The Insurance Crisis for Long Term Care Facilities

Introduction

Obtaining affordable liability insurance policies for long-term care facilities (Skilled Nursing Facilities, or "SNFs") was once an easy task to accomplish. In the past the market for such insurance was marked by its sleepiness and by the simplicity of the basic information needed to write coverage for multiple perils at SNFs. But today, those times are a distant memory for the long-term care industry. The industry is confronted by a variety of convergent economic factors, not the least of which is the inability to obtain suitable insurance at affordable rates, which threaten its financial well being right to the very core of its existence. With the rising tide of baby boomers heading for age sixty-five starting in 2010, and with estimates that there are nearly 2,000,000 people already residing in almost 15,000 nursing homes today – not to mention the assisted living facility population – the industry's financial well-being must be secured. This means, in part, getting a grip on the tail of the insurance tiger that is threatening the industry so that future risks can be controlled and affordably transferred to insurance mechanisms.

In today's insurance market premiums have jumped in some cases from generally $100 per bed to approximately $800 to $1000 per bed, depending on the size and location of a facility. In the past, it was not uncommon to obtain policies with limits of liability of $1 million per claim (or occurrence) and $3 million in the aggregate, but now even at increased rates, such limits, if available, will apply to both errors and omissions (professional liability) and general liability together. The effect is a dilution of actual limits. It has also become more difficult for owners with multiple facilities, or systems, to obtain separate per-location claim/occurrence limits and aggregates. To make matters worse, the situation is aggravated by some carriers imposing lower policy limits of liability, while requiring higher self-insured retentions and adding sub-limits for certain occurrences such as molestation, abuse and employment-related claims. A coincidental hardening of both the errors and omissions market compounds this situation for health care professionals (e.g., medical malpractice insurance for physicians) as well as a similar toughening of the property and casualty market place. The net effect is that facilities are paying more, but getting much less bang for their buck and far less in real coverage.

A. The Problem Today

What caused insurance premiums to skyrocket? There is no one universal answer to this question. Certainly the enactment of elder abuse statutes in a number of states and the incredible surge of lawsuits against facilities, followed by breath taking verdicts, are major causes, but other factors are also at work. Reimbursement cut-backs and other funding constraints affecting quality of care, as well as historic problems at poorly maintained facilities, stepped-up federal and state agency inspections and new legal claims have also contributed to the industry-wide problem. Although risk analysis is a keystone of the insurance industry, carriers previously failed to fully anticipate these risks, and are now either completely pulling out of the market, or over-compensating by charging enormous premiums. The pendulum has swung from one extreme to the other, thus causing a crisis in the industry and resulting in some extreme cases in smaller facilities going bare (i.e., running the risk of operating without any insurance whatsoever), while leaving others searching for creative solutions to minimize risks, liabilities and insurance costs.

B. Risks Facilities May Face

In the past, facilities faced some of the same types of claims they face today; however, in the absence of elder abuse laws (enacted in part as a result of the poor practices of some), these claims received less attention and were not the subject of astronomical verdicts. Such claims included common place falls, elopements and quality of care issues arising from such ailments as decubitus skin ulcers. Today, not only do facilities face many more claims, but the claims they face are much more varied. In addition to actions based on elder abuse statutes, claims range from quality of care issues to employee relations to allegations of deceptive business practices. For example, some recent lawsuits involve claims of wrongful death; physician liability; medication errors; improper nutrition; misappropriation of resident property; deceptive advertising; abuse and neglect of residents, including molestation; negligent supervision and hiring, all of which are being asserted against facilities and their principals and employees. Indeed, some cases are not only filed against long term care facilities, but are also directed against their principals, officers and sometimes their directors. In such instances, a wide range of insurance coverage is implicated (e.g., insurance for professional errors and omissions, employment related practices and the fiduciary responsibilities of officers and directors).

C. Risk Management and Reduction

As in the past, solid risk management, proactive and competent employee in-service training, as wells as records control and accurate data input, can reduce incidents and possibly lead to deficiency free surveys, thus making a facility a better insurance risk. A facility should have an experienced risk manager, together with a comprehensive employee training program, and a plan in place that is stringently followed and enforced. Similarly, facilities must be mindful of how they manage their information for minimum data set reporting. This will not only reduce incidents and liability risks, but may also assist in avoiding unexpected and unintended injuries and damages. Thus, as a consequence, when federal and state surveys occur, fewer, or at least less serious, deficiencies may be cited. In turn this makes a facility overall a more attractive risk when it comes time to obtain insurance coverage.

Careful attention to records and paper work is also essential to risk reduction, placement of insurance and, eventually, supporting claims for insurance coverage. There was a time when simple forms could be completed to place insurance, or to submit claims. Today, insurance companies that will still write coverage require much more information before they will write a policy. For example, carriers may request loss runs for the last three to five years preceding an application for insurance, they may request financial statements (or Medicaid cost reports) and they may request copies of licenses and previous federal and state survey reports. Thus, careful risk management that leads to fewer losses and better surveys with fewer, or no deficiencies will hopefully result in somewhat less expensive coverage.

In addition, proper records maintenance will be of great assistance when it comes time to submit claims for coverage (see discussion below in Section E). As coverage tightens, facilities may find carriers much more difficult to deal with on claims. Carriers will likely require far more documentation in support of claims, and may be more prone to citing policy exclusions to deny coverage. In such situations, good record keeping may prove to be useful in combating a carrier's decision to decline a defense or deny coverage of a claim. In fact, careful presentation of a well-documented claim may mean the difference between receiving insurance coverage and its denial by a carrier.

D. Possible Steps for the Future

Simple risk reduction and better claims handling practices may ameliorate the problem of obtaining affordable coverage to some degree, but they are not likely to cure the problem completely. More creative and innovative solutions must be contemplated, proposed and pursued. These solutions can range from simple measures to whole paradigm shifts in the manner that insurance is placed and by whom it is offered. Such solutions may come in at least the following forms: legislation; cooperative efforts within the long term care industry; insurance industry (carriers, brokers and agents) innovations; creation of other mechanisms for transference of risks; and, simple measures taken by facilities themselves to ensure that there are fewer risks and perils. This last option may have the positive, and possibly unintended, result of boosting a facility's good-will and reputation and, in turn, a facility's census, which may result in a greater realization of economies of scale in the calculation of cost-based reimbursement rates by government payors.

Although the long-term care industry is widely diverse in its make-up, and ranges from single facility family-owned businesses to multi-state, multi-facility systems that are publicly held ventures, the industry must find a way to pull together to address the causes of rising insurance costs (some of these causes were mentioned above). The industry as a whole faces this problem, and while some within the industry have the ability and resources to address the symptoms of the problem (e.g., monumental premium increases), they will always be affected by the situation of others because the causes of the problem are industry wide. Thus, the causes of the problem must be addressed and not just its effects (e.g., withdrawal of carriers from certain markets or escalating premiums). By banding together to eliminate, or at least to mitigate the causes, the net effect may be a reduction in liabilities and associated costs, which in turn may lead to relatively more affordable insurance coverage. Even if the industry cannot effectively coalesce on solving these problems, leaders must emerge and come forward to solve these problems for the good of all.

There are a variety of possible actions that might be fruitful in mitigating the impact of the current shortage and high cost of insurance. Indeed, there is no one single thing that will operate as a fix-all for this problem. This article will not discuss possible risk management and data management solutions, although they are an important part of any overall solution. The following list is intended to provide some overall examples of areas where other efforts might yield positive results. Some of these suggestions involve complicated legal, insurance and financing issues that should be thoroughly explored with competent professionals taking into account particular situations before efforts are undertaken.

• Legislative Reforms
  
  
  • There are already a number of efforts underway to persuade State legislators to enact new legislation, or amend existing laws, capping long term care facilities' liabilities. These efforts should be continued and should similarly ensure that existing laws that cap punitive damage awards, which in many, but not all, states are not recoverable under insurance policies, are utilized to stop run-away verdicts.
    
    
  • The long term care industry, through its various trade associations, should carefully consider lobbying efforts to encourage legislators to refine the scope of existing elder abuse statutes and to strengthen burden of proof requirements before liability may be imposed on facilities. While such an effort must naturally recognize the delicate balance of constituent interests that legislators will consider, the point must be made clear that continuing economic stress on the industry does not serve the best interests of the aged, infirm, or the community as a whole. Legislators should be reminded that continued bankruptcies, diversion of resources and pressure on Federal and State agencies to act as microscopic watch dogs, in the end serve no one's best interests and lead to less availability of services at, of course, higher costs to the private and public sector.
    
    
  • Insurance costs should be reimbursable under Medicaid rates, similar to other business expenses such as legal fees, utilities and the indirect cost of doing business. It is possible that existing rate components already afford reimbursement if such costs are properly characterized and substantiated. In many states the rate for reimbursement is based on a per diem number of residents/number of beds calculation. Insurance rates sometimes follow a similar cost premium per bed calculation. Federal and State regulators should be made to understand the gravity and scope of the insurance crisis, and its consequential effect on quality of care issues so that Medicaid State Plans allow such costs within the Plan's rate structure. Similarly, where insurance costs are deemed reimbursable, efforts should be made to adjust Medicaid rate screens so as to establish a higher means for such costs.
    
    
  • For less attractive insurance risks legislatures may establish Joint Insurance Underwriting Associations ("JUAs"). Such statutory mechanisms have been set up in the past, with mixed results, to separate higher risk insureds from those who deserve the benefit of insurance based upon their better risk loss experiences and other favorable attributes. The use of JUAs is particularly useful in an industry where insurance coverage is a practical necessity, if not mandatory. Certain States (e.g., Florida) have recently mandated insurance, or are considering such mandates as a condition to licensure.
    
    
• Insurance Alternatives
  
  
  • At this moment creative insurance professionals are hard at work devising suitable alternatives to fill the gap of dwindling insurance availability and ballooning costs. Several of these alternatives are well known to the insurance industry, but need to be further explored for specific application to the long term care industry.
    
    
    • Captive Insurance Companies/Risk Retention Groups – Captive insurance companies may be formed by facilities, or health care systems, to write harder to place primary coverage. Similarly, Risk Retention Groups ("RRGs") may be formed by a homogenous group of companies wishing to establish a liability insurance company. Recently, a group of Florida based facilities joined together to form the Long Term Care Risk Retention Group, which will pool their nursing homes risks and resources, and provide affordable coverage to members of the group. The formation of such captive insurance companies or RRGs, however, poses some problems. First, significant capital (many millions of dollars) must be raised to fund captives or RRGs. Second, members of the group may need to share financial information with co-members who are also competitors. Third, licensing of the venture will be required and may present special problems. Fourth, captives and RRGs must be selective about who can be insured and a member of the group; i.e., this situation presents the same problem traditional insurers face with excluding bad risks. Finally, captives and RRGs still need to obtain reinsurance and excess (catastrophe) insurance, which may still be very expensive. At a minimum reinsurers and excess carriers may impose stringent requirements beyond what the captive or RRG wishes to impose on its members. These problems aside, for more well heeled facility owners, especially for those whose finances are public information, formation of captives or RRGs may be a good alternative.
      
      
    • Rent-a-Captives – Rent-a-captives are usually captive insurance companies that are organized essentially to rent out their capital to third parties for purposes of insurance coverage. The owners of a rent-a-captive will issue policies, usually through another entity, collect premiums and invest capital until claims are paid. Sometimes a rent-a-captive will offer a return of underwriting and investment income. The use of a rent-a-captive allows insureds to effectively rent the capital and services (e.g., claims handling) of another entity. Use of a rent-a-captive may be preferable to the organization of a captive insurance company inasmuch as it does not require as much commitment of capital or any significant managerial effort. Rent-a-captives are often offshore entities (or are sometimes domiciled in Vermont) that frequently act as reinsurers of domestic fronting insurance carriers. In this situation, which is common, the parties seeking to use a rent-a-captive will need to find a domestic admitted carrier that is willing at least to front the policy to be reinsured by the rent-a-captive. The use of a rent-a-captive is unlikely to address the need for excess umbrella catastrophe coverage. Moreover, the use of rent-a-captives requires sizeable premiums that can be shared and defrayed by groups, but this requires exchanges of financial information and cooperation that some might find undesirable.
      
      
    • Purchasing Groups – As distinguished from a RRG, a Purchasing Group, as the name implies, pools its resources to purchase affordable insurance from other entities (e.g., traditional admitted or surplus line carriers, Captives, RRGs, or Rent-a-Captives). Once again the suitably of each member as a good insurance risk is an issue, as is the sharing of information about facilities' loss runs, that may make this option unattractive. Still in certain situations, this may be a suitable alternative to facilitate affordable coverage.
      
      
    • Alternative Risk Transfer Vehicles – For more sophisticated and financially sound facilities, there may be other forms of unconventional risk transfer (e.g., securitization, bonding, private indemnity agreements) that may be available.
      
      
• Other Forms of Indemnification and Releases From Liability
  
  

  There are other ways and mechanisms for facilities to attempt to shield themselves from liability and to transfer risks.

  • Facility operators may require physicians and other health care professionals to carry their own insurance with the facility named as an additional named insured.
    
    
  • Facility operators may require vendors (e.g., food suppliers, pharmacists, nursing staff providers, pharmaceutical and medical device suppliers) to carry insurance that lists the facility as an additional named insured. Use of preferred provider agreements might also create economies of scale and facilitate better insurance coverage and transfer of risks.
    
    
  • Use of reliable and competent staffing services, including ones that provide Certified Nurse Aides, which provide their own insurance coverage, and name the facility as an additional named insured, used in conjunction with regular and supervisory facility staff.
    
    
  • Careful use of liability disclosure statements and waivers, combined with diligent initial and in-service training, together with good record keeping, may undercut some claims. While responsible facility's are sensitive to the needs of their residents, the potential risk of accidental occurrences should be made known to incoming residents whenever possible.
    
    

E. Making Claims to Carriers

Finally, while obtaining an appropriate and affordable insurance policy is crucial, the moment of truth arrives when you submit a claim and actually need the benefit of the coverage. With the tightening of the insurance market, it is likely that insurance carriers may scrutinize claims much more closely than in the past and decline coverage more frequently. It is therefore essential that claims submission be undertaken carefully. This will make for a claim that is more likely to be well received and covered without delay. Insurance issues can be complicated and dependent on circumstances peculiar to a particular claim, including disparities in different states' laws. Therefore, counsel should be consulted before going forward with claims. The following are some general rules of thumb that may enhance the chances of your claim be honored expeditiously:

1. Submit all claims to your insurance carriers as soon as possible after receipt. (Although it is beyond the scope of this article, bear in mind that some policies are "claims made" policies. Such policies are usually plainly marked to indicate they are "claims made" policies. This usually materially affects notice requirements). Notice may be accomplished by either writing directly to your carrier, or through your insurance agent. If you choose to have your agent provide notice, be sure that you receive a copy of the notice, and that you are satisfied that notice sets forth your full claim. Also, be sure that all insurance carriers who may be obligated under various policies are put on notice – do not unnecessarily limit yourself unless you are certain a policy will not cover a claim. Many insurance carriers will deny coverage by asserting that notice is untimely. In some states, even a short delay may bar your claim. Inasmuch as you may face a lawsuit, contact your counsel to discuss appropriate action, including which carriers should be sent notice. With regard to insurance coverage, you may wish to confer with counsel who specializes in such matters;
   
   
2. Be sure your notice includes a copy of the complaint, or other documents informing you of the claim. Some policies require specific information be included in your notice. If this is the case, then be sure all such available information is provided;
   
   
3. Retain all of your insurance policies and not just notices of renewals or declaration pages. An insurance policy is a contract that should be kept in a safe place and in orderly condition;
   
   
4. Keep all your records in good order. Once you receive a claim, organize all the records that are pertinent to the claim, and confer with counsel regarding what further steps may need to be taken;
   
   
5. Your insurance carrier may write to you with many questions about your claim, or may have an adjuster make contact with you. If you receive a request for further information, having your records organized will facilitate a quick and cogent response, which may facilitate a favorable claims determination. If an adjuster contacts you, you may wish to have counsel involved. Sometimes carriers contact counsel for adverse parties to obtain information. You should request that all contact from your insurance carriers be directed to your counsel;
   
   
6. In some instances a carrier will undertake a defense of your claim, subject to a reservation of rights as to both defense and indemnity. This means a carrier may withdraw its defense at some point in the future, or decline ultimately to indemnify you if a settlement or judgment is reached. It is essential that you understand the terms of the carrier's reservation of rights as it may have important consequences down the road. Thus, conferring with an experienced insurance attorney may be a prudent investment of resources;
   
   
7. If a carrier denies your claim, you should carefully consider its reasons for denial in light of your policy's requirements and the facts of your claim. Insurance policies can be complicated documents, and often contain terms of art that do not always have obvious meanings and effects. Therefore, a review of the situation should be done with competent counsel. If there are any real bases for disagreement, the carrier should be contacted in writing with a formal explanation of your position, and a reservation of your rights. Thereafter, you may wish to evaluate the situation and take further action as warranted.
   
   

Insurance is a valuable resource. Claims handling is a serious matter that should be approached in a careful and considered manner. After all, you have probably paid a substantial amount in premiums, and you should certainly expect your claims to receive fair treatment, and whenever possible, be paid.

Conclusion

As with other industries, procurement of insurance policies and related claims handling has become a thorny business for owners and operators of long term care facilities. This may be a transitory period. In the mean time, facility owners and operators should carefully consider their alternatives, and when possible, they should pool their resources and knowledge – through associations and other working groups – to get through this current difficult time.