Deductibles: Savings may only be short-term

Practice Management. By Mike Norbut, amednews staff. July 28, 2003.

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There is a way physicians can take it upon themselves to lower their liability insurance premiums -- if they're willing to take what can be a significant risk.

Medical liability insurance companies offer plans with deductibles, which essentially spread the risk between the insurer and the physician or group. Taking on a deductible will reduce a premium, but the amount would vary according to the doctor's specialty, policy and size of deductible, insurance experts said.

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Topic: Liability crisis

A deductible could save a physician "thousands," said Frank O'Neil, a spokesman for ProAssurance Inc., a Birmingham, Ala.-based insurance holding company whose subsidiaries are licensed to sell liability insurance in 45 states.

"As premiums have gone up, physicians have become more attuned to the little things they can do to reduce premiums," O'Neil said. "A deductible is something we welcome because it does get the physician involved in the process."

A theory among insurers is if a physician takes on some of the risk, he or she may be more cautious and less likely to draw a claim. The reduced premium is the physician's reward for the willingness to pay the deductible. Deductibles typically range from $10,000 to $25,000, while a few have been known to be as large as $100,000 -- if a claim is filed.

For a physician who has never faced a claim, or a large group that easily can absorb the potential cost of paying a deductible, the idea may have merit. However, there are some real limitations for most doctors, said Richard E. Anderson, MD, chair of The Doctors Company, which is based in Napa, Calif., and sells medical liability insurance nationwide.

Taking a typical deductible "will save 10% at most," Dr. Anderson said. Whether that amounts to a significant savings depends on your policy, he said. For example, if a doctor gets a 10% credit for taking a $10,000 deductible and he or she has a $10,000 premium, that only amounts to $1,000 in savings each year. One claim in 10 years would wipe out those savings, Dr. Anderson said.

Physicians with larger policies could fare better, but the chances that they will receive a claim increase as well. A doctor with a $50,000 policy would save $5,000 a year by taking the same deductible, which would require only two claim-free years to realize the savings, he said.

However, practicing excellent medicine doesn't protect you from frivolous claims. Unless there's some stipulation in your contract that limits your liability, your deductible comes into play on each claim you get, no matter how many of them, valid or not, Dr. Anderson said.

"There's no such thing as a deductible against valid claims only," he said. "[Taking a deductible] is appealing because it allows physicians to bet on themselves, but it's difficult to do when so many malpractice lawsuits are not based on merit."

If a physician decides it's worth the risk and the money to take a deductible, he or she probably will be asked to furnish a letter of credit from a bank to prove there's a backup for those funds. O'Neil said the ProAssurance companies, for example, typically seek a letter of credit for any deductible of more than $10,000.

The letter of credit, which usually has to be renewed on a yearly basis, serves almost like an insurance policy of its own, because as long as a claim isn't filed, it isn't called into service. If a claim is filed, the bank furnishes the funds, and the letter of credit turns into a loan with an interest rate slightly above the prime rate. Banks usually negotiate with physicians or groups on how to repay the loan, including possibly amortizing it over a couple of years, said Tom Milowski, vice president of the commercial markets group for Citibank's Chicago office.

Letters of credit do carry an annual fee, though it often is a nominal amount like one-quarter of 1% of the letter's value.

"A letter of credit is as good as currency in the United States," Milowski said. "It's the easiest way to self-insure part of the risk."

A gambling physician would agree, but most probably would prefer to see a legislative solution that won't cost them a substantial amount of money each time a claim, warranted or not, is filed. The ironic twist to the deductible idea is that in the liability crisis states, where physicians are desperately looking for relief, this is not a very attractive option, Dr. Anderson said. Those also are the states with more than an average number of claims, making it a risky proposition to take a deductible, he said.

"This is not going to eliminate the malpractice crisis," he said. "The deductible approach is money in the bank year after year until [a claim is filed and] it's not."

Practice Management is written by members of our Business staff.