Nursing Home Closures, Bankruptcies, and Liability Insurance:
Is There a Crisis?
Senate Hearing March 6, 2002
Panel II - Liability Insurance
Roland Rapp – Owner/Operator Perspective
I am a second generation nursing home operator, a licensed Nursing home administrator and a practicing attorney. My wife and I operate 5 Nursing facilities in the bay area and Sacramento
I’d like to share with you my own recent experiences in trying to obtain professional liability
insurance as well as those I know of first hand from clients and colleagues. In January of 2000 we
took over a facility that had previously been operated by a large and bankrupt multi-facility
organization and had been targeted as a focused enforcement facility by the Department of Health
Services. At the time, it had nearly been decertified from the Medicare and Medi-Cal programs.
We came in and immediately changed much of how the facility operated, including a self imposed
freeze on admissions until the staff could be adequately developed to our satisfaction. The result to
date has been two very good annual inspections since then, and no unsatisfied clients. Our difficulty
in obtaining insurance, however, began at the outset when the insurance company we had used for
some time refused initially to include the facility in our existing coverage for our other facilities. By
way of background, some of our facilities, we have operated for several years, and previously were
owned and operated by my parents. These facilities had ever had a claim in all those years.
Additionally our Professional Liability premiums at the time had just skyrocketed by over 24% the
year before from about $140 per bed to $180 per bed. The coverage was still an occurrence based
and first dollar coverage.
What happened with this facility was that because of the prior operator’s survey record, we could only get a policy that was six months long and had a $250,000 deductible. After six months
they cancelled the policy and refused to renew. We have not been able to obtain prior levels of
insurance for this facility since. In addition, this facility already looses on average about a half
million dollars per year largely due to staffing unavailability and inadequate rates to support the
staffing needs and capital costs. We tried to incorporate the facility in the policy for the other
facilities this past year, since there had been a new track record established of low deficiencies from
two surveys and no claims since we took over. Instead we found that for the entire group of
facilities, no company offered comparable insurance at any rate.
The only rates quoted were roughly ten times our rate from the prior year for the nearest comparable coverage with a deductible that gave me chills to consider. Today it is not uncommon
for coverage to have a huge deductible of around 250,000, which, I believe would put many small
companies in bankruptcy if there wherever a claim.
In theory claims should rarely get to that level because of the current MICRA protections, but because of the effects of the elder and dependant adult civil protection act, attorneys readily
insist on settlements that assume they will recover attorney fees of several hundred thousand dollars,
and this is added to the risk of similar defense costs even in a truly frivolous case. As a result, there
is a real likelihood of such enormous payouts, which contrast sharply to the settlements and
judgments that historically had some relationship to the injured parties’ damages.
In addition to the pricing at over ten times last years rates and with bank breaking deductibles, the coverage is essentially nil for most policies that were offered. Many claims outside
of the classic medical malpractice cause of action are excluded. The coverage is on a claims-made
rather than an occurrence basis, which has the effect of again tripling the rate over the successive
two years’ policies.
When I meet with the insurance company directly they said that because lawsuits were no longer based upon the service of the affected resident but instead based upon the facilities survey
record, that even the best facilities would have sufficient deficiencies in the current litigious
environment to cause the risk and rates to escalate several fold over prior years even after reducing
coverage to the nominal levels I described.
In the end we had to decide whether we were willing pay the new price for insurance and thereby under our flat rate system to cut direct patient care expenses (effectively reducing the level
of quality) or risk that a single claim would end our families’ two generations of service by going
Reflective of my own personal experience, I have spoken to many operators who have facilities that they have operated for several years with no claims and they are experiencing
substantially the same difficulties in obtaining coverage at a price that would not ultimately either
effect care or the sustainability o f the operation. Recent conversations I have had with insurance
brokers suggest that there are many operators throughout the state that have chosen to operate
uninsured in order to maintain current instead service standards.
The preliminary findings by the study being prepared by the Department of Insurance does seem to support this phenomenon where it found that while the thirty-three insurers in the market in
1997 covered over 2000 facilities that year, the eight remaining insurers only covered 803 in the
year 2000, which by the way was before the severe increases occurred. This fact suggests that more
than half of the Long term Care consumer may have no insurance proceeds available if they are
injured due to errors by caregivers in long-term care facilities. I should point out, however, that I
am aware of at least one non-admitted carrier, Lloyd’s of London, that has been offering a
bare-bones, high deductible, high price, nominal coverage, claims-made policy. I think when a high
risk company like Lloyd’s enters this market it speaks loudly about the desperate state of affairs.
A recent study done by AON Risk Consultants for the American Health Care association studied the insurance and actuarial trends around the country. They found that:
? In the five-year period between 1990 and 1995 costs more than doubled from $240 per bed
to $590 per bed.
? Since 1995 costs have quadrupled to an estimated $2,360 per bed. The countrywide
increases are the result of an explosion in litigation that started in a handful of states and is
spreading to a multitude of regions throughout the country. This increase in litigation is
raising the number of claims individual long term care operators are incurring each year.
? In addition, the average size of each claim is steadily going up across the country at annual
increases well ahead of inflation. In many states, the increase in liability costs is largely
offsetting annual increases in Medicaid reimbursements.
? The average long term care GL/PL cost per annual occupied skilled nursing bed has
increased at an annual rate of 24% a year from $240 in 1990 to $2,360 in 2001.
? National costs are now ten times higher than they were in the early 1990’s.
? The average size of a GL/PL claim has tripled from $67,000 in 1990 to $219,000 in 2001.
? Countrywide, long term care operators now incur 11 claims per year for every 1000
occupied skilled nursing care beds. This is three times higher than the 1990 frequency rate
of 3.6 claims per 1000 beds.
? To write long term care GL/PL insurance. Insurance companies continue to exit the
marketplace and cannot provide coverage when faced with this magnitude of losses,
explosion in growth of claims, and extreme unpredictability of results.
The AON study reported that California’s experience statewide has been consistent with
my own experience and the national trends.
? They show average lost cost per occupied bed going from $480/bed in 1996 to $2,320 in
? On a per diem basis the loss costs reached fully 5% of our Medi-Cal budget in 2000, and
that’s before the real explosion occurred last year.
? California is one of a handful of states that shows remarkable cost growth. Currently at
(29%) annually for California, and with current costs in these states up to $3,300 per bed,
AON predicts it won’t take long at these annual trend rates to reach Florida level loss
costs. Which are currently at $11,000 per occupied bed per year.
? GL/PL claim costs have absorbed 20% ($3.78) of the $18.47 increase in the countrywide
average Medicaid reimbursement rate from 1995 to 2000.
A final point from the AON study that I believe should concern the largest purchaser of LTC
services in California is that:
Almost half of the total amount of claim costs paid for GL/PL claims in the long term
care industry is going directly to attorneys.
AON concluded that Insurance markets have responded to this claim crisis by severely
restricting their capacity
To compound this situation, the current Medi-Cal reimbursement system has captured costs
of only about one fourth of the contemporary costs. That leaves providers with the choice of cutting
services to pay for insurance, or going bare to maintain services.
Ironically, I think most would agree that when the state reduces the resources available to
providers the service level will decline and thereby increase the risk of errors and therefore increase
the risk cost incurred by the providers. Thus the more we choose to under fund providers, the more
we increase the percentage of the Medi-Cal dollars that support the legal profession and injury
recovery for the Medi-Cal Client.
Assuming however, that it is sound public policy to maintain our current liability trends and avoid the politically unpopular reform issues, how will the state Medi-Cal program fund these
dramatic increases each year?
I believe there are some immediate remedies that can and must be implemented this budget year to avoid further landslide-caliber erosion of resources available for patient services and/or
continuing trends of bankruptcies and closures.
First, we must cover contemporary provider costs, and not play the shell game of saying that we increased the insurance component of the rate only to undercut capital requirements that a
facility has no ability to reduce, or failing to also capture known increases in utility costs, workers
comp premiums, and direct labor expenses.
Second, we must consider that Medi-Cal has a huge stake in this cost escalation and further recognize that consumers demand:
(1) Higher level of service;
(2) Availability of resources for risk protection from errors; and,
(3) Prudent use of state resources.
To accomplish these fundamental objectives:
We should learn from our experiences with other programs like the CIGA and go a step further to address the risk-cost associated with the well documented under-funding of long-term
care services in California, by establishing an agency or other entity that leverages federal matching
Medicaid funds to provide a risk reserve to ensure all Californians covered under Medi-Cal who
incur injuries in facilities can recover their reasonable damages. Such a program could be designed
to recognize the State’s role in establishing the level of service to Medi-Cal recipients and provide
them protection from insolvency. It could also be designed to recover Medi-Cal liens before any
pay out of an award or settlement. The State would then become the repository of all loss data with
respect to that population of residents and also be the direct beneficiary of any future decreases in
risk that might be associated with additional resources put into the improvement of services to that
population. The state could then ultimately establish direct oversight, evaluation and claims
payment, and achieve economies of scale. Ultimately such a program may be the only way to
achieve the State’s essential objectives
To conclude, this is not just a provider problem; it is also a major problem for payers (including Medi-Cal) and patients who will be denied access if facilities can’t afford coverage or,
worse yet, be denied recovery in reasonable cases when a provider has no coverage.