Healthcare firms face ‘a perfect storm’ of liability challenges post-pandemic

The following article was written in association with Amwins.

With the healthcare management liability market growing at an unprecedented rate, increasingly high healthcare spending, including higher employee wages, is driving sector expansion.

According to Health Affairs, healthcare spending reached $4.5 trillion in 2022 and is expected to keep increasing yearly.

Furthermore, the exhaustion of COVID-19 funding, coupled with additional inflationary rises, has seen directors and officers liability (D&O) and employment practices liability (EPL) claims mount even in the typically quieter states.

With so much change on the horizon, what deeper issues and factors in the healthcare management liability market keep professionals up at night? And what can insurers expect to see in the evolving sector in the coming years?

Private equity in the healthcare industry

Yajaira Villegas (pictured), SVP at Amwins Program Underwriters’ healthcare management liability program, said these changes and challenges present a unique opportunity for private equity firms to invest in the healthcare industry.

“All of this came about due to COVID-19,” she told Insurance Business. “In 2020, President Trump enacted the CARES Act – Coronavirus Aid, Relief, and Economic Security Act. One of the act’s most important provisions was the Provider Relief Fund.

“The stimulus money, distributed by the Centers for Medicare and Medicaid Services, had two purposes. First, to provide additional money to cover COVID-19-related expenses, such as the cost of PPE like masks, gloves, and respirators, which hospitals and health systems were incurring. [Second], to cover lost revenue from elective services. For example, plastic surgery procedures were no longer available, causing a drop in revenue and a decrease in patient volume.”

This created a funding issue for hospitals. Costs increased while revenue dried up, making the Provider Relief Fund critical to healthcare’s survival. However, with the Provider Relief Fund no longer an option, hospitals and healthcare systems had to fend for themselves.

Without continued financial support from the federal government, hospitals and other healthcare providers faced significant financial challenges. These included increased operating expenses (from increased wages and benefits), rising inflation (as higher interest rates made it more expensive to borrow money), and a decline in investment income (as healthcare providers relied on investment income to support operations and offset declines in net profits).

“[Hospitals] need staff,” said Villegas. “Their biggest expenses are salaries and the benefits they provide to their staff. [While] some hospitals have great credit and could take out loans, with interest rates increasing, additional debt costs them a lot more.”

After the stimulus money disappeared, the expenses remained. They couldn’t borrow any more money, there was no relief fund to tap into, and any investment income was dwindling.

“It was the perfect storm,” said Villegas. “Private equity firms are looking at healthcare as a very ripe industry where the need for innovation, expansion and the delivery of tech-enabled healthcare can result in significant opportunities for growth and profitability.”

Negative impacts of private equity in healthcare

According to NBC research, over 40% of American hospital emergency departments are overseen by for-profit healthcare staffing companies owned by private equity firms.

The draw is there for employees, too, with research from the Physicians Advocacy Institute finding that nearly 80% of physicians now work for hospitals or other corporate entities while private practices continue to dwindle.

However, Villegas warned that the FTC will likely conduct extensive investigations and audits, specifically into mergers and acquisitions.

“The Department of Health and Human Services (HHS), the Office of Inspector General (OIG), they oversee various regulatory components of healthcare policy and regulation,” she added.

“We also have the Centers of Medicare and Medicaid that, years later, can go back to audit a particular healthcare organization or facility and fine them for misappropriation of funds, billing errors, or noncompliance.”

Private equity investments could negatively impact the healthcare industry in other ways. Villegas pointed out that some PE firms might prioritize profit over the quality of patient care. They are more likely to cut costs by reducing staff, replacing physicians with fewer experienced nurse practitioners or physician assistants, or reducing services altogether to increase profits.

“PE firms invest in various industries, and if they are not familiar with the healthcare industry and the regulatory environment, it can lead to compliance violations, which may lead to more in-depth investigations and, ultimately, costly fines,” Villegas said.

High salaries and high litigation costs

Apart from PE firms’ role in the healthcare system, another issue insurers are grappling with right now is the impact of high salaries and rising litigation costs.

“I am aware of a recent claim involving a physician,” Villegas told Insurance Business. “There was a change in CEO at the hospital. The new CEO had a conflict with a leading anesthesiologist who earned over half a million dollars annually and was part of a group of contracted specialists. The CEO informed the group that if this person [continued] to be part of the leadership team, [they would] not renew [their] contract.’”

Faced with the potential loss of a significant contract, the anesthesiology group decided to comply. However, this led to a lawsuit.

“A suit was brought against the CEO and the hospital,” Villegas explained. “The individual also sued the physician group. The cost to settle and defend the claim exceeded well over seven figures. When someone earns such a high salary, it becomes a matter of principle – they will not go away quietly.”

These super high salaries are driving similarly high claims. Villegas told IB that she’s increasingly seeing more of these high-severity, seven-figure losses.

“As an underwriter, when I see a claim involving a CEO, CFO, any C-suite executive, or a physician, I anticipate that settling these claims will incur significantly higher costs,” she said. “We are pushing higher retentions because we understand that high-value claims typically do not involve frontline workers, such as those who check your medical record card at the hospital reception in the ER.

“For those employees, we may apply lower retentions or deductibles. However, we now recognize the need for higher retentions for individuals with higher salaries in specialized roles. And the marketplace is aligning with this need.”

Staffing shortages and burnout

Due to COVID-19 and its impact on the healthcare workforce, Villegas has observed the profound impact these challenges have on healthcare workers, especially where stress is concerned.

“For many healthcare staff, burnout was very real. That’s another challenge and expense for hospital systems,” she said. “Yes, they’re in the business of providing patient care [yet] I don’t think they anticipated how much support their own employees would require due to increased patient volumes and longer work hours, which left many feeling overworked and undervalued.  

“The good news is many hospitals have made efforts to improve employee assistance programs [EAPs] for their employees by offering online behavioral mental health support.”

Staffing shortages, particularly among nurses, have also been exacerbated by the pandemic.

“Most hospitals had to contract nurses due to shortages,” Villegas added. “Many nurses left their facilities to join staffing agencies for higher pay. Salaries remain high because employers want to retain good employees and have been unable to reduce salaries since COVID.”

To combat these staffing issues, hospitals are getting creative with their recruitment strategies.

“Healthcare does not appear to be an attractive industry for many of the younger generation,” Villegas said. “Hospitals are reaching out to local high schools and universities, offering internships and even helping to finance a portion of their schooling as a recruitment strategy.”

In conclusion, the healthcare management liability market is deeply concerned about the increasing influence of private equity firms in the industry, drawn by opportunities for profitability amid regulatory scrutiny and potential impacts on patient care quality.

Insurers can expect continued scrutiny and potential legal challenges, especially regarding high salaries and rising litigation costs, which are shaping new underwriting strategies and market dynamics in the evolving healthcare sector.

Learn more about Amwins’ healthcare management liability program.