for collaboration

Lee Norman, M.D., chief medical officer of the University of Kansas Hospital, and his colleagues like the idea of a hospital's working collaboratively with physicians to improve quality of care. "Physicians for so long have had a separate enterprise from the hospital. This puts us under the same umbrella when it comes to sharing risk. It's really nice to align incentives on the same issues around accountability. And I'd like to think that we would always do what's best for the patient anyway."

Needed: fair compensation

The current malpractice liability system needs to be transformed into a system of fair, predictable compensation for persons who have been injured through preventable mistakes, says Mary Anne Hilliard, chief risk counsel for Children's National Medical Center in Washington, D.C., and president of the American Society for Healthcare Risk Management. "If we could come up with a fee schedule or some kind of structure around the process, we might be able to obtain at least some consistency, and faster access to fair compensation."