Author: John Ergastolo
The tremendous stress placed upon the healthcare sector during the pandemic of 2020 and 2021 has given way to numerous new headwinds within the sector in 2022, some of which are directly a result of the pandemic. While medical costs continue to stay at somewhat alarming rates, demand for healthcare services of all kinds continues to rise, making the healthcare sector as strong as ever.
Healthcare now accounts for nearly 20% of the U.S. gross domestic product.1 The sheer size of the industry continues to attract capital, although the cost of that capital is increasing.
What we saw in 2022 in the Healthcare Management Liability insurance market
Mergers and Acquisitions (M&A) activity in the healthcare sector decreased in 2022 due to a number of headwinds, including but not limited to potential economic volatility, supply chain shortfalls, heightened regulatory scrutiny, significantly higher interest rates and labor shortages for both skilled and unskilled labor.
These headwinds have made acquisitive organizations more cautious and have led some of those organizations to shift growth strategies away from pure M&A to more of a joint venture approach to growth. Deals are still happening, some of which are quite large in value, but by some estimates, M&A activity frequency in healthcare in Q3 of 2022 was only about 50% of the activity in 2021.2
Acquirers are making much fewer acquisitions in health systems, healthcare IT/digital health and payors as compared to 2021. Private equity companies continue to drive the M&A activity, but they are doing so much more cautiously than in the past several years.
Healthcare organizations and investors are closely watching post- pandemic healthcare spending to see if deferred care during the pandemic will provide a revenue increase in 2023.
These organizations are also focused on addressing the increased mental health and substance abuse attributed to the pandemic. They will do so while continuing to attempt to bend the cost curve for these services through the use of telemedicine and remote or home care.
In 2022, the broader Directors and Officers (D&O) Liability market experienced a downward trend in pricing. Although the healthcare sector is considered the least profitable sector for carriers writing this business, they continue to write the business, and the significant premium dollars in the sector are difficult to pass up. With limited options to grow premium revenue, carriers that once wouldn't consider writing healthcare-related management liability are now willing to compete for the business.
Carriers will continue to intensely underwrite antitrust, regulatory and the financial risk of the organizations they insure. They will continue to insist on appropriately higher retentions for organizations with heightened risk in these areas, and they will place restrictive conditions on organizations that are deemed to have excessive risk in these areas.
Healthcare organizations of all kinds are struggling with labor issues. In addition to serious labor shortages, healthcare organizations are also challenged by union demands for increase in pay and, in some cases, are facing strikes. The costs of managing through a labor strike can be crippling.
Diversity and inclusion efforts by many healthcare organizations are generating claims of reverse discrimination, which can generate high plaintiff awards.
Looking ahead at Healthcare Management Liability insurance in 2023
The Healthcare Management Liability sector will be easier to manage than in the past few years.
- Primary carriers that had no competition will see in an increase in competition in 2023, forcing them to provide more reasonable renewal quotes.
- The market will be fairly flat on a primary carrier basis, and excess carrier competition will be very strong.
- Larger risks will see fewer primary options, but their excess pricing could see meaningful reductions in premium.
- Coverage terms will be very favorable for smaller risks, but they need to be closely monitored for larger risks, as carriers will attempt to wall themselves off from antitrust and regulatory risks.
- Retentions levels should remain fairly stable for most renewals.
- The 2023 market conditions will require broad marketing of renewals to capitalize on the heightened competition in the market.
- Incumbents won't willingly keep premiums down, but they will fight to retain their business if there's competition.
- It will be prudent to start the marketing process early and cast a wide net.
Because of the highly nuanced nature of the Healthcare Management Liability insurance market, it's imperative that you're working with an insurance broker who specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understands your industry and business, along with the best solutions in the 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.