1. Page 1 Casualty Actuarial Society 2002 Seminar on Ratemaking March 8, 2002 Medical Malpractice - Advanced Topics Hospital Professional Liability Rating Prepared by: Richard S. Biondi, FCAS, MAAA Milliman USA

2. Page 2 Hospitals vs. Physicians Rating Hospital rating more complex More judgment required Market more competitive for large risks Hospitals less profitable than physicians Milliman USA

3. Page 3 Largest Physician Writers Milliman USA

4. Page 4 Largest Hospital Writers Milliman USA

5. Page 5 Rating Methods for Hospitals 1.Alternative Exposure Bases/Classifications 2.Experience and Schedule Rating Milliman USA

6. Page 6 Hospital Exposure Base Four most commonly used systems: 1.Conventional System 2.Refined Conventional System 3. HIF System 4.Diagnosis System Milliman USA

7. Page 7 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.) Milliman USA

8. Page 8 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 Milliman USA

9. Page 9 Exposure Base: Conventional System 4.Employed Physicians: Share hospital limits Discounted rates Milliman USA

10. Page 10 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 Milliman USA

11. Page 11 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 Milliman USA

12. Page 12 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) Milliman USA

13. Page 13 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 Milliman USA

14. Page 14 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 Milliman USA

15. Page 15 Experience Rating Plan Plan attempts to more accurately rate an individual insured by using insured’s own experience to the extent it is indicative of future experience Plan must balance experience and credibility Milliman USA

16. Page 16 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 Milliman USA

17. Page 17 Characteristics of a Hospital Rating Plan Use mature limited losses Reflect Trend, Development, ILFs Recognize General Liability coverage, if applicable Adjust for Employed Physician’s Premium Credibility standard Schedule Credits/Debits Aggregate Limitation Factor Milliman USA

18. Page 18 Employed Physician’s 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 doctor. Add EPP to both manual rate and experience loss cost. Milliman USA

19. Page 19 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 Milliman USA

20. Page 20 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% Milliman USA

21. Page 21 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 Milliman USA

22. Page 22 Aggregate Limitation Factor (ALF) Factor to reflect expected amounts of loss that would exceed aggregate policy limit on an annual basis Function of annual expected loss and selected aggregate limit Calculated using simulation technique Milliman USA

23. Page 23 ALF Simulation Procedure Calculate ultimate loss based on recent experience (limited) Severity:1.Select distribution (lognormal) and use limited expected value functions to estimate parameters. 2.Calculate limited average severity and trend to policy effective period. Frequency:1.Calculate expected number of claims based on ultimate loss and average severity. 2.Select distribution (negative binomial) and solve for parameters. Simulate policy year number of claims and severity to calculate losses. Calculate ratio of limited to unlimited loss = ALF. Repeat until convergence. Adjust for ALAE Milliman USA

24. Page 24 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 Milliman USA

25. Page 25 Nursing Home Classes: –Skilled Nursing Care –Intermediate Care –Residential Care –Independent Living Nursing Homes Milliman USA