The healthcare industry makes up a significant and growing component of the U.S. economy. In 2021, U.S. healthcare expenditures totaled $4.3 trillion, or 18.3% of GDP. This will only grow as post-pandemic services are expected to rebound over the next several years. Care related to changing demographics, including the aging population, will change delivery models, with increased focus on home health, telemedicine, and assisted living.
At the same time, hospitals and health systems experienced extremely challenging headwinds in 2022. Most hospitals in the U.S. saw thin or negative margins (approximately 50% of hospitals ended 2022 at a loss for the year), fueled by inflationary pressures on labor, drug and supply expenses. Physician practices continue to consolidate, often through private equity, pursuing cost savings wherever possible. Life sciences companies, forever changed by the COVID-19 pandemic, saw significant decreases in private funding and M&A activity.
Looking forward, financial pressures, while significant, are far from the only risks that healthcare entities are experiencing in 2023. From employee-related issues (staffing shortages, injuries, clinician burnout) to operational challenges (cyber threats, workplace violence, solvency), hospitals and health systems will continue to face a multitude of risks. How healthcare entities understand and mitigate these risks will be critical to their ability to survive (and thrive) in this volatile environment.
Critical to every element of patient care is an organization’s employees, whether they are clinicians, administrative staff or executives. Hiring and retaining qualified staff remains one of the most significant challenges to all entities in the healthcare sector. It is also essential for maintaining quality patient care. Employee turnover leads to negative experiences for patients as well as providers. Clinician burnout, overworked nurses and a weak pipeline of entrants into these careers, make it much more likely that staff will seek out alternative jobs with hospitals that either pay more or provide a better work/life balance. While there has been some abatement in the need for, and growth of, travel nursing, these jobs continue to remain viable options for many.
Organizations need to ensure that staffing pressures do not affect their cultures of quality, from both a patient and employee perspective. This can be challenging in this volatile environment, but organizations focusing on quality will see better outcomes with fewer Potentially Compensable Events, hence less claims for malpractice or other liability. With regard to employee safety, organizations that focus on preventing occupational injuries (patient handling, ergonomics, etc.) and establishing a culture of safety, will benefit from lower rates of workers compensation claims, further easing the pressures felt by “overworked” staff and increasingly expensive treatment.
The number of and value of medical malpractice lawsuits continues to climb dramatically each year. “Nuclear Verdicts”, so called because they can have a devastating impact on the defendant, which may be a provider, hospital or healthcare system, often exceeding $10 million, and sometimes reaching $100 million or more.
Nuclear verdicts can result from various factors, including the severity of the alleged injury, the perceived negligence of the provider, and the emotional impact of the case on the jury. They are also impacting the medmal insurance industry, who continue to pay limit losses for claims that were previously defendable.
Whereas in previous years, there were jurisdictions deemed “safe” from mega-verdicts, the changing litigation landscape in many jurisdictions opens the possibility of a nuclear verdict for many more defendants. Without tort reform measures, this will be a pervasive issue.
Hospitals and health systems continue to be prime targets for cyber threat actors. According to WTW’s proprietary Cyber Claims Data, in the first half of 2022, 25% of all notifications related to cyber threats were made by healthcare organizations, more than any other industry. Over half of these events came from ransomware and data breaches. Given the volume of, and potential value of, patient data hospitals can retain, it is no surprise that these entities are prime targets for hackers. Additionally, healthcare entities are very reliant on third party vendors for support, all of which can be avenues for intrusion.
The cyber insurance market saw significant relief in the second half of 2022, after over two years of eye-watering increases. These carriers are, however, requiring that their insureds have robust controls in place to prevent intrusions. Without such controls such as multi-factor authorization (MFA), firewalls and encryption, most carriers will decline to even look at a risk. The good news is that hospitals have made substantial investments in their IT infrastructure, which should lead to fewer claims in this arena.
In 2023, carriers continue to focus on emerging cyber risks such as chat bots (Meta pixel), consumer data protection legislation at the state and national level, and the potential for widespread / catastrophic events and the potential for breaches from vendors and other third-party providers. Lastly, the use of artificial intelligence technology, while not a true cyber risk, will bring a host of new exposures to this sector.
Violence against healthcare workers continues to trend in the wrong direction. The aggressors can be patients, families, coworkers or random bad actors, however patients are the primary aggressors in most situations. The threat of facing injury or death from the very individuals they are trying to help is adding a great deal of unneeded anxiety to an already stressed workforce. With six bills currently sitting in Congress, healthcare workers are pushing for legislation that would set minimum safety standards and would be enforced by federal agencies such as OSHA.
According to the U.S. Bureau of Labor Statistics, there was an 86% increase in “nonfatal occupational injuries…resulting from intentional injury by another person” experienced by healthcare and social workers between 2011 and 2018. Further, there were three times as many attacks against healthcare workers over the same time period than in all other industries combined.
Hospitals and other healthcare facilities have had to respond by increasing security, through either employed or contracted professionals. Magnetometers, armed guards, and video surveillance can be found in almost every setting. The implementation of these measures is extremely expensive and brings unforeseen risks to hospitals and health systems, including allegations of excessive force, false arrest, or discrimination. Extensive training for all employees, as well as established procedures for code black situations are critical to protect patients and employees and avoid liability.
Most buyers of property insurance know that this market has been particularly difficult for several years, both from a renewal and claims handing perspective. Healthcare institutions, with high value facilities and equipment, and exposure to significant losses from water damage and catastrophic weather events, experienced severe rate increases over multiple renewal cycles.
While the pace of rate increases at renewal has decelerated, the property market remains stubbornly challenging due to a variety of factors. In 2022, there were 18 disaster events in the U.S. with losses exceeding $1 billion: hurricanes, western wildfires, and winter storms/freezes reaching areas like Texas, along with severe flooding in the Midwest to name a few. Recent reinsurance renewals have been very difficult for commercial property insurers, with increased rates and reduced capacity. This inevitably affects insureds, even those that are highly protected and loss-free.
Property insurers are particularly concerned that their insureds’ physical assets (building and equipment) are not valued appropriately on their statements of values. If insured organizations have not consistently and methodically trended the value of their largest assets, the insurer may have to pay much more than expected to replace or repair these locations, especially in light of high inflation and supply chain disruptions.
Most insurers are insisting that their insureds are increasing the stated values of their buildings and equipment at renewal by significantly higher factors than in the past. FM Global’s 2023 Building Cost Index, a benchmark for the property insurance industry, indicates an 11.1% increase in “completed building prices” since January of 2022. This is on top of the roughly 18% increase they indicated in 2022 (and continued rate increases being quoted for hospitals and other healthcare institutions). Insureds should be prepared to demonstrate their methodology for calculating these values, or their insurers may seek to cap limits on various locations. Third party appraisals remain the most accepted method of valuation.
While the risks facing any specific healthcare organization are as unique as the organizations themselves, the mentioned risks (staffing, cyber, workplace violence, and property) will continue to create universal strife in the healthcare industry. When considering optimal methods for mitigating and/or financing these risks, it is beneficial to have insight into trends, benchmarks, analytics, and other healthcare specific data points to help assess the most efficient solutions for individual circumstances. The WTW team of healthcare industry experts are ready to provide answers to questions, data and analytics by line of coverage, and guidance based on our experience with healthcare clients across the country.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
