Casualty Actuarial Society 2002 Seminar on Ratemaking March 8, 2002 Medical Malpractice Advanced Top - PowerPoint PPT Presentation


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Casualty Actuarial Society 2002 Seminar on Ratemaking March 8, 2002 Medical Malpractice Advanced Top


Credits or debits for (1) known characteristics of risk not reflected in the ... Existence or lack of continuing education programs for staff ... – PowerPoint PPT presentation

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Title: Casualty Actuarial Society 2002 Seminar on Ratemaking March 8, 2002 Medical Malpractice Advanced Top

Casualty Actuarial Society 2002 Seminar on
RatemakingMarch 8, 2002Medical Malpractice -
Advanced TopicsHospital Professional Liability
  • Prepared by
  • Richard S. Biondi, FCAS, MAAA
  • Milliman USA

Hospitals vs. Physicians Rating
  • Hospital rating more complex
  • More judgment required
  • Market more competitive for large risks
  • Hospitals less profitable than physicians

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Largest Physician Writers
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Largest Hospital Writers
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Rating Methods for Hospitals
  • 1. Alternative Exposure Bases/Classifications
  • 2. Experience and Schedule Rating

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Hospital Exposure Base
  • Four most commonly used systems
  • 1. Conventional System
  • 2. Refined Conventional System
  • 3. HIF System
  • 4. Diagnosis System

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Exposure Base Conventional System
  • Three Step Process
  • 1. Facility classified as
  • Clinic, dispensary, infirmary
  • (out-patient only)
  • Convalescent or nursing home
  • Hospital NOC (not otherwise classified)
  • Mental institution
  • Miscellaneous (blood banks, wellness
    centers, etc.)

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Exposure Base Conventional System
2. Further classification For profit Not
for profit Government 3. Given type of
facility 2 main exposure bases Occupied beds
- average number of occupied beds per
year 100 outpatient visits (annual) 2000
outpatient visits 1 occupied bed
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Exposure Base Conventional System
  • 4. Employed Physicians
  • Share hospital limits
  • Discounted rates

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Refined System
  • Refined bed classifications (1) neo-natal, (2)
    obstetrical, and (3) other
  • Refined outpatient visits (1) surgical visits,
    (2) emergency room visits, and (3) all other
  • More responsive to risk characteristics of
    individual hospitals

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HIF System
  • 1986-87 - Large HPL insurers (Hospital Insurance
    Forum) commissioned actuarial study to analyze
    alternative rating loss
  • Recommended Exposure Base
  • (1) Acute Care Occupied Beds
  • (2) Psychiatric Occupied Beds
  • (3) Extended Care Occupied Beds
  • (4) Births
  • (5) Inpatient Surgeries
  • (6) Outpatient Surgeries
  • (7) Emergency Room Visits
  • (8) Other Outpatient Visits

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Diagnosis System
  • 1994, St. Paul develops significantly different
    HPL exposure based system
  • Inpatient exposures rated on a discharge basis by
    diagnosis type (elimination of length of stay)
  • Outpatient visits rated by type (emergency
    visits, surgical visits, and all other)

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Diagnosis System
  • Type of Diagnosis
  • 19 major categories (International
  • Classification of Diseases, WHO)
  • Eight Rating Categories
  • Examples Group contains infectious
  • and parasitic disease, blood and blood
  • forming organic disease, skin and
  • subcutaneous tissue disease
  • Conversion Factors

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Variables Not Measured by Exposure Bases
  • Patient Demographics - Age, Education, Income
  • Specialty Hospitals - e.g. Manhattan Eye Ear
  • Outsourcing of Hospital Functions - e.g.
    Emergency Room

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Experience Rating Plan
  • Plan attempts to more accurately rate an
    individual insured by using insureds own
    experience to the extent it is indicative of
    future experience
  • Plan must balance experience and credibility

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Experience Rating Plan
  • Three step process
  • 1. An experience loss cost is developed using the
    actual loss experience of the insured
  • 2. A premium is developed based on the manual
    rate, which is the experience of all insureds
  • 3. The results of the first two steps are
    combined and any necessary adjustments are made

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Characteristics of a Hospital Rating Plan
  • Use mature limited losses
  • Reflect Trend, Development, ILFs
  • Recognize General Liability coverage, if
  • Adjust for Employed Physicians Premium
  • Credibility standard
  • Schedule Credits/Debits
  • Aggregate Limitation Factor

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Employed Physicians Premium (EPP)
  • EPP computed using current rates for each rating
    class and territory.
  • Give credit for EPP losses already included in
    loss experience.
  • Give discount to reflect lower cost of insuring a
    hospital employee relative to a self-employed
  • Add EPP to both manual rate and experience loss

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Credibility Standard
  • Dependent on hospitals size and length of
    experience period
  • Typical Formula Credibility N/(N 500)
  • where N bed equivalents for all
    experience period years combined
  • Occupied beds Outpatient Visits
  • 2,000

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Schedule Rating
  • Credits or debits for (1) known characteristics
    of risk not reflected in the experience or rate,
    or (2) changes in the nature of the risk since
    the end of the experience period
  • Usually subject to maximum credit/debit of 25

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Examples of items used for Schedule Rating
  • Compliance/non-compliance with insurance company
    loss prevention recommendations
  • Existence or lack of continuing education
    programs for staff
  • Accreditation or lack of accreditation by Joint
    Commission on Accreditation of Hospitals or
    American Osteopathic Association
  • Existence or lack of effective patient incident
    reports and analysis system

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Aggregate Limitation Factor (ALF)
  • Factor to reflect expected amounts of loss that
    would exceed aggregate policy limit on an annual
  • Function of annual expected loss and selected
    aggregate limit
  • Calculated using simulation technique

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ALF Simulation Procedure
  • Calculate ultimate loss based on recent
    experience (limited)
  • Severity 1. Select distribution (lognormal) and
    use limited
  • expected value functions to estimate
  • 2. Calculate limited average severity and trend
  • policy effective period.
  • Frequency 1. Calculate expected number of claims
    based on
  • ultimate loss and average severity.
  • 2. Select distribution (negative binomial) and
  • for parameters.
  • Simulate policy year number of claims and
    severity to calculate losses.
  • Calculate ratio of limited to unlimited loss
  • Repeat until convergence.
  • Adjust for ALAE

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Nursing Homes
  • Once rated as class of hospitals
  • Free standing vs. part of hospital
  • Rate per resident was 5 - 10 of acute care
    hospital bed rate
  • Today much higher 50 relative to acute care
    hospital bed rate
  • Biggest increases in Florida, Texas, Southern US

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Nursing Homes
  • Nursing Home Classes
  • Skilled Nursing Care
  • Intermediate Care
  • Residential Care
  • Independent Living

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