Advantage BHG! Having a competitive advantage is key to success in business. At BETA Healthcare Group, our success has been driven by several advantages including our organizational and governance structures, high-quality services, affinity nature of our programs, and the expertise and commitment of our staff. BHG has grown and prospered because of these advantages, and we promise to remain focused on our core businesses as we confront yet again another soft market, keeping rates as low as reasonably possible and not trying to secure new business at inadequate prices.
So, where do we go from here? The frequency of healthcare professional liability claims appears to have stabilized at historic lows. Our investment portfolio has improved greatly but reinvestment rates remain low. Contributions have decreased for three straight years. Risk management (packaged more effectively as patient safety) has been embraced like never before, but the severity of large claims continues its upward spiral. We are several years into another soft market characterized by decreasing rates, more competition, less focus on the bottom line and more on the top; yet, fortunately, we have not reached a tipping point where actuarial science and underwriting are replaced by marketing mandates for growth. But if the soft market continues for another year or two, will the end result be any different this time around?
The good news is the naïve capital that in prior cycles offered unsustainable premiums for the benefit of short-lived marketing staffs has not surfaced. Reinsurers, the insurers of insurers, are holding firm with reasonable rates and still have vivid memories of the wounds inflicted by primary medical malpractice insurers less than ten years ago. Insurance companies and self-insureds have increased their retentions in light of improved data, more thorough analysis, expanded surplus positions and better focused and effective risk management initiatives. Releases of claim reserves deemed actuarially redundant have helped drive the results of the medical malpractice insurance sector from the worst to the best in five years.
BHG and its members were the beneficiaries of outstanding results in 2009. The Combined Statement of Operations reported $89.4 million, up $7.7 million or 9.4% from 2008. Even though net contributions/premiums declined by 6.8% to $79.9 million, primarily because of rate decreases, net investment income skyrocketed by 272% to $19.5 million. Significant positive operating results and a claim reserve release of $30.5 million produced net income from operations of $31.9 million. Based on these solid results, the BETA Council approved a $15 million dividend, and the fund balance grew to $151 million, up 24%. This amount includes $9.8 million of unrealized gains on investments.
Assets at December 31, 2009, totaled $453.9 million up 10% over 2008. Using five investment managers, BHG's investable assets of $378.5 million are broadly diversified in the fixed income markets with a minor equity component of $6.7 million invested by Health Providers Insurance Reciprocal, RRG. The BHG portfolio does not contain any leveraged investments and there were no additional impaired assets during 2009.
BHG's investment portfolio closed 2009 with an annual return of 6.68%, a yield to maturity of 5.65%, and a duration of 3.68 years. Over 95% of the BHG $362.7 million fixed income investment portfolio is rated "A" or better with 77% rated "AA" or better. All securities with maturities of greater than five years and/or rated below "A" are reviewed by the BETA Council at each quarterly meeting.
A. M. Best reconfirmed BHG's rating for the thirteenth year in a row at "A-" (Excellent) with a "stable" outlook stating, "The rating reflects BETA Healthcare Group's sound risk-adjusted capitalization, favorable operating profitability and conservative loss reserve philosophy" and adding "[t]he outlook takes into account BETA's tax-exempt status and very high member retention from its high-quality claims and risk management services, stable rates, and retroactive credit/member dividends." A. M. Best also raised BHG's Financial Size Class to VIII.
For the year, the BETA pool opened 895 claims, closed 881, and had 974 open claims at year end, all record highs. Eighty-two percent of the 765 healthcare professional liability (HPL) claims were closed with no indemnity payments down from 85% in 2008. These claims cost BETA $6.3 million in defense expenses, an average of $10,048 per claim, 11% more than in 2008. Of the 140 HPL claims closed with an indemnity payment, the average total cost was $254,013, consisting of $198,933 in indemnity expense and $55,080 in defense costs, which is a 4% decrease over 2008 average indemnity payments, but a 23% increase in defense costs. Overall, defense expenses represented 37% of all claim costs.
While large HPL claims ($1 million and higher) continue to represent only 1% of the total closed claims, they represented 44% of total incurred HPL claims costs, down from 60% in 2008. The five large claims closed in 2009 averaged $3.3 million in incurred costs, with indemnity costs representing 96% of the total, an increase from 93% in 2008.
Total incurred costs for the 56 directors and officers' liability closed claims were $6,036,556, for an average of $107,796 per claim. Defense costs represented 64% of total incurred costs. There were 60 auto claims closed at an average cost of $3,375.
In 2009, HealthPro closed 124 claims at a cost of $13,775,368, 75% of which was indemnity payments. Ninety-two percent of all HealthPro claims closed without indemnity, but had average defense expenses of $29,774. Five large claims represented 40% of the total claims cost, 48% of total indemnity paid and 14% of total defense costs. HealthPro closed over 82% of its claims without an indemnity payment.
The reinsurance program protecting BHG and its members/insureds continues to perform well, with an incurred loss ratio of 21% for the period July 1, 2004 through December 31, 2009. Through a well-diversified reinsurance program consisting of highly rated international reinsurers, both BETA and HealthPro are able to retain appropriate levels of risk while securing special coverages and offering optional higher limits to our members and insureds.
Risk management enhancements took center stage in 2009 with a variety of activities. BHG continued working with Advanced Practice Strategies (APS), encouraging its members to use its online perinatal education modules. Paying 50% of the two-year licensing, BHG assisted its members by increasing the competency of over 1,200 labor and delivery clinicians at 29 hospitals. BHG also commenced a program in conjunction with APS focusing on decreasing risk in obstetrics through 15 monthly webinars and we completed over 40 Medication Safety Assessments in conjunction with Dan Ross, Pharm.D. Updated model medical staff bylaws were also prepared for district and nonprofit members.
BETA’s #1 risk management program made substantial strides in 2009. The Obstetrical Initiative moved forward with five members earning a 5% discount on their July 1, 2009 renewal contribution by attaining 100% compliance in meeting three criteria:
- Fetal monitoring interpretation competency for all perinatal professional staff and physicians,
- Use of current NICHD nomenclature,
- Multidisciplinary fetal monitor strip review.
The Obstetrical Initiative will be offered again in 2010 with the hopes of growing the number of those achieving compliance and savings!
A special thanks to Terry Bonecutter (former CEO of QueensCare) and Mark O'Connor (former board member at El Camino Hospital) who retired recently after years of service to BETA Healthcare Group. Terry served as the first nonprofit member representative on the BETA Council joining in 2001. Mark served as a Vice Chairman of BETAlliance Insurance Services, the attorney-in-fact for HealthPro, since 1999 and on the BETA Council since 2007. Their expertise, insight, humor and friendship will be missed greatly.
And very importantly, BHG welcomes the following new member facilities and medical groups which joined BETA or HealthPro in 2009:
- Central Valley Hospitalists
- Culver Emergency Medical Group
- Los Gatos Community Hospital
- Pathways Home Health & Hospice
- Restorative Healing Group
- San Diego Blood Bank
- USC University Hospital and Norris Cancer Hospital
- ValleyCare Health System
BETA Healthcare Group has continued to use its competitive advantages for the benefit of all its members and insureds. Thank you for working with us to reduce risk, improve patient outcomes and reduce liability costs for California healthcare providers.