Skip to main content

How Hospitals Can Cut Medical Liability Costs

By Roxanna Guilford-Blake, for HealthLeaders Media  
   December 13, 2010

Medical liability costs continue to grow for hospitals, but the secret to controlling this isn't necessarily found in the financials. It's cultural. And that may leave a CFO wondering just what he or she can do to bend that cost curve.

"The reality is there's little finance can do directly to reduce those costs," says Jeff Rooney, interim CFO at Saint Agnes Medical Center in Fresno, CA.

But the C-suite is far from powerless. In fact, a CFO can drive change by making it a priority. A greater commitment to patient safety drives lower liability expenses; the changes that reduce medical liability costs are cultural, not overtly financial, say the experts. "First and foremost, the CFO needs to be an ardent supporter of internal quality/safety initiatives," says Rooney, who is a partner with Tatum, LLC, an Atlanta-based executive services firm, and has served as interim CFO at several hospitals and health systems.

Overall medical liability system costs, including defensive medicine, are estimated to be $55.6 billion in 2008 dollars annually, or 2.4% of total healthcare spending, according to a report by Harvard's Michelle M. Mello and colleagues, published in the September Health Affairs. That study looked at the cost of the risk-management function. "Using the most conservative estimate of $185,000, the estimated national cost of risk-management operations for all 5,708 registered U.S. hospitals is approximately $1.06 billion. This figure is also conservative because it does not include risk-management costs for other types of facilities, such as independent ambulatory surgery centers."

Involve the C-suite
Elevate liability coverage issues to the C-suite, counsels says Todd Nelson, technical director in charge of senior financial executives for HFMA (and a former hospital CFO). Discuss these issues at the executive level and the board level. He points out that quality was once a middle-management issue. It moved to the C-suite and board level as payment began to be tied to quality scores.

There are no quick fixes. "It's hard to spend less in the short-term. You have to take a long-term view on this," says J. Garrett Parker, CFO of Risk Management Foundation in Cambridge, MA, and treasurer of Controlled Risk Insurance Company of Vermont, which is based in Burlington, VT. "The CFOs I see that are more engaged in a dialogue about patient safety contribute to the success of an organization."

His advice: Understand where your exposure is and what the root causes are. Once you have a grasp on that, and how your organization is faring compared to peers, you can map a course that's dictated by the data.

Create a risk-management and quality dashboard, suggests Nelson. Each organization's dashboard elements will be different, but, ideally, you want to monitor quality measures related to risk?falls, employee accidents, number of malpractice suits, etc. Make sure the executive team is tracking these trends so they can reverse them before they get out of control, he says.

Then put the power of the purse behind the call for change. Once the executive team has identified high-risk areas, allocate money to reduce the risk, Nelson says. For instance, if patient falls are increasing, allocate capital funds for equipment to limit that risk; if workplace injuries are an issue, invest in equipment to help staff lift the patients.

Review the coverage
If you have outside coverage, take advantage of everything your insurer offers, says Nelson. You may be able to align internal improvements with incentives from insurers.

CFOs also should look for potential pitfalls; they should review their policies carefully with an attorney experienced in insurance coverage issues, says attorney William J. Spratt, Jr., a partner with K&L Gates' Miami office. Many policies have exclusions and limitations that effectively nullify the coverage, he warns. "Unfortunately, the exclusions become the focus when a significant claim arises and the insurance company seeks to deny or rescind coverage."

A detailed analysis of the policies and the foreseeable risks, by an experienced insurance coverage attorney, will reveal gaps in coverage, Spratt says.

 From there, the CFO, working with the head of risk management, should develop a matrix and:

  • Analyze the loss ratios across all lines of insurance
  • Analyze the cases for trends
  • Develop a proactive strategy to tailor coverage for the predictable risks and develop risk abatement strategies

Monitor the cases
The CFO also should monitor the status of cases. Rooney advises monthly or quarterly meetings between the CFO and chief legal counsel. "Regular review of new cases and proper estimation of reserves is essential, which can be a bit of an art and needs the input of an experienced litigation attorney."

The hospital legal department should include at least one attorney with medical liability insurance experience, he adds. "This helps not only with estimating reserves but in managing the costs of outside law firms hired to defend the hospital."

Monitoring reserves makes sense, but the lessons learned may come too late. "The self-insurance reserve is a lagging indicator," Rooney warns. "By the time it starts moving up, it's too late."

The same may apply to any clues yielded on the balance sheets, says Spratt.

"The effects of operational and budgetary decisions generally are unlikely to manifest themselves in losses in the short term. By the time the losses show up on the balance sheet, the operational decisions that gave rise to them are often a distant memory."

Nevertheless, he adds, it is helpful to analyze spikes in losses "and attempt to correlate them to operational changes made at or shortly after the time of the events that gave rise to the losses. Increases and decreases in expenses in a particular department may correlate to incidents that later gave rise to claims."

 It is also instructive to track increases and decreases in premiums against risk assumption to determine the appropriate cost-effective level of risk assumption for the hospital, Spratt says. For example, a hospital may wish to self-insure at a higher deductible to reduce its premium. The savings achieved over the policy with a lower deductible may be more than sufficient to manage self-insured claims, allowing for a lower-cost, higher-deductible policy. But the opposite may also be true, he warns.

Rethink the culture
But these considerations notwithstanding, it comes back to a culture of safety, driven from the C-suite. "The integration of risk management with the quality function is the most important factor that will result?in fact is resulting?in a long-term trend of decreases in liability insurance costs. I haven't had a liability insurance surprise on the financial statements in many years," Rooney says.

"The best practice I've seen is a serious organizationwide commitment to patient safety, beginning with the CEO, to sharing the learnings from incidents of actual patient harm, and also from near misses."
The indicators that matter are cultural and intangible, he says, such as whether there's an organizational culture in which staff members and physicians feel free to challenge each other  to prevent an error at the point of care.

It's an investment that pays off in savings and safety, Rooney says. It takes time: "It's usually a period of years, not something you see in 12 months," he warns. But it does pay: "Hospitals [and health] systems that I've worked with have seen real decreases over time in medical liability and insurance expense, but the most important impact is a safer care environment for patients."

Tagged Under:


Get the latest on healthcare leadership in your inbox.