Growth, Stability and Changes in Store for Long Term Care Market

By | November 14, 2010

With the first of 77 million baby boomers nearing retirement age in 2011, assisted living facilities and nursing home facilities will play a more important role than ever before. About three million Americans will require long term and post-acute care this year alone. And the demand for long term care services is expected to more than double by 2040, according to the American Health Care Association (AHCA). With such dramatic changes on the horizon, the long term care industry is making giant steps toward improving patient care and how they do business, say some insiders.

“Ten or 15 years ago, for the for-profits (long term care providers) for example, profit wasn’t the motive; it was the primary goal,” said Dominic Colaizzo, managing director of Aon Risk Solutions’ Health Care practice. “Now the smart CEOs are saying quality is my primary goal. Profit will come if I provide a quality service.”

And that focus on quality care seems to be paying off at least when it comes to the insurance market. Liability insurance pricing and availability for long term care providers are good and getting better.

The majority of states now enjoys a stable and healthy long term care liability market. General liability and professional liability pricing for long term care facilities remains soft and will continue to remain soft well into next year, Colaizzo predicts.

The industry’s focus on quality care is just one reason for the market’s stability, adds Christian Coleianne, associate director and actuary of Aon Risk Solutions’ Actuarial and Analytics practice. Coleianne also cites industry initiatives such as improved standards for electronic health records as a reason why loss costs and severity are on the decline for the sector. Tort reform measures also have played a key role in the long term care liability market’s stable outlook.

Nationwide, the average annual loss cost per bed has decreased from $1,710 in 2001 to $1,270 in 2009, according to the 2010 Long Term Care: General Liability and Professional Liability Actuarial Analysis, published in August 2010 by the Actuarial and Analytics Practice of Aon Global Risk Consulting (Aon). The frequency rate has also slightly decreased from 1.05 percent in 2007 to .94 percent in 2009 and the severity rate has been stable since 2007 at $135,000.

The study also found that the loss cost as a percent of the Medicaid per diem reimbursement rate has also decreased – from 4.07 percent in 2001 to 2.09 percent in 2009.

The study, conducted in partnership with the AHCA, measures the frequency and severity of claims, tracks the loss cost as a percent of the Medicaid per diem reimbursement rate and calculates the overall loss cost per occupied long term care bed.

Problem States

While the majority of the nation seems to be enjoying stable loss costs and severity for general and professional liability in the long term care sector, the study showed three states where long term care providers might find a more turbulent insurance market.

The study revealed that Arkansas, Tennessee and West Virginia are experiencing exceptionally high loss costs.

Arkansas is experiencing the highest loss cost per occupied long term care bed, the most severe claim trend and the highest loss cost as a percent of the Medicaid per diem reimbursement rate, the study found. The estimated loss cost per bed in 2009 was $3,990, down from a peak of $6,800 in 2001.

While there is some level of tort reform in Arkansas, the limit is high, says Coleianne. “Their cap on non-economic damages is $1 million. In others states that are in the study, the caps are much lower, generally around $250,000 per claimant.”

Coleianne added that despite the cap, the tort reform measure can be circumvented for non-economic damages if intent to harm is found. “So in that case, there’s a way around the cap.”

Even so, the $1 million cap on non-economic damages, enacted in 2003, has made a difference. In 2009, the average claim severity in Arkansas was $380,000, down $110,000 from 2005. The loss cost as a percent of the Medicaid per diem reimbursement rate was down from 23.98 percent in 2001 to 7.63 percent in 2009.

In West Virginia the loss cost per occupied long term care bed has increased from $1,380 in 2001 to $3,770 in 2009, the second highest in the Aon study. At $290,000 per claim, West Virginia’s average claim severity was the third highest as was the loss cost as a percent of the Medicaid per diem reimbursement rate at 5.51 percent.

Tennessee had the third highest loss cost per occupied long term care bed at $3,070 and the second highest average claim severity at $357,000. Increasing severity per claim was the driver behind loss cost increases, the study found. The loss cost as a percent of the Medicaid per diem reimbursement rate was flat over the past several years, but at 5.83 percent, it was still the second highest.

“Tennessee and Arkansas have been on the radar for quite some time as having high cost,” Coleianne says. Arkansas in particular has had a difficult time with very little capacity in the long term care sector, he added. “There really is not any kind of capacity. the folks that are there are forced to self-insure. Even the self insurance organizations that they have carry very low limits because they really can’t fully fund for the cost.”

West Virginia is an odd case because the state implemented tort reform in 2004 but has yet to show relief in terms of cost. “We would have really expected to see some sort of downward trend in their claims costs, but we haven’t seen that,” Coleianne says. “Research that I’ve done around the tort law environment there suggests that maybe defendants have limited access to appeal. That may influence their willingness to settle cases.”

Overall Market

Aside from Arkansas, Tennessee and West Virginia, long term care providers in most states can find affordable and available general liability and professional liability. Aon’s Colaizzo says right now there is plenty of capacity and more competition within the markets for both small and larger long term care facilities.

While small long term care facilities – those with two or three individual facilities owned by private owner – and large corporate for-profit long term care groups are both experiencing good insurance market conditions, they have very different needs for coverage, Colaizzo says.

“The small guys would need to buy almost per dollar coverage or small deductibles, and the very, very large take high retentions or take retentions that aren’t so high to manage their profitability.”

Colaizzo says in long term care facilities, the greatest loss area maybe in workers’ compensation, notably employee safety concerns. However in acute care settings the medical malpractice line might see higher loss costs due to more patient injuries.

“You have more complexity in the care of the patient (in acute settings), whereas in nursing homes you have more of a maintenance situation, bedsores, falls, those kind of incidents,” Colaizzo explained.

Colaizzo has seen a movement in long term care since the last market crises and even today of larger insureds entering into the alternative risk transfer market for primary coverages, either by forming a captive insurance company or a risk retention group, or forming a captive with a fronted insurer where they assume the risks. “More and more long term care providers are looking to self-insure their working or primary layer of coverage, and that takes money out of the insurance marketplace,” he says.

Large facilities moving into the alternative market is nothing new, but the trend is still happening today.

“And then once the people take on some retention like that, they never go back,” Colaizzo says. “They’re not only saving money, they’re in control of their own destiny. They are controlling their own claims and not relying on a third party to control their claims or consent or settle their claims on their behalf. … then they can access the reinsurance marketplace which provides a broader marketplace.”

While most larger long term care facilities have captives, Colaizzo is seeing more smaller groups with 10 to 15 facilities enter the alternative market.

Future Reform

No one knows exactly how, or if, federal health care reform measures will impact the long term care industry. But Colaizzo predicts the bundling of payments and services for medical facilities and possibly even long term care facilities in the future might change the way the sector operates.

“I might, as a long term care provider, want to bundle my services so that I’m more attractive to contract with accountable care organizations or with hospitals for that component of the bundled payment,” he says. “With that, I have to look at that risk a little differently.”

Another concern that might come up is that with a shortage of doctors in the long term care sector, nurse practitioners will have a greater role in patient care, he said. “They’ll have a greater role overall in health care. But nurse practitioners will have a greater role in long term care,” he says. As a result the industry may see the liability of nurse practitioners increase over time.

“Whereas now they may be underwritten as a nurse, but later, as time goes on, and they take more of a primary care, supervisor of medical care role,” liability could increase, he predicts. These are just a few of the things that keep Colaizzo awake at night.

Topics Trends Profit Loss Virginia Market Tennessee Aon Arkansas West Virginia

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