Aon Risk Solutions

2012 U.S. Industry Report

Health Care

Table of Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . 3 Risk Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top 10 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Risk Preparedness for the Top 10 Risks . . . . . . . . . . . . . . . . . 6 Loss of Income Associated With Top 10 Risks . . . . . . . . . . . . 7 Identification and Assessment of Major Risks . . . . . . . . . . . 8 External Drivers Strengthening Risk Management (past two years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Claim Frequency and Severity . . . . . . . . . . . . . . . . . . . . . . . 9 Emerging Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Client Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Priorities in Choice of Insurer . . . . . . . . . . . . . . . . . . . . . . 14 Desired Property and Casualty Market Changes . . . . . . . . . 15 Risk Management Department . . . . . . . . . . . . . . . . . . . . . 16

Market Insights . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Medical Professional Liability . . . . . . . . . . . . . . . . . . . . . . 17 Managed Care Errors and Omissions . . . . . . . . . . . . . . . . . 18 Managed Care HMO Reinsurance, Excess-of-Loss and Provider Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Workers Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Directors and Officers Liability . . . . . . . . . . . . . . . . . . . . 21 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Use of Captives . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Coverages Insured by Captive . . . . . . . . . . . . . . . . . . . . . . 25 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Methodology, Notes and Disclaimers . . . . . . . . . . 27 Aon at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Key Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

2012 Health Care Report

Aon Risk Solutions

Foreword
Aon is pleased to present you the findings of our 2012 Health Care Industry Report. The health care sector continues to face many risks and challenges, which affect the way companies view and prioritize their resources in response to risk. Even though it is not known at this point to what degree the health care reform will impact the traditional lines of property and casualty coverage, we can be certain there will be an impact on medical professional liability, as hospital providers employ more physicians, and ACOs assume some of the financial risk of providing care. Consequently reform may also have an effect on vicarious liability and antitrust exposures. When more physicians are employed, we anticipate the underwriting of those physicians to be more rigorous, including not only the traditional criteria of specialty and losses but also non-traditional underwriting criteria such as infection rates, readmission rates and other quality indicators. At this point we also believe that reform will affect some of the traditional coverage lines such as D&O and workers compensation. In additional we would also like to highlight a few key findings and observations to guide you through an array of interesting risk management facts and figures within the report. When you look at the top 10 risks as a whole, there is an undeniable interdependence among many of these risks. It is more important than ever for organizations to embrace an enterprise-wide approach to managing risk, and optimize their strategies on a holistic basis. Regulatory/legislative changes remain the top risk for the health care sector as respondents are concerned over the broader implications and impacts of the new health care reform laws and legislation. Increasing competition is ranked as the second top risk. Considering the tremendous amount of mergers and acquisitions taking place in the health care industry, we expect this will remain to be a high priority for health care organizations. The nations slow economic recovery continues to weigh heavily on the minds of survey respondents who have ranked economic slowdown as the third top risk. The next on the list is failure to attract or retain top talent. As baby boomers start to retire in the next three to five years, the federal government is predicting that by 2020, there will be a shortage of nearly 24,000 doctors and close to one million nurses in the U.S. In addition to potential staff shortages, the health care industry must also contend with training and deployment inefficiencies, which could lead to declining health care quality and accessibility. History provides only a partial understanding of risk for the future. To effectively manage risks, organizations must assess the likelihood and potential impact of all viable risk events in order to be prepared for the next challenges while maximizing future growth opportunities. If you have any comments or questions about the survey, or wish to discuss the findings further, please contact your Aon account executive. Best regards,

Ron Calhoun
Managing Director Aon Risk Solutions Health Care Practice
2012 Health Care Report Aon Risk Solutions

Dominic Colaizzo Chairman Aon Risk Solutions Health Care Practice

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Executive Summary
Organizational sustainability in the health care industry demands proactive understanding and management of risk . In the current and still evolving economic, legal and regulatory landscape, health care companies risk profiles can change quickly . Recent challenges such as health care reform laws and legislation, as well as actual and potential pandemics, killer tornadoes and unprecedented flooding remind us that threats to organizations come from all directions and in many different forms . The ability to manage these risks is key to survival and success . Staying fully informed and up-to-date with the latest trends around risk is the best way to remain competitive and relevant in the evolving global market . We provide this report to clients for this very reason to help you understand the emerging issues and to learn what your peers and competitors are doing to manage risks, overcome challenges and capture opportunities . The report is comprised of four main components:
insights include top 10 risks faced, reported readiness, loss of income related to risks, how Risk organizations are identifying and assessing risks, external drivers affecting risk management, claim frequency and severity and emerging risks. Client insights include priorities in choice of insurer, desired market changes and risk management departments. arket insights include discussions of coverage terms and conditions, retentions, limits and M premium rates for the major property and casualty lines of coverage purchased by health care providers. of captives include coverages insured by captive and financial performance, expense ratios, and Use premium-to-surplus ratios.

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Key Findings
Risk Insights
Greatest risks At a time when the countrys health care reform laws are being implemented and continue to dominate political debates, it is no surprise that respondents to Aons 2011 Global Risk Management Survey indicate regulatory/legislative changes as the top risk for the health care sector. Risk preparedness for the top 10 risks Health care respondents report the lowest levels of preparedness for two of the most complex and difficult to control risks economic slowdown (64 percent state they are not prepared) and political risks/uncertainties (57 percent). Loss of income associated with top risks For the health care industry, economic slowdown tops the list of risks with the most income loss in the past 12 months, at 77 percent. Identification and assessment of major risks Respondents have cited senior managements intuition and experience as the primary method used to identify and assess major risks facing their organization. In practice, organizations typically utilize a combination of risk registers, a structured enterprise-wide approach and senior managements intuition. External drivers strengthening risk management Increased scrutiny from regulators and economic volatility remain the most important external drivers strengthening risk management for the health care sector. Claim frequency and severity Aons 2011 Hospital Professional Liability and Physician Liability Benchmark Analysis shows that the frequency of medical professional liability has stabilized, growing at a 1 percent annual rate, while severity continues to grow at a constant inflationary trend. Emerging risks The health care sector faces many unknowns, most of which stem from the global economic uncertainties as well as health care reforms. We find that health care organizations are coping with these challenges in a range of ways. One prominent trend is the employment of more physicians.

Client Insights
Priorities in choice of insurer Health care respondents rank value for money/price as the most important standard in selecting an insurer, followed by financial stability/rating and claims service. These are the same two top priorities stated by health care providers in 2009, when financial responsibility was rated number one and value for money/price number two. Desired market changes Surveyed health care organizations are looking for increased ability to recognize internal risk management through lower premiums and broader coverage/better terms and conditions. Risk management department Seventy-four percent of health care respondents indicate that they have a formal risk management department. Among those, 29 percent say their risk management department reports to the CFO/Finance and 29 percent report to the General Counsel. In the case where no formal risk management department exists, 43 percent say their CFO handles risk management.

Market Insights
Market conditions In 2011 most of the major lines of coverage for the health care sector experienced no market changes, except for property premiums which began to see an upward trend in the second half of the year. In 2012, we expect to see flat to increasing rates. For medical professional liability, we anticipate a continuation of the current stable market, with some rate reductions. Retentions, deductibles, limits and coverage terms and conditions should remain fairly stable.

Use of Captives
Coverages insured by captive While medical professional liability continues to be the major line of coverage for a health care captive, Aons 2011 Health Care Captive Benchmark Study shows that captives are assuming a range of new exposures, such as employed physicians, auto liability, workers compensation, medical stop loss and directors and officers liability.

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Risk Insights
General Introduction
In todays global environment, health care organizations are facing increasingly complex challenges extensive regulatory oversight and the increasing cost of compliance, rising litigation, and technology failures that could potentially disrupt businesses. The stakes for organizations are high. It has never been more critical for businesses to access accurate and the most up-to-date information and proactively address business risks at every level of the organization. Within this section of the report we provide industry-specific insight into: Top 10 Risks Risk Preparedness for Top 10 Risks Losses of Income Associated with Top 10 Risks Identification and Assessment of Major Risks External Drivers Strengthening Risk Management Claim Frequency and Severity Emerging Risks

Top 10 Risks
Respondents are provided a list of 49 risks and asked to select 10 that they believe to be the top risks facing their organizations. Given the controversy surrounding the current debate on health care reforms, it is not surprising that surveyed companies have chosen regulatory/legislative changes as the top risk category for the health care sector. Ranked second on the list is increased competition, which continues to be a key concern for the health care sector, particularly in local markets and markets with low barriers to entry. The industry is going through a significant number of mergers and acquisitions. Hospitals and health care systems are merging and expanding their physician workforce by either hiring on an individual basis or acquiring physician practices. In addition, there are increased efforts among health care organizations to align more closely with physicians and physician practices through insurance programs, electronic health record systems and management service organizations. The economic slowdown remains a key concern for health care organizations, most likely fueled by uncertainties in the global economy and the potential for further deterioration. At the same time, organizations have to grapple with the rising cost associated with capital, reduced levels of reimbursements, accessing and hiring adequate professional staff and a range of technology upgrades, as well as meeting the increasing regulatory and legislative demands.

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Survey participants list failure to attract or retain top talent as the fourth top risk. In the next three to five years, a large number of baby boomers will be retiring. The federal government is predicting that by 2020, nurse and physician retirements will contribute to a shortage of at least 24,000 doctors and close to one million nurses. Moreover, the aging population and the addition of over 30 million newly insured individuals under health care reform will further exacerbate the situation. Besides, the training and deployment inefficiencies could also lead to declining health care quality and accessibility. When you look at the top 10 risks as a whole, there is an undeniable interdependence among many of these risks. It is more important than ever for organizations to embrace an enterprise-wide approach to managing risk, and optimize their strategy on a global basis Top 10 Risks - Health Care
Rank 1 2 3 4 5 5 5 8 8 8 Health Care 2011 Top 10 Risks Regulatory/legislative changes Increasing competition Economic slowdown Failure to attract or retain top talent Pandemic risk/health crises Damage to reputation/brand Capital availability/credit risk Political risk/uncertainties Professional indemnity/errors and omissions liability Lack of technology infrastructure to support business needs

Data Source: 2011 Global Risk Management Survey Where ranking numbers are duplicated that indicates a tie

Risk Preparedness for the Top 10 Risks

Preparedness for risk means having a plan in place to address the risk or having undertaken a formal review of that risk. Health care respondents report the lowest levels of preparedness for two major risks economic slowdown (64 percent) and political risk/uncertainties (57 percent). These two risks, typically more complex and difficult to control, carry a higher degree of unpredictability and are enterprise-wide. As risk management is becoming more embedded in an organizations culture and with additional demands for improved quality outcomes, we expect to see an upward trend in risk preparedness over the next two years.

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Top 10 Risks Reported Readiness - Health Care

Regulatory/legislative changes Increasing competition Economic slowdown Failure to attract or retain top talent Capital availability/credit risk Damage to reputation/brand Pandemic risk/health crises Lack of technology infrastructure to support business needs Professional indemnity/ errors and omissions liability Political risk/uncertainties 0% 20% 40% 57% 60% 80% 100% 76% 76% 64% 82% 73% 70% 86% 77% 83%

Loss of Income Associated With Top 10 Risks

Among the top 10 risks, economic slowdown is cited by the health care sector as causing the most loss of income in the past 12 months, at 77 percent. Loss of Income From Top 10 Risks - Health Care
Regulatory/legislative changes Increasing competition Economic slowdown Failure to attract or retain top talent Capital availability/credit risk Damage to reputation/brand Pandemic risk/health crises Lack of technology infrastructure to support business needs Professional indemnity/ errors and omissions liability Political risk/uncertainties 0
Data Source: 2011 Global Risk Management Survey

30% 21% 77% 13% 27% 9% 14% 10% 38% 33% 10 20 30 40 50 60 70 80

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Identification and Assessment of Major Risks

Survey participants cite senior managements intuition and experience as the primary method used to identify and assess major risks facing their organizations. In practice, organizations typically utilize a combination of risk registers, a structured enterprise-wide approach and senior managements intuition. Should organizations relying predominantly or exclusively on management experience and intuition for their major risk decisions be concerned? In todays fast evolving business environment, where the past may not always be the best predicator of the future, exclusive reliance on senior managements intuition and experience to identify and assess risks could result in a significant loss to an organization. Some of the reasons include the following: Risk identification based on experience tend to miss emerging or new risks. Risk identification based on intuition may not be consistent and may not be given credence by others. There may be a tendency toward risk aversion by managers with the view better safe than sorry. On the contrary, the use of risk registers, quantitative analysis and an enterprise-wide approach to identifying and assessing risk is desirable, adding consistency to the process and enabling the organization to more effectively assess the potential impact of an identified risk on the organization so it can deploy appropriate resources for treatment. As risks increase in complexity, health care organizations must integrate intuition and experience with sophisticated analytics to make the most informed objective and predictive decisions. Identification of Major Risks
Other Structured enterprise-wide 6% approach 13% External service provider/advisor 2% Business unit risk registers or key risk indicator worksheets 9% Board level discussion and analysis 6%

Assessment of Major Risks

Other 5% Board level quantitative analysis 4% Senior management intuition and experience 36%

Structured enterprise-wide approach 13%

Consult with external service provider/advisor 13% Senior management intuition and experience 64%

Business unit quantitative analysis 28%

Data Source: 2011 Global Risk Management Survey

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External Drivers Strengthening Risk Management (past two years)

Increased scrutiny from regulators and economic volatility remain the most important external drivers strengthening risk management for the health care sector, one of the most regulated industries in the world. Organizations in this sector are exposed to a myriad of regulations, and face a great deal of uncertainties relating to the health care reform laws - even though many of the provisions and mandates are being challenged in federal courts. It is important to keep in mind that reform is inevitable and will continue to occur with or without legislation or any Supreme Court decision. Health care providers have to continue providing services while trying to plan for the unknowns in the future. External Drivers Strengthening Risk Management (past two years)
Other Large third party liability losses/litigation Workforce issues Pressure from suppliers/vendors Pressure from customers Demand from investors for greater disclosure and accountability Natural weather events Political uncertainty Economic volatility Increased focus from regulators 0% 10% 20% Health Care
Data Source: 2011 Global Risk Management Survey

14%

19% 19% 33%

13% 13% 7% 6% 19% 18% 6% 7% 14% 11% 19% 41% 50% 48% 50% 60% 22%

38% 30% 40% All Industries

Claim Frequency and Severity

Based on Aons 2011 Hospital Professional Liability and Physician Liability Benchmark Analysis released in October 2011, the frequency of medical professional liability has stabilized, growing at an annual rate of 1 percent. Claim severity, including both indemnity and defense costs, increase at a consistent rate and is projected to rise 4 percent annually (subject to a USD 2,000,000 per occurrence limit). Since 2006, claim frequency has been growing at a modest but steady pace. Even though the impact may not be felt yet, the period of declining claim frequency appears to have ended. We have entered a period of modest growth. See a snapshot of frequency fluctuations between 2000 and 2010 on the following page.

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Hospital Professional Liability Benchmark Frequency per OBE

2.50%
1.98% Indemnity Claims Expense Claims 1.97%

2.00%

1.90%

1.83%

1.87%

1.94%

1.93%

1.95%

1.50%
1.21% 1.16% 1.10% 1.14% 1.17% 1.16% 1.17% 1.18%

1.00%

0.50%

0.77%

0.74%

0.73%

0.73%

0.77%

0.77%

0.78%

0.79%

0.00% 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year
Source: Aons Hospital and Physician Professional Liability 2011 Benchmark Analysis

Hospital Professional Liability Benchmark Claim Severity Limited to $2M per Occurrence
$180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2004 2005 2006 2007 2008 2009 2010 2011 Accident Year
Data Source: Aons Hospital and Physician Professional Liability 2011 Benchmark Analysis

$138,000 $125,000

$143,000

$146,000

$152,000

$158,000

$164,000

$171,000

Claim severity (average cost per claim) has been subject to a constant inflationary trend throughout the historical period shown above. The severity amounts shown in the graph have been limited to USD 2,000,000 to minimize the effect of very large outlier events. The amounts are comparable to typical self-insurance retention levels.

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Emerging Risks
1. Health Care Reform: A shift in the health care delivery marketplace One of the primary objectives of the health care delivery and reimbursement reforms under the Patient Protection and Affordable Care Act (PPACA) is to promote better outcomes and drive greater efficiencies within the Medicare and Medicaid marketplace. However, the PPACA has changed the way care is being managed and delivered to the commercial (non-Medicare/Medicaid) marketplace. A fundamental shift from volume-based to outcomes-based reimbursements currently under way, is driving the evolution of commercial ACOs (Accountable Care Organizations). Emerging risk management needs related to health care reform ACOs have the potential for driving better outcomes while reducing costs. However, achieving these goals will require changes in organizational structure and operational workflow. In some cases, depending on the current state of the organization, this transition will require a major cultural transformation. Additionally, providers must digest and manage unfunded regulatory requirements not seen in the past. These dynamics have related financial and operational risks that will require unique risk mitigation strategies. Additional challenges facing academic medicine As the health care delivery system are migrating away from fee for service and toward outcomes based reimbursements, there will be winners and losers within the academic medical center (AMC) community. In the absence of a cogent Medicare/Medicaid reimbursement carve-out strategy, AMCs will be competing with regional integrated delivery systems in the commercial ACO marketplace. This creates a unique set of challenges for AMCs, given that their mission and related expense structures are fundamentally different from the integrated delivery systems. Those AMCs that are building around current or emerging brands in pursuit of additional market share (either directly or via strategic alliances) will continue to be the winners in this new era. Employment of physicians Whether the current legislation stays in its current form, health care reform in one way or another is here to stay. For example, health care organizations are already making organizational changes. Aons Hospital and Physician Professional Liability 2011 Benchmark Analysis has confirmed the trend of hospitals hiring more physicians, and integrating physicians into their self-insurance programs. The graph below shows the current composition of employed physician rosters for non-university systems. The fastest growing specialty for non-university systems is hospitalist. Other fast growing specialties include neurology, neurosurgery, orthopedics, pulmonary disease, radiation oncology, and emergency medicine. When hospitals team up with physicians, they have effectively minimized medical professional liability risk. Specialty Distribution of Employed Physicians
3% 25%

8% 5% 4% 16% Anesthesiology Pediatrics General Surgery All Other Surgeons Emergency Medicine OBGYN Surgery Internal Med/Fam Practice/Hospitalist Other NonSurgical Specialties

9% 29%

Data Source: Hospital and Physician Professional Liability 2011 Benchmark Analysis

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Accountable Care Organizations The health care reform legislation enacted in March 2010 authorizes the Medicare program to contract with ACOs - networks of physicians and other providers that could work together to improve the quality of health care services and reduce costs for a defined patient population. In theory, ACOs provide financial incentives for health care organizations to reduce costs and improve quality. In reality, given the complexity of the existing system, health care providers are facing more challenges than ever before. The new health care landscape will be characterized by: Center for Medicare and Medicaid Services (CMS) is moving to tiered risk payments and performance-based quality care. New alignments will be developed across all providers and care settings, and among multi-hospital and multi-physician groups. Payer-provider links will promote risk sharing, data integration and patient management. Accountable care will be driven by quality metrics and efficiency rather than volume and unit pricing. Financial and data transparency, IT infrastructure and process improvement will be keys to success. Health care providers will be required to become both clinically and financially accountable. 2. Physician Payments Sunshine Act. This part of the Affordable Care Act is intended to limit the influence of drug and medical equipment manufacturers and supplies on physician or hospitals practices. The law requires manufacturers to report payments or transfers of value to physicians or academic medical centers and teaching hospitals by January 1, 2012. However, there is little guidance on what information to be provided. Both providers and industry leaders are concerned about how it will be interpreted by payers and the public. CMS was asked to issue regulations specifying what was needed and in what format no later than October 1, 2011 so far nothing has been done yet. 3. Reimbursement changes pay-for-performance (P4P) and non payment for never events. The need to ensure appropriate reimbursement for services provided has always been a challenge but it is getting far more difficult in a number of ways. For example, P4P, also known as value-based purchasing, is a payment model that rewards physicians and hospitals for meeting certain performance measures for quality and efficiency. Under the new law, CMS and many commercial carriers will essentially stop paying the treatment costs of preventable medical complications or never events. 4. Focus on patient safety and quality. Closely related to the above reimbursement challenges and transparency issues is the ongoing focus on patient safety. This area has been a priority for all health care organizations, but clearly, the pressures will continue to escalate. Hospital providers are awaiting several key decisions from the Centers for Medicare & Medicaid Services over how the agency intends to interpret and apply penalties against hospitals that have higher than expected rates of 30-day readmissions in three disease categories: heart failure, heart attack and pneumonia. [Health Leaders, November 21, 2011]. The providers performances are being closely scrutinized and audited, rewarded or punished in a broader range of ways. 5. Medicare secondary-payer mandatory reporting Known as MMSEA section 111in reference to the section of the Medicare, Medicaid, and SCHIP Extension Act, where the issue is addressedthe mandatory reporting program requires organizations to report payments, settlements, and awards involving Medicare beneficiaries. Medicare, since its inception in 1965, has been a secondary payer for workers compensation programs, including the federal black-lung benefits program. In 1980, the Medicare Secondary Payer Statute expanded the program to include liability, automobile, and no-fault programs. The intent of the Medicare secondary-payer program is to protect the Medicare trust fund by identifying situations in which the Medicare program should not be the primary payer to the beneficiary. The new provision in MMSEA mandates reporting, with penalties of USD 1,000 per claimant per day for noncompliance.

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6. Electronic Medical Records (EMR) and Electronic Health Records (EHR): Health care providers are being offered a plethora of options for electronic information technology. While they are required to network with other providers and publish outcomes, they also have to keep the information entirely private. The ramification of a breach in privacy & security may include: The duty to notify potentially affected individuals HIPAA (Health Insurance Portability and Accountability Act) fine Protected Health Information (PHI) regulations Regulatory action Class action potential Reputational damage 7. Shortage of health care professionals: As baby boomers start to retire in the next three to five years, the federal government is predicting that by 2020, retirements will contribute to a shortage of nearly 24,000 doctors and close to one million nurses. In addition, the health care industry must also contend with training and deployment inefficiencies which may result in the risk of declining health care quality and accessibility. 8. More civil and criminal penalties: The U.S. Department of Justice has invested in new legal tools, added hundreds of more investigators and increased the budget by USD 350 million over the next 10 years to enhance its capabilities to combat fraud, waste and abuse. The U.S. Health and Human Services is also well positioned to effectively crack down on health care fraud and abuse. 9. Meaningful use: CMS is expected to issue rules defining State II of meaningful use of electronic medical records for hospitals and doctors in the first quarter of 2012, but there is continued expectations that the implementation will be postponed with hospitals hoping for a one-year delay. Meaningful use is a very big deal for hospitals because theres USD 4 billion in incentive payments for doctors and hospitals, said Don May of the American Heart Association. The Stage II criteria are feared because CMS is expected to significantly increase the percentage of clinicians who, for example, are using computerized physician order entry to meet the meaningful use requirements. (Health Leaders, November 21, 2011)

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Client Insights
General Introduction
The right knowledge at the right time can literally change the world. The health care sector has capitalized on timely information being available for some time. Similarly, the value Aon offers through content is empowering our clients with analytical, relevant, and timely risk insights that can help them make not just better decisions but the right ones to achieve their goals. Within this section of the report, we provide industry-specific insight into: Priorities in Choice of Insurer Desired Market Changes Risk Management Department

Priorities in Choice of Insurer

Value for money/price is ranked the highest priority among health care respondents followed by financial stability/rating illustrating the fact that concerns over financial stability of a carrier may be somewhat tempered by competitive pricing. We expect that value for money/pricing will continue to be an important factor in the foreseeable future and especially during the economic recovery, when organizations seek to save money wherever possible. Of interest, the health care industry appears to have lowered the priority on long-term relationships, going from number two in priority ranking during the 2009 survey to number five in 2011. Long-term relationships do matter to health care providers, but the ongoing economic challenges and an active competitive market compel them to pay close attention to the bottom line, making the long-term relationships somewhat less important. Priorities in Choice of Insurer
Priorities in choice of insurer Value for money/price Financial stability/rating Industry experience Claims service Long-term relationship Flexibility/innovation/creativity Prompt settlement of large claims Capacity Speed and quality of documentation Ability to deliver a global program
Data Source: 2011 Global Risk Management Survey

2011 Health Care 1 2 3 4 5 6 7 8 9 10

2009 Health Care 2 1 5 4 2 7 8 6 10 9

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Desired Property and Casualty Market Changes

When asked what changes health care organizations would most like to see in the insurance market, the majority of respondents desire: Recognition of investments in internal risk management efforts through lower premiums Broader coverage/better terms and conditions Desired Property and Casualty Market Changes
7% 7% 47% 32% 31% 42% 27% 28% 42% 11% 18% 64% 58% 67% 63% 0% 10% 20% 30% 40% 50% 60% 70% 52%

Other More product innovation Better quality of service More sophisticated information technology (IT) systems More exibility Increased capacity Recognition of investments in internal risk management e orts through lower premiums Broader coverage/better terms and conditions

Health Care
Data Source: 2011 Global Risk Management Survey

All Industries

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Risk Management Department

Among health care respondents, 74 percent indicate that they have a formal risk management department. Among those, 29 percent say their risk management department reports to the CFO/Finance and 29 percent to the General Counsel (The health care sector has the highest percentage of respondents say their risk management department reports to the General Counsel than any other industry group surveyed). In the case where no formal risk management department exists, the greatest majority, 43 percent, also say their CFO handles risk management. Those with an in-house risk management department typically maintain a staff of one or five people. Formal Risk Management Department

No 26% Yes 74%

Data Source: 2011 Global Risk Management Survey

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Market Insights
General Introduction
Access to timely insights on policies, premiums and carriers allow health care clients to make faster and more accurate decisions while seeking to obtain the best coverage and rates. Aon has invested resources to develop the industry leading research and platforms and ensure our clients have the data they need, when they need it. Within this section we provide insights into the following coverages: Medical Professional Liability Managed Care Errors and Omissions Managed Care HMO Reinsurance, Excess-of-Loss and Provider Excess Workers Compensation Directors and Officers Liability Property

Even though it is not known at this point to what degree the health care reform will impact the traditional lines of property and casualty coverage, we can be certain there will be an impact on medical professional liability, as hospital providers employ more physicians, and ACOs assume some of the financial risk of providing care. Consequently reform may also have an effect on vicarious liability and antitrust exposures. When more physicians are employed, we anticipate the underwriting of those physicians to be more rigorous, including not only the traditional criteria of specialty and losses but also nontraditional underwriting criteria such as infection rates, readmission rates and other quality indicators. At this point we also believe that reform will affect some of the traditional coverage lines such as D&O and workers compensation. There will be a more immediate impact on managed care exposures, including medical stop loss and provider stop loss, as health care providers move in the direction of ACO development and assuming more risk. ACOs will require that the D&O, privacy, vicarious medical professional and business risk of ACOs, among other risks, will require consideration in risk management financing treatments. As reform changes evolve, additional exposures will develop.

Medical Professional Liability

Category Pricing Deductibles/Retentions Limits Coverage Terms & Conditions
Data Source: 2011 Global Risk Management Survey

2011

2012

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Pricing
The medical professional liability market remains stable, with renewal pricing staying either flat rate or reduced, even in difficult venues. The market stayed soft through 2011 and we expect the same for 2012. With many insurers writing hospital business, capacity is plentiful. Redundant reserves (market over-reserving) will continue to provide insurers some margin of profitability. This high level of competition encourages some insurers to decrease pricing in order to retain business.

Deductibles/Retentions
Retention levels are at historically high levels, but continue to remain stable. Health care providers have become accustomed to higher retentions as a result of the hard market several years ago. Markets continue to provide aggregate protection in certain situations.

Limits
For medical professional liability, limits purchased range from zero (going bare) to well in excess of USD 100 million. The question of limits is answered by understanding a range of issues: venue, state liability caps, statutory protection such as municipal immunity for some health care providers, financial resources or board attitudes toward risk. Insurers are reporting successful reinsurance renewals that mirror results In insurance pricing. In addition, several commercial insurers who ceased to purchase reinsurance report that they may be interested in purchasing reinsurance to take advantage of favorable pricing. This will serve to further increase the already abundant medical professional liability capacity.

Coverage Terms & Conditions

There are some negative trends with claim frequency and severity, which may impact rates in the near future. Aons 2011 Hospital Professional Liability and Physician Liability Benchmark Analysis, which was released in October 2011 shows a rise in frequency and a continued increase in severity over the past few years. The data also suggest that there is an average 1 percent increase in the number of reported claims during the past four years.

Managed Care Errors and Omissions

Category Pricing Deductibles/Retentions Limits Coverage Terms & Conditions 2011 2012

Pricing
Market conditions stayed soft throughout 2011. We anticipate that in 2012, underwriters will hold the line and as a result, rate reductions could slow to low single-digit for good risks, and flat to increases for risks with claims or a difficult risk profile. Furthermore, given the industrys systemic risk, some carriers have cited current rates as unsustainable, indicating a stronger stance against any additional rate decreases.

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Deductibles/Retentions
Retention levels continue to show downward movement, assuming favorable claims experience by the particular client. Similar to last year, carriers are using this metric to improve its program, in an attempt to avoid further premium decreases.

Limits
Limits purchased by managed care entities have been relatively flat in 2011. Some entities which have expanded operations, either organically or via acquisition, have increased their total program limits. As more managed care organizations are broadening their scopes of services, new exposures are created. They are addressing these new exposures related to areas such as direct care and wellness programs either via the master program or in separate insurance policies.

Coverage Terms & Conditions

Coverage is relatively stable, with some broadening features still emerging. Two carriers have recently revised their base policy form with clearer and more favorable policy language. While some markets continue to provide some forms of privacy/security coverage, others push this exposure into a separate policy/program geared exclusively toward the risk. As more managed care organizations expand into variations of direct care, such as home care and clinics, the question is to figure out where this exposure should be addressed via the managed care E&O program, or separately in a medical malpractice policy.

Managed Care HMO Reinsurance, Excess-of-Loss and Provider Excess

Category Pricing Deductibles/Retentions Limits Coverage Terms & Conditions 2011 2012

Pricing
Leveraged trend (percent of increase in high-cost claim recoveries year-over-year) ranges from 15 percent to 25 percent annually. Advances in medicine and medical technology coupled with double-digit increases in the charge masters from tertiary and specialty care facilities have caused high cost claims to more than double in the past five years. To offset the significant trend and expense of loss, reinsurers have imposed a greater number of limitations within their policies, or have increased premiums to levels that have forced clients to purchase higher retentions and co-insurance alternatives. In response, managed care organizations are seeking variable funding alternatives in order to best improve their chances for a favorable return/net cost of insurance. Many reinsurers offer a host of alternatives designed to transfer catastrophic risk, support the provider contracting efforts of their clients and supply value-added services that help mitigate or transfer expense. These include care and case management support, transplant network pricing, and claim auditing to name just a few. Each can serve as an outsourced defense to health plans and provider organizations in need of further back-room support of their current programs. Most insurers are offering similar coverage line sizes but we anticipate that capacity will increase in the coming year.

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Selected managed care organizations such as managed state Medicaid programs and developing programs for the uninsured/underinsured appear to be most in need of excess-of-loss cover. State Medicaid programs that transfer full risk of neonate exposure to managed care organizations are seeking some form of catastrophic protection. The rise in this type of claim has been highly significant in the past three to five years. Delegated risk from managed care organizations to provider entities is expected to grow rapidly in the next several years as ACOs along with Medical Homes are gaining popularity. What was once popular in the mid 90s and remained a contracting strategy in various pockets of the country has resurfaced as a viable method of risk transfer and payment to hospitals and physicians. The health care reform legislation passed in 2010 should pave the way for more demonstration projects beyond those existing ones in Massachusetts and other pockets of the country. As provider entities have shifted their focus to maximizing revenues over the past seven to 10 years, it will be difficult to again shift the culture of an organization to be both clinically and fiscally accountable for a patients health care while seeking profitability under a delegated risk contract. Nonetheless we are witnessing interest from specialty providers and facilities that see this strategy as a means to garner patients and market share. As requirements from the new health care reform laws become clearer in 2012, there will be greater understanding of the classes and levels of risk that will enter the current insurance pool. Nearly 30 million uninsured are anticipated to be enrolled within the health insurance market. Much of this risk class can be considered uninsurable by todays standards. If this is true then alternative markets must be accessed to cede the poor risk expense. Conversely, the government may realize that it must assume the care for the poor, a high risk group in the health care system. They must also find alternatives to transfer expense as the federal and state budget deficits worsen. All insurers will find reinsurance imperative as they begin to explore segmenting risk classes within their own enrolled populations. Sufficient worldwide capacity exists today to accept much of this exposure. However, pricing will rise as demand and leveraged trend continues to gain at a double digit pace.

Deductibles/Retentions
We continue to see higher deductibles for this line. Outlier frequency increases will force the need to address deductible levels.

Limits
Healthcare reform will require all risk bearing payers to provide unlimited protection to all policyholders within the next few years. To this end inquiries have begun on expanding the limits of protection provided within reinsurance policies. Reinsurers have yet to provide this range of protection, but have put forth policies with annual limits as great as USD 5 Million which appears to be a pragmatic level of cover based on current day provider reimbursement levels.

Coverage Terms & Conditions

In recent years we have witnessed subtle changes to the health care reinsurance marketplace, which has balanced a proper mix of capacity and competition. With the passage of health care reform in 2010, we are seeing the onset of further change within the industry as insurers and reinsurers prepare for the evolving exposures anticipated over the next several years. These changes include the interest of new players to explore entrance to the market, and the need for additional capacity by current insurers as they prepare to address the 30 million of new high-risk members anticipated over the next several years. Other issues driving the change include: Expansion of products and offerings from current markets New reinsurer entrants in search of at-risk revenues Anticipated growth in delegated risk contracts Need for additional capacity to address health care reform regulation

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Workers Compensation
Category Pricing Deductibles/Retentions Coverage Terms & Conditions 2011 2012

Pricing
Over the past year, workers compensation rates for health care organizations have averaged flat-to-single digit rate decreases. We expect this stable market conditions to continue for the insureds with a good loss history, benign risk profile, and limited exposure changes. The insureds are anticipated to closely scrutinize medical bill charges in an effort to create additional sources of savings. Further, state taxes and assessments will continue to go up, as in the case of a recent increase by the state of New York.

Deductibles/Retentions
Most insureds choose to maintain their deductible/retention levels. For insureds with loss sensitive programs, collateral requirements continue to impact the overall deductible/retention strategies and the attractiveness of changing primary markets.

Coverage Terms & Conditions

Overall, there has been no significant change regarding coverage for workers compensation, and we do not anticipate any major changes in the near future.

Directors and Officers Liability

Category Pricing Deductibles/Retentions Limits Coverage Terms & Conditions 2011 2012

Pricing
We believe that pricing for D&O will stay soft for most insureds as long as there is ample capacity in the marketplace with carriers competing for business. While the final effect of health care reform laws has not yet been realized, we anticipate a gradual differentiation by carriers between those health care facilities that are poised to prosper, and those that will struggle. With the quality measurements and corresponding reimbursement rates taking effect, along with a myriad of other financial and operational pressures facing health care facilities, carriers will be pricing a risk more heavily on the basis of the facilitys financial performance.

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Deductibles/Retentions
For private/non-profit hospitals, the employment practices liability (EPL) retention, and more specifically, a separate retention for class/mass actions will continue to drive the overall retention levels. Given the prolific employment claim activity in this space, carriers will zero in on this issue when constructing programs, matching retention levels with both employee count and historical employment claim activity. The soft marketplace means that carriers will be inclined to lower EPL retentions below what their rating model would suggest for a particular employee count, as long as the claim/litigation history for the account supports the decrease. With that said, most carriers are not willing to go below a certain minimum, which is related almost directly to the employment count. It is also important to note that the way a carrier counts parttime employees toward the overall employee tally varies. Some count these toward the total count, same as full-time, while others include them at a discount rate (i.e. two part-time employees count as one full-time). Carriers also approach antitrust retentions differently. Certain carriers maintain a strict adherence to the underwriting philosophy that demands a higher retention for this exposure. These carriers cite the catastrophic nature of these types of claims, as well as the continued prevalence of this litigation in the health care space. Other carriers see this issue as a way of differentiating themselves and creating a competitive edge. Despite this variation in the approach, the overall antitrust retention level has come down over the past few years from an average of USD 1 million or higher, or a current average of USD 500,000 to USD 1 million. The following, taken from Aons proprietary benchmarking database, provides information on D&O retentions for various sized entities. Keep in mind that programs often have higher retentions for the EPL and antitrust portions of the coverage.
Size Category Assets $1M - $750M Assets $750M - $3B Assets >$3B Employees 100 5000 Employees 5000 10000 Employees >10000
Data Source: Aon FSG Proprietary Databases

Average $65,000 $352,188 $1,000,000 $99,571 $309,615 $485,385

Median $25,000 $250,000 $500,000 $62,500 $250,000 $250,000

Limits
Overall D&O limits purchased by non-profit/private hospitals and health care systems have been on a slight upward trend year over year. We see many buyers opting to increase the total program limits with Side A excess to insulate the board from the potential exhaustion of limits by entity coverage.

Coverage Terms & Conditions

As some hospitals and health systems purchase physician practices or doctor groups, there is heightened concern over limit adequacy for the kick-back and antitrust exposures. Furthermore, theres been continued uptick on EPL claim activity in this industry, many of which involve nurses and other similar groups of employees. Coverage continues to evolve as the marketplace stays soft and carriers attempt to hold the line on pricing, but use policy language as a means to compete. One coverage expansion is with early trigger of coverage on items such as a service of subpoena, request for witness testimony, document production, or request for an insured person to appear for an interview. A further enhancement pertains to the EPL coverage commonly blended with the D&O in these programs. The EPL enhancement provides late notice forgiveness for situations where an Equal Employment Opportunity Commission

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charge was not reported in a prior policy period but evolves to a complaint or other type of claims in the current period. These new enhancements represent carriers attempts to not only differentiate coverage, but also to stabilize and increase premium, since there is typically an additional premium associated with the enhancements.

Property
Category Pricing Deductibles/Retentions Limits Coverage Terms & Conditions 2011 2012

Pricing
In the past 12 months we have seen a 1.1 percent average rate reduction for health care accounts, however, mounting global losses and updates to RMS modeling has led to rate increase pressure. We expect rates will continue to be under moderate pressure for the near future. Rate levels should be flat to +15 percent for most renewals. The full impact of RMS version 11 still may not be felt until 2012 when most large property accounts renew in the first half of the year.

Deductibles/Retentions
Over 96 percent of health care accounts in our database maintain the same deductibles in last 12 months ending September 30. In general, there continues to be limited pressure from the majority of markets to change deductibles/retentions unless specific account experience warrants a change. With upward rate pressure expected, we anticipate some accounts will opt for higher deductibles/retentions to counter the rate pressure.

Limits
In the last 12 months, 92 percent of health care accounts have maintained the same or higher limits. We believe that the percentage of organizations purchasing higher limits may decrease with the anticipated upward rate pressure.

Coverage Terms & Conditions

There was no real change in property coverage. Broad coverage will continue to be available. Coverage improvements were available in 2011 and are expected to remain available in 2012.

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Use of Captives
General Introduction
Captives exist or are created because they fill a niche that cannot be easily, or as efficiently, filled by the conventional insurance marketplace. While not for everyone, captives can be an important part of a professionally constructed risk financing program that recognizes the value of retaining certain risks in meeting overall corporate financial objectives. Many captive owners benefit from reduced insurance costs, access to reinsurers, an ability to insure the uninsurable and improved cover and control. Many organizations in the health care industry utilize these alternative risk transfer vehicles as part of their risk management/insurance programs. To gauge the use of captives in the health care sector, Aon conducted its third annual Health Care Captive Benchmark Study in early 2011. This study includes information from 113 participating health care captive insurance companies.

Demographics
As is the case with Aons previous study, most of the captives participating in Aons study are not-for-profit hospitals but as shown in the exhibit below, a number of other types of organizations have also used captives: Type of Parent
Group 3% Educational 8% Clinic 3% Services 6% Long Term Care Facility 5% Physician Practice 6%
Data Source: 2011 Health Care Captive Benchmark Survey

For Profit Hospital Educational Services Long Term care facility Physician practice Hospital 69% Group Clinic Total 19 0 4 3 6 2 1 35

Not for Profit 57 9 3 3 0 1 2 75

Total 76 9 7 6 6 3 3 110

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Coverages Insured by Captive

According to Aons 2011 Health Care Captive Benchmark Study, medical professional liability is the most common coverage line underwritten, at 62 percent. This finding does not come as a surprise because the coverage is typically one of the largest insurance costs for health care providers, and may not be affordable or the coverage needed in the standard market may not be offered. The study also reveals that captives are assuming a range of exposures, such as employed physicians, auto liability, workers compensation, and medical stop loss and D&O liability. Coverages Insured by Captives
70%
62%

60% 50% 40%

Captives

35%

30%
23%

20% 10% 0%
Directors & O cers Liability Auto Liability Medical Stop Loss Professional Indemnity Non-Employed Physicians* Workers Compensation Property Equipments Maintenance Employers Liability Medical Malpractice Employed Physicians* General Liability 11% 11% 11% 7% 6% 5% 4% 4% 2%

1% Crime/Fidility

1% Business Interuption

1% Life/Diability

1% Product Liability

1% Aviation

1% Environmental

*This is Professional Liability *D&O does not include Side A

Data Source: 2011 Health Care Benchmark Survey

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Financial Performance
One of the values of forming a captive is lower expense ratios than the commercial markets. The findings of the captive benchmark study show that expense ratios of captives and Risk Retention Groups (RRGs) are lower than commercial insurers, which typically have 25-30 percent or higher loss ratios. The use of captives or RRGs has enabled providers to prudently keep these costs low. Expense Ratio
25% 21% 20%

15%

10% 5%

5%

0% Captives
Expense Ratios equals Expenses divided by Net Earned Premium Expenses limited to $1,000,000 Data Source: 2011 Health Care Benchmark Survey

RRGs

From the study, we also see that health care captives and RRGs are generally healthy, as demonstrated by their premium-tosurplus ratios which shows plenty of surplus in writingcoverageat less than one dollar of premium for every one dollar of surplus. Average Premium to Surplus Ratio
0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 O Shore
Data Source: 2011 Health Care Benchmark Survey

0.79

0.61

On Shore

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Methodology, Notes and Disclaimers

This report is based on data from Aons 2011 Global Risk Management Survey, Aons 2011 Health Care Captive Benchmark Study, Aons Hospital and Physician Professional Liability 2011 Benchmark Analysis, Aon Financial Services Group, Aon GRIP and other proprietary databases. 2011 Global Risk Management Survey Health Care data shown in this report is based on 54 global company responses. Breakdown of respondent base is a follows:
Revenue Range < USD 1B USD 1B USD 4 .9B USD 5B USD 9 .9B USD 10B USD 14 .9B USD 15B USD 24 .9B USD 25B+ Cannot disclose % of Respondents 61% 22% 2% 2% 0% 0% 13% Public Private Government/Government owned corporation Not for profit Other Type of Organization

% of Respondents
7% 26% 4% 63% 0%

Along with the support of other Aon insurance and industry specialists, Aon Analytics collects and tabulates results, provides analysis and interpretation of findings, and prepares this report. All summaries of existing law provided in this Industry Report are general in nature and do not constitute legal advice, and are not intended to form the basis for a specific course of action by any person or entity. You should consult with your legal, risk and professional advisors before taking any action based upon the laws and regulations summarized in this report. This report is furnished for informational purposes only. Do not distribute or copy. Aon has endeavored to confirm the correctness of the data and opinions expressed in this report, however, neither Aon nor its employees make any representation or warranty as to the accuracy or completeness of the data or opinions expressed herein. Aon has no liability to the recipient or any other party resulting from the use of, or reliance upon, the contents of this report. Copyright 2012 Aon Corporation.

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Aon at a Glance
Aon Corporation (NYSE:AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital solutions and outsourcing. Through its more than 59,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aons industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the worlds best broker by Euromoney magazines 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business

Insurances listing of the worlds insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by the readers of Business Insurance. Visit http://www.aon.com for more information on Aon and http://www.aon.com/unitedin2010 to learn about Aons global partnership and shirt sponsorship with Manchester United.
Centr e Aon
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a n and A n

Aon Analytics provides clients with forward-looking business intelligence, comprehensive benchmarking and total cost-of-risk analysis as well as global market insights using proprietary technology like the Aon GRIP to enable more informed and fact-based decision making around risk management, risk retention and risk transfer goals and objectives.

Based in Dublin, Ireland, the Aon Centre for Innovation and Analytics provides Aon colleagues and their clients around the globe fact-based market insights. As the owner of the Aon GRIP, one of the worlds largest repositories of risk and insurance placement information, the Centre analyzes Aons USD 54 billion global premium flow to identify innovative new products and to provide Aon brokers insights as to which markets and which carriers provide the best value for clients.

Aon Global Risk Insight Platform (Aon GRIPSM) is the worlds leading global repository of global risk and insurance placement information. By providing fact-based insights into Aons USD 54 billion in global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography. The Web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients. It also gives Aon brokers a leg up when it comes to negotiations, making sure every conversation is based on the most complete, most current set of facts.

As the worlds leading insurance broker and risk advisory firm, Aon is committed to helping clients respond quickly and effectively to changing market conditions that may impact their businesses. The Aon Situation Room, accessible at www.aon.com, provides clients with factbased information to help guide their businesses through this volatile period. In the Aon Situation Room, clients will find current insurer financial strength ratings and the most recent updates from Aons Market Security Committee on specific carriers. The latest news, legislative action, and earnings information is included on the site as well. Clients can also register to receive up-to-date e-mail alerts.

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Key Contacts
Health Care
Ron Calhoun Managing Director Aon Risk Solutions Health Care Practice ron .calhoun@aon .com +704 .343 .4128

Aon Analytics
George M. Zsolnay IV Head of Aon Analytics - U .S . george .zsolnay@aon .com +1 .312 .381 .3955

For Media and Press Inquires

Dominic Colaizzo Chairman Aon Risk Solutions Health Care Practice dominic .colaizzo@aon .com + 215 .255 .1728 Kelly Drinkwine Director of Public Relations Aon Corporation kelly_drinkwine@aon .com +1 .312 .381 .2684

Contributors
Karen Cullinane Director of Communications Aon Risk Solutions Health Care Practice karen .cullinane@ aon .com +1 .312 .381 .4450 Cathy Gavin Samantha Burns Linda Milliken Kathryn Meyers Richard Chiocchi Martha Jacobs

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Aon Risk Solutions, 2012. All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. #8178 1/2012