It has been a decade since we witnessed the last buying frenzy that led many doctors to sell their practices to local hospitals. The last time this happened, physicians received payments for their practices and employment contracts that guaranteed their income for a number of years. Most of those deals fell apart after three to five years with the hospitals cutting loose the medical practices without getting any of their investments back. Many of the doctors in those practices kept right on practicing, as they had before, but were able to pocket the money they made from the sale of their practices, a big win for the doctors.
We are again witnessing a buying frenzy. The Accountable Care Act and other economic pressures are generating significant interest in buying physician medical practices in virtually all specialties all over the U.S. Some of these are simple takeovers with the physicians guaranteed about 5 years of income. Some are very lucrative to the sellers, with the partners receiving significant multiples of their current incomes at the time of sale and guarantees of future income for about five years. This time, it does not look like the deals are going to unwind.
The future of reimbursement for medical care is moving in the direction of insurance companies and the government making a single payment for all services related to a particular ailment. For example, if a pedestrian is hit by a car, the insurance company or government will assign a value to the treatments needed for that injury and make single payment to cover the Orthopedist, Plastic Surgeon, Anesthesiologist, Radiologist, Surgery Center or Hospital and all other components of care. This is one of a number of factors driving large institutions like hospitals to purchase medical practices because they want to control how these payments will be divided up.
Also, many doctors understand that insurance companies are not paying a level fee across all similar specialties in their neighborhoods and that the best way to assure the highest level of reimbursement is to merge into large groups that can leverage that size into negotiating clout. After these mergers and subsequent negotiations with insurance companies, some doctors have seen their incomes for the same patient load increase by over 15%, a huge increase in take home pay. These factors, among others, have led to an upheaval in the way physicians practice, and in a reduction of solo practices.
The goal of this posting is to provide advice on managing some of the insurable liabilities associated with these transactions. In particular, it will deal with the Malpractice and Director’s and Officer’s exposures. This posting won’t be too detailed, but will give you enough information to make sure you are asking the right questions. Working with an experienced Healthcare Insurance professional is very important.
DIRECTORS AND OFFICERS EXPOSURE ON THE SALE OR MERGER OF MEDICAL PRACTICES
We’ll deal with the Directors and Officers (D&O) exposure first because it’s the simplest. This is not an issue for solo practitioners and is probably not a big issue for small groups of 2-5 physicians, but in larger groups, particularly those composed of a mix of older and younger physicians, where the interests in selling the practice and giving up control may be far apart, this can be a major issue. The senior partners with retirements looming in the next 5-7 years may be delighted to take some cash up front for the sale of the practice, particularly with income guarantees at current levels at a time that they are seeing their reimbursements drop. The younger associates may feel that they didn’t enter private practice to work as an employee of a large corporation; they entered private practice to have some control over the future of their practices. Disagreement like these can lead to large lawsuits, much of which can be protected by D&O insurance coverage. Having said this, it may be hard to obtain this coverage if a group already is in negotiations for an acquisition or merger. All medium and large-sized groups should consider whether D&O coverage should be a part of their insurance portfolio. I can’t begin to tell you how often I’ve seen practices that run really well, with much camaraderie, fall into infighting over issues they never expected. D&O Insurance can often help.
MALPRACTICE INSURANCE ISSUES ON THE SALE OR MERGER OF PHYSICIAN PRACTICES
MAKING SURE ALL PAST SERVICES ARE COVERED
Malpractice claims can follow a physician for a long time after services are rendered, often 3-5 years and for over 21 years if children are involved so it’s very important to deal with this issue carefully during mergers and acquisitions. The focus here is not on claims for treatments provided after the merger or acquisition, it’s for those services rendered before the change in ownership. If the group being merged or acquired is covered under an Occurrence policy (one that does not require a tail, this is not a concern, because all future claims for services provided before the merger, will continue to be covered by those policies. If the group being merged or acquired is covered by a claims made policy, it is important to make sure the transition is completed without creating gaps in coverage. See our October 2009 blog posting http://www.medmalinsuranceblog.com/index.php/2009/10/
DEMAND TRIGGER POLICIES CAN LEAVE YOU WITH A GAP IN COVERAGE
Physicians insured by a claims made policy (which is most private practice physicians in the US), must secure a tail when they cancel that policy or make arrangements to have the same period that was covered by the claims made policy taken over by the new insurance carrier. If they fail to do this, any new claims that come in for that coverage period will not be covered and will expose the doctor’s personal assets to lawsuits. The free tails that are offered for death, disability or retirement, do not cover this situation.
Also, it is important to know whether the claims made policy has an “incident” or “demand” trigger. If the policy has an incident trigger, transitioning to another company that takes over the prior exposure is usually not a problem because the company being replaced will continue to cover any bad outcomes they were told about before the policy was cancelled. If the previous policy had a “demand” trigger or some hybrid version of a “demand/incident” trigger, it is important to determine whether the insured doctor reported any bad outcomes (“incidents”) that were not yet claims at the time of policy cancellation. If incidents were reported and claims come in after the merger, they may not be covered by the old or new insurance companies. See our November 2009 blog posting See our October 2009 blog posting http://www.medmalinsuranceblog.com/index.php/2009/10/. Having an incident doesn’t mean you cannot be part of a merger or acquisition; it requires special handling and has to be considered. Managing a merger or acquisition for large groups can get very tricky because of situations like this and making sure that you are using knowledgeable attorneys, accountants and insurance brokers is important.
DEALING WITH THE NEED TO SECURE A TAIL
There is no rule of thumb on how Malpractice Insurance will be handled by the acquiring entity. Those that continue with traditional insurance may:
- Allow you to keep your current policy
- Require that you insure with its carrier, but the carrier will pick up the prior exposure
- Require that you insure with its carrier, but the carrier will not pick up any prior exposure so you have to purchase a tail.
(There is a version I have seen where the doctor or group being purchased or merged is told “if you like your current Malpractice insurance, you can keep your current Malpractice insurance” only to be told a year later, if you want to remain part of our group or get all of its benefits, you’ll have to switch to the group’s insurance plan.)
If the plan is for the practice being acquired to move to the new entity’s self-insurance plan, this is handled by:
- The physicians purchasing a tail with their own funds or with funds provided as part of the transaction or
- The physicians initially continuing with their own policies for 3-5 years and, when the new entity feels they are far enough away from any exposures of the old practice, folding all the exposures including that from the old practice into its self- insured program.
There are, of course, infinite variations of the above.
IF YOU NEED A TAIL, WHERE DO YOU BUY IT
It used to be the case, that the only place to purchase a tail was from the insurance company that insured you in the earlier practice (unless you were covered by a new claims made policy after the acquisition and the new company took over the old exposure, called securing a “nose.”) This is no longer the case. The premium for a tail from the physician’s current insurance company can range anywhere from about 125% of the expiring premium to over 300%. The usual cost is about 200% of the expiring premium. But there are quality companies that will provide a tail for another company’s policy at premiums that are anywhere from 10%-40% lower than the current company’s pricing. These are called “standalone” tails and are a good way to go.
There are, of course, many other types of insurance that practices will have to deal with if they are merging or being acquired. These include Workers Compensation, Office liability, Health, Pension Plan Bonds and more. Handling these is usually fairly straight forward. They usually are occurrence policies and can be cancelled after the practice being sold or merged ceases to exist, but even these should be dealt with only after obtaining professional advice.