For many physicians new to practice, it may seem like a load off when the practice or system they plan to join offers a contract that includes picking up the tab for their malpractice insurance. That’s just one less thing to worry about, right?
Unfortunately, even those physicians may wind up with sticker shock a few years down the road when they leave for another practice opportunity. That’s because they didn’t know about, or fully consider, the importance or huge cost of the tail coverage necessary when making a practice change. Yet it’s an expense that can be avoided if negotiated into an employment contract before signing.
The most common and widely used malpractice insurance is claims-made malpractice coverage. Claims-made insurance covers a physician for any alleged act of malpractice that takes place and is made with the insurance carrier while the policy is in effect.
This type of malpractice insurance is especially popular with physicians new to practice because of the pricing model.
"All the malpractice insurance carriers extend a new-to-practice discount, which reduces the premium significantly in the first, second and third year a new physician is with the carrier as they build their patient load," explains Andrew Hawkins, a medical malpractice insurance broker with nearly 30 years of experience. After five or six years of practice, premiums level out.
However, since malpractice claims often are not made until years after the alleged instance of malpractice occurred, if a physician with claims-made coverage switches insurance carriers due to a practice change (or for any reason), the physician will not be covered if a claim is filed against his or her previous carrier, leaving a gap.
There are two options to address this gap in insurance: purchasing tail coverage or transferring "prior acts" to a new policy. Tail coverage will typically cost 200 to 300 percent of the underlying premium and is purchased from the carrier a physician is leaving. Having prior acts (aka "nose coverage") covered by the carrier a physician is changing to is typically the better choice.
"It’s always a cheaper option to have prior acts transferred to a new policy and avoid the cost of tail," says Hawkins. "Physicians should just make sure their contract with their group allows that transfer." Occasionally, group employment contracts stipulate that a physician must purchase tail coverage if he or she leaves the practice - something physicians should seek to negotiate out in favor of a transfer.
The best option when it comes to claims-made insurance is to negotiate it into the employment contract to have the practice pick up the cost of tail coverage in the event of separation.
In addition to claims-made malpractice insurance, occurrence-based malpractice insurance is another option. Occurrence-based insurance covers a physician whenever the alleged act of malpractice occurred, regardless of when the claim is actually filed, meaning there is no need for tail or prior acts coverage. "Occurrence has a built-in tail policy, but it’s much more expensive and only available in a limited number of markets," says Hawkins.
Some medical trusts operate claims-paid malpractice insurance coverage, which sets premiums based on malpractice claim payouts from the previous year and anticipated payouts in the coming year. As with claims-made insurance, tail coverage is necessary - and often hugely expensive - when ending a claims-paid policy. Additional drawbacks of this type of policy include premiums that may fluctuate unpredictably, strict rules on what is covered and what is not, and difficulty switching to a new carrier.
Every practice situation is different. When navigating your employment contract, make sure there is an answer to the question of who pays for malpractice insurance premiums while with the practice and tail coverage in the event of separation.
For the individual physician, the ideal situation is, of course, having the practice foot the bill. While it probably shouldn’t be a deal breaker if the practice does not pay for that coverage, knowing that tail or prior acts malpractice coverage will be necessary is the first step in planning for an almost certain big expense in every modern physician’s career.
Ryan Rekieta provides executive leadership for the Career Services team at Afferent Provider Solutions