The self-insuring option

In the United States, malpractice insurance is one of the more expensive, and often unpredictable, overhead items in medical practice. This is especially true in some high-risk areas around the country, where the premiums can be into the six-figure range annually and the medicolegal environment is particularly litigious. There have also been times during which insurance has been difficult to obtain or become exceedingly expensive. Historically, this was an issue in the 1970s, 1980s and early 2000s. The resulting concept of self-insuring, although not universal, became an increasingly common strategy among high-risk specialties. The most common include OB/GYN, plastic surgery, orthopedic surgery and neurosurgery; however, the model is by no means limited to these specialties. 

Consider one example of a mixed interventional radiology and diagnostic radiology group of 27 physicians: in 2005, the annual malpractice premium for this group exceeded $1.3 million. Leading up to that point, premiums had increased by double digit percentages for several of the preceding years. Various strategies, including lowering limits and introducing deductibles, failed to result in any meaningful savings. At the time, a mature policy premium for an interventional radiologist with no prior claims history could cost more than $60,000 per year. Additionally, any diagnostic radiologist who happened to do minor procedures, such as paracenteses, thoracenteses, thyroid biopsies and lumbar punctures, were treated the same as an interventional radiologist by the insurer. Any physician with a history of medical malpractice suits, regardless of the outcome, paid an even higher annual premium.

At that point, the concept of self-insuring became a viable alternative for the group.

Self-insuring vs. “going bare”

Self-insuring is sometimes erroneously equated with “going bare.” The distinction is important. Going bare means practicing without malpractice insurance and without a structured plan to manage potential claims. It is unstructured, high risk and in this author’s opinion, reckless. The physician remains fully liable for any claims and legal fees, but has no organized mechanism for legal defense, claims management or financial preparedness.

Self-insuring, on the other hand, means taking ownership of, and responsibility for, much of what a commercial insurer would traditionally provide. In essence, the physician/group becomes its own insurer and reclaims risk management autonomy. It is a deliberate process that includes arranging legal defense, establishing a means for managing suits, satisfying any negotiated claims or judgements, and operating in compliance with applicable state rules and regulations. Asset protection is an integral component, and the strategies utilized are no different from those used in routine personal and business financial planning.  

The concept of self-insuring is not unique to medicine. Some large corporations will self-insure for employee health benefits or workers’ compensation. The principle is the same: assuming direct financial responsibility for risk in exchange for more control and lower costs.

Creating a self-insured model is not difficult; however, it cannot be overemphasized that engaging experienced legal and financial advisors is essential. Rules and regulations vary significantly from state to state, and the regulatory landscape is constantly changing. As of now, there are several states that mandate individual medical malpractice insurance, thereby prohibiting self-insuring: Colorado, Connecticut, Kansas, Massachusetts, New Jersey, Rhode Island and Wisconsin. While not strictly forbidden, other states including Indiana, Louisiana, Nebraska, New Mexico, New York, Pennsylvania and Wyoming have regulations that heavily disincentivize self-insuring. In some of these states, self-insured physicians face the added risk of direct personal liability that would otherwise be absorbed by an insurer. And, independent of state regulations, health insurance networks and hospital credentialing rules may impose additional requirements.

Pieces of the puzzle

Risk and reward: It is important to note another key difference from conventional insurance: when a claim is to be paid, it is paid by the physician or group, not by the insurer. While individual claims can be costly, the rationale behind this strategy is that the savings realized by eliminating insurance premiums will more than offset costs and claims over time.

A significant benefit of self-insurance is the removal of the perceived “deep pocket” that attracts litigation. Subjectively, without a visible insurance policy, the financial incentive to pursue frivolous or marginal lawsuits against self-insured entities is substantially diminished. However, this is an observation, not a guaranteed outcome.

Legal defense: Numerous law firms and individual attorneys provide services for self-insured entities on a prepaid or retainer basis, particularly in high-risk areas. As with any service, the experience and a track record of the legal team should always be considered. There is also a cost: typically, there is an annual retainer fee covering the physicians and the group as a whole. The fee can often be prorated and paid monthly throughout the year, and the retainer usually covers legal services and litigation costs, including management of letters of intent, depositions, discovery and negotiations. This is in contradistinction to the front-loaded and much larger premium payments often required by insurance companies.

However, unlike insurance companies, which can and do settle claims—sometimes over the objection of the client—the legal defense team works collaboratively with the physicians and groups, providing legal advice, risk assessment and strategic counsel. Decisions ultimately lie with the medical group and its members.

Demonstrating financial responsibility: The requirements for demonstrating financial responsibility differ by state. In some instances, one need only to pledge that they will fulfill adverse judgements in accordance with the rules of the state. Failure to comply could result in suspension of one’s medical license. In some cases, a letter of credit or escrow may be required. These latter methods may have unintended consequences: by re-establishing a visible fund, they may recreate the very target that self-insurance was designed to eliminate.  

Asset protection: Asset protection is not a strategy unique to self-insurance. Many of the tools involved are also used regularly in estate planning. Rules vary by state, but in most states, one’s primary residence is protected to some extent. Most states have capped limits on homestead protection, while a few states, such as Texas and Florida, have nearly unlimited protection for a domicile. On the other hand, New Jersey and Pennsylvania provide no homestead protection. A home mortgage and home equity line of credit provide an added layer of protection by reducing accessible equity.

While not universal, other modalities can provide varying degrees of personal asset protection, including IRAs, pensions, life insurance policies, annuities, accounts held as joint tenants by the entirety (JTBE) and limited liability companies (LLCs). Again, rules vary by state and may be situational. Professional financial and legal guidance is strongly advised.

Corporate asset protection is also not unique to self-insurance. Tools such as business loans and lines of credit are commonly used in the normal course of business. In many practices, the accounts receivable represent the largest and most important asset. When used as collateral, the lending institution holds the first lien on the receivables, thereby protecting them from potential judgement creditors.

Caution: Any estate and corporate planning measures must be set up well before any claims, demand letters or lawsuits arise. Transferring or restructuring assets too close in time to a known or expected claim can be considered a “fraudulent conveyance” or “voidable transfer”, potentially exposing the physician to additional liability.

Tail coverage considerations: When transitioning to a self-insured model, tail coverage should be reviewed. Is it included in the prior policy? Does it require a separate purchase or expenditure? Could it be included under the new self-insured model with the legal defense team?

Advantages of self-insurance

Eliminating the deep pocket: As previously discussed, the absence of a visible insurance policy changes the dynamic when a lawsuit is being considered. Financial incentive is reduced, particularly when it comes to pursuing frivolous or marginal claims. Under the commercial insurance model, when considering claims, there is a threshold below which settling a claim becomes a business decision for the insurer, potentially independent of the facts of the case. This can have significant professional and personal impacts upon the individual being sued, but these issues may not enter the discussion. How many times have we heard “It’s not personal, it’s just business?” Yet for those who are self-insured, some marginal cases may never come to light.

Control of the defense strategy: Self-insured physicians maintain involvement and decision-making authority over their own defense. Cases are evaluated on their merits, or lack thereof, and the physician directly participates in the discussions and decisions about whether to defend, negotiate or settle.

Cost reduction and predictability: While individual claim costs may vary, the cost of the self-insurance model, including the annual retainer fee and asset protection planning costs can be more predictable and manageable compared to the cost volatility of commercial insurance.

Self-insuring in practice

The mixed IR/DR group mentioned earlier transitioned to a self-insurance model in 2005. Over the subsequent twenty years, they observed significant reductions in letters of intent (-85%), number of settlements per year (-58%), and average annual settlement payout (-76%). These results were achieved while the group was proactive with maintaining responsibility for, and ownership of, their risk management and legal defense. This is by no means a scientific evaluation, but simply an observation. Insurance premiums were not simultaneously tracked over the same time period, nor were trends in malpractice claims and tort reform.

Catastrophic lawsuit

The goal, of course, is to avoid a catastrophic judgement, which is rare, but can happen. It is worth noting that even with conventional medical malpractice insurance policies, there is only limited protection against truly catastrophic outcomes. The excess falls back on the physician or group regardless of the insurance model. The post-judgement options available to a physician, including appeal, negotiation, structured settlement, or bankruptcy protection, are the same with either insurance model. 

Disclaimer: This article does not advocate for or against self-insuring. Every group and individual physician will have unique circumstances, practice settings and state specific rules and regulations to consider. Sound professional legal and financial advice is always recommended.