How is tail coverage calculated as far as the cost is concerned? Let’s first talk about when a physician would need tail coverage, who’s responsible for it, and then kind of what the good cost estimate would be. First, a physician only needs tail insurance if they have a claims-made policy. Claims made policy means a policy must be in effect when the claim is made. It’s possible if a physician terminates a contract that there will be a gap in between the last day that they work for the employer and then the last day that someone can sue them. In most states, it’s called statute limitations.
How long someone can sue for, and in most states, it’s two years. So, it’s two years from when the patient either knows or should have known of the malpractice. That’s why there are some incidents that can go beyond two years if it would be impossible for the patient to know that malpractice incident had occurred. If a physician has a claims-made policy, someone needs to purchase tail insurance. And so, in the physician contract, it’s going to say who’s responsible for it. If it doesn’t, that’s a problem that needs to be worked out prior to signing the agreement. As far as who pays for it, well, it depends where the physician is employed. First, if a physician works for a smaller physician-owned practice, most of the time, the physician is going to be responsible for that tail cost.
However, if the physician works for a big hospital network, it’s very unlikely the physician will have to pay tail because that hospital network, depending upon the size, will either be self-insured or will always cover the tail for any of the physicians that are employed by them. There is another instance where the physician would not have to pay tail and that’s if there’s an occurrence-based policy. Under an occurrence-based policy, a policy must be in effect when the incident occurs. And so, that way, no tail is needed. The difference between occurrence and claims made is price. An occurrence policy is usually about one-third more expensive than a claims-made policy. So, you’ll pay one-third more per year. But then, you don’t have to pay that big chunk at the end for the tail coverage.
Claims-made is obviously cheaper per year. And when the physician leaves, that tail policy will have to be paid. And that’s when that big outlay of cash comes in. How much does tail insurance cost? When I’m talking to a physician, I’ll usually say the best estimates are around two times what your annual premium is. However, depending upon the length of time that the physician has been with the employer, it could be either shorter or longer. So, I think the best rate range is usually between about 150% to 300% of what the annual premium is for that policy. The annual premium is simply what the employer pays to ensure the physician per year. Let’s just take primary care for instance. A good rule of thumb is primary care malpractice insurance is usually around 6,000 a year.
Now, it also depends on what state you’re in, but just like an overall general estimate, we’ll just say 6,000. In this case, let’s say, the physician has been there three years, they terminate the contract, moving on into a new job. In that case, the tail cost would be $12,000 or an estimate of $12,000. And if the physician was responsible to pay for that, then prior to their last day of providing care to that employer, they would have to purchase that policy, show proof of that to the employer, and then they can move on. There are, I guess, two scenarios where a physician would not have to pay tail if they were responsible for it. One, they could always get their new employer to pay their old tail and that’s called nose coverage.
Think of it as a signing bonus that the new employer will just pay the old tail, or if the physician stays with the same insurance company. So, if you’re with one insurance company, your new physician utilizes the same insurer, in that scenario, they’ll generally roll over your old policy into your new one. Then you won’t have to pay tail. As I said before, most of the time, if you’re in a private physician-owned practice, the physician won’t be responsible for paying tail. Now, there are a couple of ways to negotiate this. One, just say to the employer, I’d like you to pay for my tail. If they’re unwilling to do that, another scenario would be to split the cost based upon how long the physician has been there.
I think one good way of doing it is, let’s say, it’s a four-year term for a contract. Then 25% of the tail costs will be covered by the employer for each year that the physician is employed. So, if they’re employed for two years, and then they leave, then they would split the tail costs 50/50 with a new employer or with the old employer. That’s one way of doing it. This is important for some specialties like the higher-level surgical specialties, OB-GYN can have enormous tail costs and it absolutely needs to be considered. If the physician is an OB-GYN and they must pay for all of their tail, and they’ve been there for eight years, they could have a tail cost of a hundred thousand dollars, and it has to be paid all at once.
That’s a lot of money for almost anyone. So, trying to figure out a way to split the cost of the employers is really one of the higher points of negotiation as far as that goes. Anyway, I hope that was helpful as far as how a tail cost is calculated, anywhere between 150% to 300% of your annual premium. The longer you’re there, the higher the range, the shorter you’re there, the lower the range.
