Average Long Term Care Liability Claim Rising: Aon Study

Long term care liability costs are rising because the average claim size is increasing even as claim frequency declines.

There has been a four percent increase in the average claim size, according to research by Aon Risk Solutions in its 2011 Long Term Care General Liability and Professional Liability Actuarial Analysis. The study is in partnership with the American Health Care Association.

Nationwide, the severity of liability claims increased steadily from $125,000 in 2005 to $153,000 in 2010. In 2011, claims severity is projected to reach $159,000, according to the study.

In addition, the average annual loss rate per bed, which has hovered around $1,400 for the past five years, is projected to be $1,430 in 2011. Likewise, since 2005, the loss cost as a percentage of the Medicaid per diem reimbursement rate has been near its 2010 level of 2.22 percent.

While claim severity has grown, liability claims frequency has decreased from 1.07 percent in 2003 to 0.91 percent in 2010. Claims frequency is projected to drop slightly to 0.90 percent in 2011, which means less than one liability claim will arise for every 110 residents in a long term care facility.

The increase in the size of claims outweighs the decrease in claim incidence, according to the study, which says that the resulting growth in liability costs is important for long term care providers since they must also contend with uncertain Medicaid funding and cuts in Medicare reimbursement.

The study’s backers urge providers to explore ways to control the growth of liability costs to preserve their already threatened funding base.

“For the long term care profession, controlling liability costs is necessary if we are to make do with dwindling resources for patient care and adequate staffing,” said former Kansas Governor Mark Parkinson, president and CEO of AHCA.

While tort reform may help control liability costs, the way tort reform legislation is drafted is critical to its effectiveness, according to Aon.

Global Risk Consulting’s associate director and actuary Christian Coleianne, who coauthored the study, said that limiting non-economic damage awards alone may not be enough to control liability costs.

Coleianne said that California caps non-economic damage awards at $250,000, yet liability costs in the state remain among the highest in the study – largely due to provisions in California’s elder adult protection law that run counter caps on non-economic damages.

“Tort reform laws have been circumvented in West Virginia as well, where liability costs are the highest in our study,” said Coleianne. “Texas-style tort reform, where constitutional amendments have protected a hard cap on damages since 2003, stands in sharp contrast to both California and West Virginia.”

The study shows that since Texas implemented tort reform, loss rates have been among the lowest in the database, “which underscores the point that tort reform is supported by constitutional protections is highly effective in controlling liability costs.”

West Virginia has the highest frequency of claims and loss rate per occupied long term care bed in the study. The state also has the second highest projected severity and loss rate as a percent of the Medicaid per diem reimbursement rate.

Claims frequency is expected to be 1.29 percent in 2011 and the loss rate per occupied long term care bed in West Virginia is $3,900 – more than three times what it was in 2003 ($1,100). West Virginia has the second highest projected severity at $302,000. The loss rate as a percent of the Medicaid per diem reimbursement rate is at 5.34 percent, second highest in the study.

Kentucky’s loss rate has increased over the past 10 years and has been more than $3,000 per occupied bed in four of the past five years. The projected loss rate in 2011 is $3,230, the second highest of the profiled states. The projected 2011 frequency of 1.15 percent is second highest of the profiled states. The projected severity rate is $281,000. The loss rate as a percentage of the Medicaid per diem reimbursement rate is currently 5.82 percent, placing Kentucky highest among the profiled states.

Tennessee’s claim severity is projected to be $312,000 in 2011 – the highest in the study – while claims frequency is expected to be at 0.84 percent, the fifth highest among profiled states in the study. The loss rate dropped from a high of $3,370 in 2003 and is projected to be $2,620 for 2011, the third highest loss rate of the states profiled in the study. Tennessee’s loss rate as a percent of the Medicaid per diem reimbursement rate also has dropped from a high of 8.46 percent in 2003 to 4.83 percent in 2010. Despite dropping by nearly half, this rate stands out as the third highest of the profiled states.

California has a projected loss rate per occupied long term care bed of $2,020 in 2011, which is the fourth highest loss rate in the study. Claim frequency has been stable since 2008, and the projected 2011 severity is $192,000. The loss rate as a percentage of the Medicaid per diem reimbursement rate has been less than 4 percent since 2005.

Texas had the second highest loss rate in the study in 2003, the year its tort reforms were enacted. Texas now maintains the lowest projected loss rate in the nation at $330. In addition, Texas has the lowest 2011 forecasted severity at $73,000 and the second lowest frequency of claims at 0.45 percent. The Medicaid per diem for Texas is 0.70 percent.

Approximately 17,000 individual non-zero claims from long term care facilities were aggregated by Aon Risk Solutions Actuarial and Analytics practice to perform this analysis. The claims experience spans the period 2003 through 2010. The facilities operate approximately 260,000 long term care beds, consisting primarily of skilled nursing facility beds, but also including a number of independent living and assisted living beds. Participants represent approximately 14 percent of the beds in the U.S.