A Remedy For Malpractice Malaise

Hospitals are offering free coverage to recruit doctors from private practice

For the past few years, the insurance industry has been running Dr. Stephen W. Crane's practice into the ground. A perinatologist, Crane treats expectant moms who have complications that endanger their pregnancies. Malpractice insurance premiums for such high-risk specialists run as high as $150,000 a year in Ohio -- triple what Crane paid when he moved to Akron seven years ago from Syracuse, N.Y. And with many insurers dropping their malpractice coverage, Crane feared he would be ditched altogether. So when Akron Children's Hospital offered him a full-time job last December, he jumped, thanks to one tantalizing perk: The hospital would foot the entire bill for his malpractice coverage through its own in-house insurance company. "At some point, you can't afford to be in private practice anymore," Crane says.

Doctors and hospitals have been in a squeeze for some time, of course, as malpractice premiums have soared. Now they're also getting inventive. To keep more physicians from bailing out, hospitals are increasingly offering doctors malpractice insurance through not-for-profit entities known as "captives." The captive at Akron Children's can cover Crane and his colleagues for 50% less than doctors pay on the open market, estimates CEO William H. Considine. That's because, unlike traditional insurers, hospitals don't have to calculate premiums based on industrywide losses. Instead hospitals, which often supplement coverage through reinsurers, can design coverage around the hospital's track record, a much smaller risk pool.

Today only 7% of doctors actually work for hospitals; the majority just obtain privileges to practice at them. That could change rapidly as hospitals learn they can make an end run around insurers. Among the 2,369 hospitals in 19 "crisis states," where the malpractice situation is most serious, 11% had in-house insurance in 2004 -- up from 9% in 2002. That number is expected to multiply. "Interest is skyrocketing," says S. Allan Adelman, a partner with law firm Adelman, Scheff & Smith LLC in Annapolis, Md., which advises hospitals on setting up captives.


Hiring doctors also gets hospitals around anti-kickback laws which bar hospitals from providing financial incentives to independent doctors who refer patients to those hospitals. Insurance could be construed as a kickback. But "if you employ them, you can insure them," Adelman says.

The malpractice conundrum has also emboldened hospitals to give the doctor business another try. In the 1990s hospitals bought up physician practices in droves, hoping to gain specialities that would make them more competitive. It was a disaster. Doctors resented hospital execs watching over them like Big Brother. For their part, the execs griped that doctors grew complacent. Now hospital CEOs are learning from those failures. For example, many hospitals are drawing up job contracts that allow doctors to nab bonuses based on productivity.

Washington understands the bind doctors and hospitals are finding themselves in. President George W. Bush is pushing legislation that would cap so-called noneconomic damages -- for emotional distress, for instance -- in malpractice cases at $250,000. But experts doubt that reduced jury awards will motivate profit-driven insurers to lower their prices much. That's why hospitals are taking matters into their own hands. Akron Children's Considine says he plans to add three more perinatologists over the next 18 months. They'll join more than 50 pediatricians and other specialists he has hired. "We need physicians to be there for the kids," Considine says, "and we're going to be aggressive about employing them." With no end to the medical malpractice crisis in sight, he won't be alone.

By Arlene Weintraub in New York

Before it's here, it's on the Bloomberg Terminal.