How does medical malpractice insurance work?
Most health care providers need to buy professional liability insurance. Nearly all states require that physicians have liability insurance. Even in states that don’t, physicians usually have to have insurance coverage in order to get privileges to see patients at a hospital. In some contexts, however, physicians can choose to “go bare.” In Florida, for example, it is estimated that about five percent of physicians carry no liability coverage.
Physicians usually buy their insurance from a commercial company or a physician-owned mutual company, either individually or through a group practice. Hospitals and other health care facilities purchase their own insurance, and hospitals that directly employ physicians typically buy a policy that covers both the hospital and its medical staff. Physicians employed by the federal government don’t buy insurance; if they are sued, the suit is brought against the federal government, which insures itself. Some state-employed physicians receive coverage from the state.
Premiums for malpractice insurance vary with the provider’s degree of risk, but experience rating is not widely used.
Insurers set premiums on a prospective basis based on: 1) their expected payouts for providers in a particular risk group; 2) the uncertainty surrounding this estimate; 3) their expected administrative expenses and future investment income; and 4) the profit rate they seek. They use information on past losses and expenses, combined with other information, to help them set rates.
Physician professional liability insurance does not work like auto insurance, which is generally experience rated. When a motorist has a claim, his insurance premiums go up. Physician malpractice premiums, by contrast, are usually priced according to the physician’s specialty and geographic location only (some insurers also consider number of hours worked and types and setting of work within the specialty). Experiments with individual experience rating have not worked because physicians’ claims experience is too variable over short time periods, making it difficult to produce an actuarially stable estimate of their risk.
For hospitals, some degree of experience rating occurs, but usually no more than 25 percent of the hospital’s total premium is based on experience. Experience rating hospitals is more feasible than experience rating physicians because hospitals’ claims experience is more stable over time.
Hospital premiums also vary with hospital location (e.g., urban versus rural) and the clinical services offered (e.g., level of trauma care).
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