Liability Costs for Long Term Care Industry Stabilize, Aon Reports

May 13, 2008

An Aon Corp. analysis of liability in the long term care industry found for the first time in nine years of reporting that liability costs are stable on a national average basis.

The study found that average general liability and professional liability loss costs nationwide are at approximately $1,460 per bed after peaking at $2,030 per bed in 1998. This trend is driven by a reduction in the average severity of claims from a high of $261,000 in 1998 to $138,000 in 2007.

In addition, the frequency has stabilized in recent years — hovering around 10.6 claims per 1,000 occupied beds after rising from 6.7 claims in 1997.

The Long Term Care 2008 General Liability and Professional Liability Actuarial Analysis, with the endorsement of the American Health Care Association (AHCA), utilized data representing 15 percent of the total number of long term care beds in the United States

“The impact of tort reform has been lasting, but it is not the only factor contributing to the stabilization of liability costs in the long term care sector,” said Theresa W. Bourdon, managing director and actuary for Aon Global Risk Consulting. “Many other changes, including the withdrawal of some long term care facilities operators from expensive markets, more effective defense strategies, the use of arbitration for claims settlement and significant improvements in quality of care, have combined to help alleviate the liability crisis.”

In addition to reviewing trends nationwide, the Long Term Care 2008 General Liability and Professional Liability Actuarial Analysis reviewed 13 states in detail.

Of the profiled states, Alabama, California, Massachusetts, Ohio, Pennsylvania, Tennessee and Wisconsin showed increasing loss cost levels. Other states, including Arkansas, Florida, Indiana, New Jersey, Texas and West Virginia, exhibited stable or decreasing loss cost levels.

Liability costs dropped significantly in states that passed tort reform in the last several years. As a group, the average loss cost of these states (Florida, Georgia, Louisiana, Mississippi, Ohio, Texas and West Virginia) dropped from $7,190 in 1998 to an estimated loss cost of $1,230 in 2005. The loss cost for these states increased only slightly through 2007 to $1,270.

Further, both the frequency and severity of claims decreased in states that have passed tort reform. The number of claims per 1,000 occupied beds for this group peaked at 20.9 in 2002 and has since dropped to 12.2 in 2007. The average claim size plunged from $384,000 in 1998 to $104,000 in 2007.

High cost levels persist in Arkansas, California and Tennessee, where loss costs per occupied bed are multiples of countrywide averages. At $5,460, Arkansas has the highest loss cost of any state. Tennessee has the second highest loss cost at $4,510 and California the third at $3,410. The driving factor for the high loss costs in these states is average severities that are well above the national average. At the top of the list is Tennessee, with a 2007 indicated average severity of $455,000.

In all other states, excluding the 13 states profiled, the study found that loss costs peaked in 2002 and have increased slightly since 2005. The analysis of claims in all other states indicates that loss costs have risen from $630 in 1997 to $1,260 in 2007.

The Long Term Care 2008 General Liability and Professional Liability Actuarial Analysis represents data reported from 37 long term care providers operating around the country and approximately 20,300 individual non-zero claims from long term care facilities.

Source: Aon
www.aon.com

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