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Article | FINEX Observer

Financial lines challenges facing the healthcare industry

Outlook for second half of 2021

Financial, Executive and Professional Risks (FINEX)
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By John M. Orr | August 31, 2021

U.S. healthcare continues to be one of the most dynamic industry segments. We discuss the progression of the top financial risk exposures facing healthcare organizations for the rest of 2021.

U.S. healthcare continues to be one of the most dynamic segments of the marketplace. We entered 2021 in a continued hardening financial lines marketplace for healthcare, driven by several years of record high securities class action filings (for publicly traded companies), high profile and severe exposure employment practices lawsuits, continued antitrust litigation, false claims act related investigations and litigation, and bankruptcy/restructuring claims. Below we discuss the progression of these top financial lines exposures for healthcare organizations in the second half of 2021.

  1. 01

    The impact of COVID-19

    COVID-19-related issues heavily impacted financial lines insurance for healthcare organizations, which has continued to impact the healthcare marketplace in the second half of 2021. For example, an uptick in directors and officers (“D&O”) and employment practices (“EPL”) lawsuits, both directly and indirectly tied to COVID-19, have occurred.

    The EPL insurance market may continue to be stressed by an increase in claims from those unemployed due to the COVID-19 pandemic, claims arising from allegations around workplace safety, claims related to healthcare organization policies and procedures regarding the vaccination and return to work. In fact, in May 2021, a lawsuit was filed against a Texas hospital due to the system mandating that all employees get vaccinated against COVID-19. The plaintiffs alleged, in part, that the hospital was compelling employees to participate in what they called an “experimental vaccine trial” as a “condition of continued employment.” The court ultimately dismissed the case, reasoning, “It is a choice [of the hospital] made to keep staff, patients and their families safer.” Nevertheless, we anticipate seeing more litigation as more healthcare organizations begin moving towards mandating the vaccine, especially on the heels of formal FDA approval of the vaccine in August.

  2. 02

    Liquidity, restructuring and bankruptcy

    Economic volatility and unbalanced demand stemming from the pandemic have stressed cashflow and liquidity on many organizations’ balance sheets. The pandemic-impacted economic environment hangs over a profitability-challenged healthcare financial lines market, fueling underwriter concerns about liquidity, operational resilience to COVID-19, and systemic risks. The strained U.S. healthcare system has pushed some organizations beyond their limits, despite supportive efforts by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and related U.S.-funded stimulus packages. As this dilemma continues, uncertainty may be prolonged, further impacting healthcare organizations’ financials. For organizations hit hardest by the pandemic, restructuring or bankruptcy may be inevitable.

    What drives underwriting concerns today? Financial pressure, whether heightened by the pandemic, supply chain, economic shifts, lower demand for elective surgeries, or recalibrated pandemic lifestyles and ways of working. These factors suggest that older business models may not fit as well in a post-pandemic environment.

    The good news is that many recent restructurings have been largely consensual, pre-packaged filings. From a D&O perspective, a pre-packaged restructuring often presents materially less risk. Nevertheless, bankruptcy claims can be severe. Companies facing restructuring or bankruptcy should seek professional D&O insurance advice in advance of any filing.

  3. 03

    Antitrust / unfair competition

    The financial impact of COVID-19 may have a cascading effect on the future of healthcare organizations. With uncertain futures, continually rising costs and insureds faced with the financial burden to curb their own risk, it is possible, if not likely, that consumers will gravitate to a more competitive environment. As such, many U.S. healthcare organizations would see the need to consolidate or grow via mergers, acquisitions or joint ventures. This may provide an avenue for survival; however, it also may lead to more risks from a financial lines exposure perspective.

    Antitrust and unfair competition issues arise from M&A activity – for example, providers offering health insurance and acquiring physician practices or payers, thus creating joint ventures to be more active in the actual delivery of care.

    In addition to the strategic buyer, another player in the healthcare space is the private equity firm along with other alternative asset investors. This investor class has been attracted to the healthcare sector for the last several years due to factors such as steady cashflow, consumer needs, and the fragmentation of subsectors across the U.S.

  4. 04

    Regulatory

    The new federal administration may lead to a more aggressive regulatory and enforcement landscape. For example, the Department of Justice (“DOJ”) has emphasized rooting out COVID-related fraud, which is intensifying under the Biden administration.

    In addition, the healthcare industry continues to be a primary target by the DOJ under the False Claims Act (“FCA”), including “Qui Tam” (whistleblower) provisions; Stark Law; Anti-Kickback Statute (“AKS”); and government funded “recovery audit contractors,” or “RACs.”

    For fiscal year 2020, companies and individuals agreed to pay more than $1.8 billion to the DOJ, which accounted for 83% of the DOJ’s total recoveries; however, these recoveries did not include settlements totaling billions of additional dollars that are not yet final or did not become final before the end of the fiscal year.

    In addition, in 2020, the government announced that FCA enforcement related to COVID-19 funding will be a priority. It then enacted legislative stimulus packages totaling $4 trillion in COVID-relief funds, with a large portion of this being allocated to healthcare organizations, such that FCA cases will likely follow. The DOJ’s intent has been to focus scrutiny under the FCA on several aspects of the stimulus funding under the CARES Act.

  5. 05

    Opioid epidemic

    Before the pandemic, the nation was in the throes of another public health crisis: the opioid epidemic. The opioid crisis remains a priority for enforcement actions by the DOJ. A large opioid manufacturer reached a settlement in February 2020, in principle, worth $1.6 billion. In October 2020, the DOJ announced it negotiated an $8 billion settlement with another large pharmaceutical company for its role in the crisis and individuals were personally held liable to pay $225 million to resolve civil claims.

  6. 06

    Environmental, Social, Governance (ESG)

    Growth in D&O risks and claims, while fuelled in part by the pandemic, are also being driven by long-term shifts in risk drivers, including cultural shifts and social inflation. We are now in a time when employees, customers, investors, shareholders, stakeholders, and donors have more of a voice, and they are demanding change. Companies have faced heightened scrutiny on diversity after events sparked protests over racial inequality.

    An emphasis on diversity and inclusion has already led to D&O lawsuits in the form of shareholder derivative litigation, particularly against Big Tech, companies such as Alphabet, Qualcomm, Oracle, and Facebook. Generally, the lawsuits allege that boards have breached their fiduciary duties because, while these companies have made public statements about inclusion & diversity initiatives, they have failed to deliver on their stated commitments. The lawsuits also allege boards have failed in their oversight by ensuring the companies’ compliance with anti-discrimination laws. Whether these lawsuits will hold up in court is to be determined – in fact, however, some have been dismissed.

    Some states have implemented new laws requiring diversity on boards. For example, California and Washington have laws mandating board diversity. California enacted a law requiring publicly held companies headquartered in California to elect at least one director from an underrepresented community by the end of this year.

    Furthermore, as the world continues to grapple with the COVID-19 pandemic and social unrest, the EPL market has shifted to a hard market where underwriters are focused on the workforce impact from COVID-19, the financial health and stability of employers, vaccine protocols, pay equity, sexual harassment, and inclusion, diversity and equity initiatives.

    Socially driven movements such as #MeToo, pay equity, and Black Lives Matter are also impacting EPL litigation. There has been a shift to employee activism, as employees are pushing their employers to take a stance on social issues. These movements, collectively and individually, may continue to drive EPL claims.

What to expect in the second half of 2021

In the second half of 2021, absent changes in risk or claims activity, we anticipate public company healthcare risks to experience primary D&O rates to increase in the range of +15% to 30%, with excess rates to follow primary; however, if ILFs were not adjusted upwards in previous renewals, increases may be higher as excess insurers try to right-size ILFs. For private/non-profit companies, we anticipate primary increases in the range of +25% to +40%, and excess increases in the range of +15% to +30% (also depending on expiring ILFs).

Impacts on coverage/retentions are likely to include: (1) significant increased pressure on antitrust retentions and coinsurance, and (2) significant EPL retention pressures for high earners and higher claim frequency and severity geographies.

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage forCOVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. 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 and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson has made best efforts to provide accurate information as of the date written, but some content may have changed since the date of this publication. Please reach out to your Willis Towers Watson contact for more information.

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