Long-term care liability loss rates and claim severity are now at an eight-year high and could grow steadily into next year, according to Aon Global Risk Consulting’s “2012 Long-term care General Liability and Professional Liability Actuarial Analysis,” which was created in partnership with the American Health Care Association.
According to the analysis, the annual loss rate (liability costs relative to occupied long-term care beds) has grown to a projected $1,480 in 2012 from $1,040 in 2005. It is expected to increase to $1,540 in 2013, according to the report, which is based on 19,500 individual claims from long-term care facilities.
Claim size also has grown to a projected $168,000 per claim in 2012 from a low of $109,000 per claim in 2005; projected claim size in 2013 is $175,000. Since 2009, claim severity and loss rates have been growing at 4% annually, though claim frequency has been stable since 2008.
“Long-term care and skilled nursing centers strive to provide quality care each day, but they also must find ways to cope with the ever-increasing cost of doing business and multiple rounds of funding reductions at the state and federal level,” said Governor Mark Parkinson, president and CEO of AHCA/NCAL. “This report underscores the need to continue to utilize tools like voluntary arbitration agreements, a cost-effective option for long-term care providers and their residents to resolve legal disputes.”
Additional findings from the study:
• Long-term care loss rates are increasing by 4% annually
• The overall forecasted 2013 accident year long-term care GL/PL loss rate is $1,540 per bed
• Long-term care frequency is neither increasing nor decreasing
• The 2013 accident year long-term care GL/PL frequency is 0.88% per bed
• Long-term care severity is increasing by 4% annually on an overall basis
• The forecasted 2013 accident year long-term care GL/PL severity is $175,000 per claim
Long-term care providers faced high loss rates in the late 1990s and early 2000s and responded by reinvesting in patient safety, developing liability defenses, advocating for limits on tort damages and implementing arbitration, the report says. Those efforts have helped control the growth of liability costs, but reductions in Medicare reimbursement rates and health care reform have affected long-term care provider revenue and budgets.
“With reduced revenue, providers may have difficulties funding expansion and improvements, maintaining facilities and hiring and training qualified caregivers,” said Christian Coleianne, associate director and actuary at Aon Global Risk Consulting. “These competing priorities have the potential to impact liability costs. By providing access to this invaluable data, we are enhancing our clients’ ability to better understand and more effectively manage these risks.”
The Patient Protection and Affordable Care Act encourages closer coordination of care with additional health care providers with the expectation of reduced costs, the report says, and interaction between long-term care providers and dependence on other health care providers may increase exposure as the new system is expected to operate at a lower cost.
Loss Rates by State
The report says state loss rates vary considerably due to state laws and judiciaries, which have a strong influence on liability costs. For example, In Kentucky tort limits on awards are constitutionally prohibited and the state has the highest loss rate in the study, at $5,120 per bed for 2012. Texas, on the other hand, has amended its constitution to protect tort limits and has the lowest projected loss rate at $320 per bed for this year.
“Malpractice costs and the tort environment are often major considerations in the decision to locate and invest in long-term care beds and services in a specific state,” said Dom Colaizzo, chairman of the National Health Care Practice for Aon Risk Solutions. “This ultimately affects the supply of beds and cost to seniors and their families in a marketplace where demand is growing for senior care and constrained by reduced reimbursements.”
The study finds that providers are more willing to settle for higher amounts to avoid trials when the potential for unlimited judgments exists. Kentucky’s loss rate has increased dramatically over the past eight years and at $5,120, Kentucky has the highest projected loss rate of the profiled states. Kentucky’s constitution prevents limitations on tort awards, which makes the state an attractive venue for torts. The projected 2012 claim frequency of 1.64%, which has been increasing since 2007, is the highest of the profiled states. Claim severity in Kentucky is projected at $313,000 for 2012, and is twice that of the overall average claim severity, the study finds, and the second highest of states profiled.
Tennessee’s loss rate has increased to a projected $3,380 in 2012 from $1,560 in 2008. Tort limits were recently enacted there and Aon’s study shows an increase in claim frequency as claimants move to assert their claims before the limits become effective. This pattern is typically followed by a decrease in claim frequency as the caps reduce the upper bound of claim sizes and lessen the incentive to pursue claims. Claim frequency in Tennessee is projected at 1.13% in 2012. Claim severity drives Tennessee’s loss rates relative to other states. At $300,000, Tennessee’s 2012 claim severity forecast is third highest among the profiled states.
Texas’ loss rate, projected at $320 per bed in 2012, is the lowest loss rate of the profiled states, as are its claim frequency and claim severity. Texas enacted tort reform in 2003 and shortly thereafter saw remarkable reductions in loss rates, from an estimated $5,500 per occupied bed before the tort reform to under $1,000 in 2004. The 2012 claim frequency forecast is 0.43%, and the 2012 claim severity forecast is $73,000.
The study also found that arbitration is an effective tool for limiting costs for long-term care providers. It found that of 1,449 closed claims, claims settled under valid alternative dispute resolution agreements are 21% less expensive than other claims. Although plaintiff advocates continue to look for ways to limit their use, arbitration appears to have the support of the Supreme Court of the United States.
Chris McMahon is the senior editor of Insurance Networking News, a SourceMedia publication.
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