Malpractice Insurance Costs and Going Bare
With the prospect of at least 10,000 medical malpractice lawsuits a year and the continuation of soaring insurance premiums, what’s a physician to do?
Medical Malpractice Costs
By 2001, the total price tag for medical malpractice litigation in America zoomed to a whopping $21-billion – twice what it was 10 years earlier and 20 times what it was in 1975.
Malpractice costs have become so expensive that more and more physicians are seeking alternatives wherever they can find them. Some are so angry and frustrated by soaring insurance premiums that they are going “bare,” foregoing costly insurance – relying instead, in some cases, on the threat of bankruptcy to bail them out of any hefty patient claims. This is a risky choice, indeed.
Going “bare,” especially when it comes to medical malpractice insurance, has never seemed advisable. Certainly, insurance has played an important part in our healthcare system since the courts began assessing blame for patient complaints and providing recourse for damages.
On the one hand, managed care has drastically reduced the earning power of most medical professionals. What physicians face is a very real threat of out-of-control lawsuits and ridiculously high jury awards. Meanwhile, squeezing the economic equation from the other side are the insurance carriers that once (but no longer) relied upon stock market advances to cushion their losses.
The net effect of all these economic factors has been skyrocketing insurance premiums, which seemingly defy justification.
In some states, general practice physicians, with no surgery and no claims, have seen increases on the order of 300-500 percent in one year alone – a drop in the bucket compared to what some physicians with riskier specialties have seen in recent years.
Types of Malpractice Insurance
There are two distinct malpractice insurance coverages: indemnity and defense.
“Indemnity” refers to policy limits. A policy limit of $1,000,000/$3,000,000 means that the insurance company is obligated to pay out in a settlement or award $1,000,000 per incident and $3,000,000 in the aggregate. “Defense,” on the other hand, is the cost of defending the claim from inception through trial and appeal, if necessary. Together these costs can be staggering, which is why an insurance company always considers both factors when deciding whether to settle or fight a claim.
Therefore, before opting to self-insure, physicians should carefully weigh the cost of current and future malpractice coverage against the cost of fighting a lawsuit alone.
There are other factors to consider. For example, many hospitals require that physicians maintain a certain level of insurance to receive staff privileges. Physicians also should be concerned with state requirements regarding indemnification, when considering self-insurance. The state of Florida, for example, requires doctors to post a $250,000 bond and must be available to satisfy a claim – that isn’t much considering the annual cost of malpractice insurance alone can be upwards of $100,000 or more for certain medical specialties.
If there were a loss in Florida, then the $250,000 posted bond would be used to satisfy the judgment. But what happens if the judgment is $2,000,000, and there is no insurance coverage? The physician would have to pay the excess out of personal assets – $1,750,000 – assuming the physician had no other alternative available.
But there is an available alternative. According to the Wall Street Journal, “Many of the doctors dropping malpractice insurance are sheltering assets in sophisticated trusts or partnerships, safely out of reach from legal judgments down the road.”
With a properly structured asset protection plan, the excess amount of any judgment would likely not come from the physician’s personal assets. In fact, with an asset protection plan in place, assuming there are no other defendants or insurance companies involved, there may be no award or judgment at all. The presence of an asset protection plan in and of itself may be sufficient to deter litigation in the first place.
But even before worrying about paying a judgment, the uninsured MD still has to put up a defense against a claim. Costs just to answer a claim and begin the legal defense process could easily start with a retainer of $10,000-$20,000 – and could be much more, depending on the type of case.
From there on out, the costs would build as long as the case goes on. If it is settled early, the financial bleeding could then stop. If not and a trial ensues, defense costs could easily amount to hundreds of thousands of dollars.
Another insurance option is available in some states that can offset potential defense costs. It’s called a “defense only” policy. At least one company in Florida is writing a policy that provides $100,000 in defense insurance costs. The premium is $5,000 a year. Such a policy, when combined with a solid asset protection plan, could give a physician a great deal of comfort knowing that the vast majority of his or her assets would likely be safe from litigation.
Going Bare Because of High Cost
So what should a physician do? In states where insurance costs are still manageable and claims remain under control, malpractice insurance – expensive though it may be – is still the best first line of defense against potential litigation.
In those states where malpractice costs are soaring beyond reach and bonding is permissible, “going bare” is certainly an option for careful consideration, assuming there are no ethical concerns involved.
Under either circumstance, however, anyone seriously concerned about securing personal assets from possible litigation should consider establishing a strong asset protection plan. A properly drafted Family Limited Partnership (FLP) combined with an International Asset Protection Trust (APT) is still the most secure way to ensure that the courts will not leave you and your bank accounts truly bare.
Having said that, like everyone else in America, physicians are vulnerable to a great many other types of lawsuits besides those involving malpractice. One can be sued for discrimination, sexual harassment, wrongful termination and a myriad of other complaints. In fact, doctors are twice as likely to be hit with a sexual discrimination award than a judgment for medical malpractice!
Therefore, it is our opinion that no individual should go without some level of liability coverage – nor should anyone be lulled into believing that such coverage will provide enough protection to do the whole job. This is why an asset protection plan – which deters all kinds of litigation – is so important.