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Rural Hospitals Are in Crisis, but Efforts to Save Them Don’t Come Without Risk

Financial struggles are forcing rural facilities to close at a rapid pace. Decisions to sell or shave costs increase management liability and medical malpractice exposure.
By: | August 28, 2018 • 6 min read

Rural hospitals are in crisis. Since January 2010, 83 rural hospitals have closed, leaving the community without access to acute care. According to a 2016 report by iVantage Analytics, 673 more were at risk of closure, constituting nearly one-third of all rural hospitals in the U.S.

“In many rural areas, there is only one hospital to begin with. If it closes, people are left wondering what they’ll do if they have an emergency. Even routine care falls to the wayside as it becomes too logistically challenging,” said Christine Hilbun, Assistant Vice President, Private Healthcare Division, Allied World.

The global recession of 2008 factors largely in rural facility financial struggles; many have never been able to fully recover. The Affordable Care Act of 2010 exacerbated these struggles by shifting focus to quality of care over quantity, encouraging the cutting of extraneous services and promoting efficiency wherever possible.

While beneficial for patients looking to avoid bloated hospital bills, these initiatives have also cut into healthcare organizations’ revenue streams and made it more difficult for cash-strapped rural providers to survive.

To stay in business, there are two paths these hospitals can take: merge with or be acquired by a larger entity, or cut costs. Both approaches come with unique liability risks.

The Management Liability Implications of M&A

Christine Hilbun
Assistant Vice President, Private Healthcare Division, Allied World

Survival option one is to seek a buyer and merge with or be acquired by a larger and more profitable health care network.

“Under extreme financial pressure, hospitals are faced with tough choices to ensure their survival. A large buyer could be their savior, but it means giving up some independence and losing control over some decisions related to budget and operational execution,” Hilbun said.

Consolidation in the health care sector has been going strong for a decade. A Deloitte report on the outcomes of hospital mergers and acquisitions found that there were more than 750 hospital M&As between 2008 and 2014.

According to a study by consulting firm Kaufman Hall, there were 115 transactions in 2017, up 13 percent over 2016 and the highest number recorded in any year so far. But 2018 may well set a new record; the first quarter saw 30 announced transactions — 11 percent more than first quarter of 2017.

Surveys of hospital executives indicate that being acquired by a larger health network leads to improved cost efficiencies and access to more capital investments. But joining with another entity means every aspect of a hospital’s operations will come under the microscope, inspected by both the potential buyer and by regulators.

These actions could impact management liability policies, and claims in this area have grown exponentially.

Loss data compiled by Advisen shows that management liability claims in the healthcare sector more than tripled between 2008 and 2016, with the average payout increasing from $2.2 million in 2008 to $6.5 million in 2016.

In one of the most expensive cases, Kindred Healthcare paid $125 million to settle allegations that its healthcare professionals coordinated with medical equipment firms to knowingly submit fraudulent Medicare reimbursement claims. In another instance, Saint Francis Hospital and Medical Center paid $107 million to settle workers’ claims that it underfunded its pension plan by nearly $140 million, in violation of ERISA.

“Management liability insurance is especially important for a rural hospital if it wants to pursue a merger or court a buyer and avoid potentially crippling lawsuits,” Hilbun said.

Shaving Costs Increases Medical Malpractice Risk

Karen Crawford
VP, North American Healthcare Division, Allied World

A rural hospital’s second option to survive on its own is through cutting costs and improving efficiency, but this potentially jeopardizes quality of patient care and increases medical malpractice risk.

For example, layoffs could result in understaffed patient corridors and over-stressed nurses, increasing the opportunity for error. Eliminating specialties like surgery units or maternity wards could also force physicians to perform procedures they are not trained for in emergency situations. Shaving the payroll by recruiting less experienced doctors with lesser salary requirements will also compound the risk.

“Budget cuts can also dishearten staff and weaken morale. Decreased employee engagement increases the likelihood of mistakes,” said Karen Crawford, VP, North American Healthcare Division, Allied World.

Substandard care would increase re-admissions, which negatively impacts Medicare and Medicaid reimbursement. All of these factors could eventually cause a loss of Joint Commission or DNV accreditation if quality of care continues to decline.

“Attempting to deliver high-quality care while also cutting costs is a difficult balance, and it creates many avenues for medical malpractice claims to be brought against a hospital,” Crawford said.

Turning to Risk Control Experts Can Help

Unfortunately, there are no quick fixes to save rural hospitals, but there are ways to establish safeguards against liability exposure. Partnering with an insurer that provides industry-specific risk control services can help avoid losses.

“Our healthcare liability risk consultants can help medical professional policyholders identify areas of potential liability, examine their clinical practices and existing risk management programs, and develop risk reduction strategies,” Crawford said. “Organizations are encouraged to engage our consultative services when redrafting or developing new policies or procedures, as we offer assistance with reviewing and editing and can provide sample policies and procedures.”

Allied World also provides a 24/7 hotline for medical professional and management liability policyholders. Should a crisis occur, consultants are on hand to provide recommendations or referrals to specialists — such as security vendors or public relations firms — depending on the nature of the event.

Education programs are another staple of Allied World’s loss control strategy. Customized to an organization’s specific vulnerabilities, a range of educational resources give healthcare risk managers the tools to augment their programs and stay on top of their exposures.

“Education programs are often jointly developed following an analysis of areas of exposure and educational needs through clinical risk assessments, claims history review and emerging trends in liability. Our education programs are a powerful tool to help each client mitigate potential loss, and they reinforce the central role each staff member plays in managing their organizational risk,” Hilbun said.

All of these tools complement Allied World’s comprehensive healthcare liability coverages for both management liability and medical practice risks.

To learn more, visit https://www.alliedworldinsurance.com/usa-management-and-financial-lines-healthcare-management-liability

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, GmbH, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. FrameWRXSM services are provided by third-party vendors via a platform maintained in Farmington, CT by Allied World Insurance Company, a member company of Allied World. © 2018 Allied World Assurance Company Holdings, GmbH. All rights reserved.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Allied World. The editorial staff of Risk & Insurance had no role in its preparation.




Allied World is a global provider of innovative property, casualty and specialty insurance and reinsurance solutions.

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]