2021 has been a rebound year in the healthcare sector. The COVID-19 impact felt throughout the healthcare sector in 2020 began to fade as the industry began to normal and manage the realities of the new normal created by the pandemic. Healthcare sector stocks are trading at their high for 2021, as per the S&P 500 Healthcare Sector Index. Only the home health and managed care sectors underperformed the S&P 500. All other healthcare sectors outperformed the S&P 500 by wide margins. This is clearly a sign of recovery within the healthcare sector.
What we saw in 2021
Mergers & Acquisitions (M&A) activity within the healthcare sector also rebounded in the first half of 2021, up 43% compared to the first half of 2020.1 According to Baker Tilly, 872 M&A transactions closed in the first half of 2021, up from 738 in the second half of 2020.1 Non-acute healthcare has been the most active sector for M&A in 2021 with long-term care coming in second in terms of number of M&A transactions in the first half of 2021. Hospital M&A deals are down in 2021, but the size of those transactions is up significantly. Private equity continues to be a major source of M&A activity in the healthcare sector.
From a regulatory perspective, it's clear the Biden administration is much more interested in M&A than the prior administration. The Federal Trade Commission, while experiencing significant backlogs, will be keeping a close eye on all M&A activity, particularly the large deals.
The vast majority of healthcare primary Directors' and Officers' (D&O) Liability insurance carriers are not seeing their books of business performing well. As a result, they intend to take continued action to make their books of business profitable, with many Directors' and Officers' Liability carriers continued focus on:
- Reducing their limits of liability on any one insured;
- Raising retentions on all the coverage lines they provided;
- Restricting terms for antitrust coverage and regulatory coverage;
- Raising premiums in excess of 10% for virtually all risks and raising premiums much more significantly for larger risks in
Health systems saw margin compression in 2020 from large reductions in elective surgeries. Physician offices, long-term care providers, clinics, rehabilitation businesses and other healthcare providers that closed due to the pandemic experienced massive economic hardship in 2020. Directors' and Officers' Liability underwriters will focus on the financial recovery of these healthcare organizations in their underwriting.
The continued heightened frequency and severity of Employment Practices Liability (EPL) claims continues to be a major issue in the healthcare sector. M&A frequently leads to redundancy of positions and reductions in staff to control expenses in order to maximize profitability. These staff reductions in force often lead to EPL litigation, and when those reductions in force include highly paid physicians, costs of EPL claims costs accelerate quickly. The need to control expenses due to margin compression generated by the pandemic is also resulting in reductions in force that have resulted in increased frequency of claims.
The healthcare management liability sector will once again be challenging in 2022.
- Primary carriers are targeting at least double-digit premium increases on their D&O and EPL private/nonprofit renewals.
- Carriers will attempt to increase EPL retentions again.
- Excess capacity is still plentiful but more costly.
- Coverage terms negotiations will be contentious in 2022.
Now, more than ever, it's critically important to start renewals as soon as possible and deliver a comprehensive and professional submission to underwriters.
Because of the highly nuanced nature of the healthcare management liability market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists who understand your industry and business, along with the best solutions in the healthcare management liability marketplace for your specific challenges.
Please note: A client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals.