Why is Physician Tail Coverage so Expensive? | Tail Insurance

Why is tail insurance for a physician so expensive? Let’s get a little background on when a physician would need tail insurance and then kind of cost analysis, and then why it is so expensive. First, the physician must identify what type of insurance policy they have. There are usually three main types. If you’re employed with the hospital network, most large hospital networks are self-insured now, so you would not need tail insurance if you’re working for a big hospital network, usually. 

Some hospital networks have claims-made policies, but the physician won’t need to pay for the tail insurance expenses in most instances. Most of the time, if there’s a claims-made policy and the physician is required to pay for their tail insurance, it’s when a smaller physician-owned group employs them. If you have occurrence-based coverage, you do not need tail insurance. Occurrence-based coverage means the incident must occur when the policy is in place. In that scenario, it doesn’t matter when the claim is filed if there was a policy when the event occurred, then the physician is covered.

 One would purchase claims-made over occurrence-based because occurrence-based is about one-third more expensive than the claims-made policy. So, if you paid 6,000 a year for claims-made, you pay around 8,000 for occurrence. Now, if you do have a claims-made policy, and most of the time, if you have a claims-made policy, it means you’re employed with a smaller physician-owned group. And then, the employment contract will state who is responsible for paying for the tail insurance. In this scenario, the physician is responsible for paying for tail insurance coverage, and there’s a claims-made policy.

Considerations for a Physician’s Tail Insurance Calculation

In that scenario, tail insurance coverage usually costs about twice what the annual premium is for the physician. The annual premium is what the practice pays annually to insure the physician. It would be best if you found out what is your annual premium. And then two, you must figure out how long you’ve been with the practice. Tail costs can go anywhere from one and a half up to three times the annual premium. 

And it’s usually based on the length of time the physician has been with the employer. If you’re only there for a year or two, it might be closer to the 1.5 ratio, whereas, if you’ve been there two decades, it could be closer to the three times your annual premium. Specialty is also certainly important. OB-GYN and many surgical specialties have extremely high yearly premiums, meaning their tail insurance cost could be like a hundred thousand dollars. 

Whereas if you’re in family medicine or pediatrics, your annual premium is probably 6,000, meaning your tail insurance costs might be around 12,000 per year. Tail covers the gap between when you leave the employer and the last day somebody can sue you. It’s called the statute of limitations. In most states, it’s around two years from when the patient knew or should have known of the malpractice. There are some exceptions for minors allowed to sue up until the date of majority, but a good rule of thumb is it’s around two years in that scenario. There are shorter tail policies. You may get one that’s only two years long, or you may want to get a policy that covers an infinite amount of time. The length of time the tail insurance lasts can also affect the cost of the tail insurance itself.

Can Tail Insurance Coverage Be Negotiated With the Employer?

Anything with long tail insurance will cost a little bit more. You might not get to the two-times ratio with anything with shorter tail insurance. This is something that you can negotiate in a contract. A couple of ways of approaching it.

Forgiveness Period for Tail Insurance

If the employer isn’t willing to kind of foot the entire cost of tail insurance, you could suggest giving a forgiveness percentage at the end of each year of employment. For instance, you could say, look, let’s say, for every year that I’m employed here, you will cover 25% of the tail insurance cost. If I’m here for one year, the physician’s responsible for 75%, two years, 50%, three years, and 75%. And then, if the physician completes four years of employment, the employer will pay for the entire amount.

We often use that if the employer isn’t willing to pay the entire cost from the beginning. Maybe offer them, alright, well, it’s fair that if I’m here for a very long period, you will cover my tail insurance. I think that’s one good way of negotiating it if they’re not willing to foot the entire bill. 

Nose Insurance

Another way of paying for it is if when you leave the employer and get a new job, the new employer could pay for your old tail insurance, which is called nose insurance. And that could be a part of the negotiation when you’re leaving one job and going to another is alright, here’s my tail insurance cost, I’d like you to cover that—and sometimes used as a signing bonus or in addition. I guess it just depends. 

Same Insurance Company

Then lastly, if you stay with the same insurance company, let’s say you stay in the same state. You’re in the same specialty and just moving to a different practice. They utilize the same insurance company. Most companies will roll over your old policy into a new one, and you won’t have to pay tail insurance. So, is tail insurance expensive? It’s specialty-dependent. I mean, every amount is relative. If you’re making 500,000 a year and must pay a 15,000 tail insurance, it’s probably not as shocking as those in other professions.

Other blogs of interest include:

• What is Tail Insurance Coverage for Physician Malpractice Insurance?
• How Does Tail Insurance Work?
• How is Tail Insurance Coverage Calculated?
• What Can You Negotiate in a Physician Contract?

How Is Tail Insurance Calculated?

How is tail insurance calculated? What is tail insurance? Under what kind of malpractice policy do you need it? And then how much does it cost? There are two common types of malpractice policies for healthcare providers. You have occurrence-based and claims-made. In a claims-made policy, you need tail insurance; if it’s an occurrence policy, you do not. 

Different factors are considered to Calculate tail insurance. There are different lengths of tail insurance. You could have one year, two-year, five-year, or infinite, and then with each one, it’s a little bit more expensive. A good rule of thumb in calculating tail insurance costs is about twice your annual premium. Let’s say you’re a family practice physician. On average, your annual premium, so how much it costs to insure you each year, will probably be about $6,000. And so, if you had to pay double that, the tail insurance calculation would be $12,000.

Now, that’s a one-time payment. You do not have to pay it annually. You give it all at once, and then you’re covered for how long the tail insurance is. If it’s up to you how long the tail insurance lasts, it makes sense to get an indefinite tail insurance policy. You are rolling the dice if you have one-year tail insurance, but the statute of limitations is longer than a year because you’re uncovered for that period. And if you do not have malpractice insurance, they could come after you potentially. And that could be catastrophic for a professional. If it’s only a couple thousand dollars more, it’s just simply worth it to get the longest tail insurance policy that you can. That way, it’s just one last thing you have to worry about.

Two Common Types of Malpractice Insurance Coverage

Let’s talk about the differences between the two malpractice insurance. For an occurrence-based policy, a policy must be in effect when the malpractice incident occurs. There is no need for tail insurance in that scenario, and I’ll explain why.

In a claims-made policy, a policy must be in effect when the claim is made. And so, for an employee who terminates a relationship with an employer, there will be a period where somebody can sue them. In most states, it’s two years. It’s called the statute of limitations. And in this scenario, let’s say a physician leaves the practice, they’re no longer an employee, and they have a claims-made policy, and that policy is done.

Well, they need an additional policy called tail insurance that covers the gap between when they leave the employer and the last day an individual can sue them. There are some exceptions in some states when a minor becomes an adult and a few other scenarios, but let’s use two years as a standard amount here. The employment contract will state that the employer will pay for the underlying policy, assuming you’re not an independent contractor.

Who Will Buy Tail Insurance Coverage?

And then, it will also state who is responsible for tail insurance. Now, if you’re in private practice, like a smaller physician-owned group, they will likely have a claims-made policy. And it’s also very likely they will make the provider pay for tail insurance when the contract ends. If it’s an occurrence-based policy, you’re good; you don’t have to worry about tail insurance when the contract ends.

Why Would Someone Get One Over the Other? 

An occurrence-based policy is around one-third more expensive per year than claims-made. So, if it is a smaller physician-owned practice, they usually use claims-made, so they pay a third less annually for the premium because they’re going to be the ones paying for it. And then two, they’ll usually put the tail insurance cost on the provider. So, they not only pay less per year for the premium, but they also don’t have to pay for tail insurance, and it’s just cheaper for them. That’s why 9 out of 10 private practice owners use claims-made coverage. Some use occurrence-based, but it’s rare. 

If you have a claims-made policy, and it is determined in the employment agreement that you are responsible for paying for tail insurance, let’s break that down. It will state that you must purchase a tail insurance policy prior to your last day of employment with the employer. Usually, it’ll also say how long the tail insurance policy must be. 

How Do You Get the Employer to Pay for tail insurance?

Well, ask them when you’re negotiating. I’d like you to cover the tail insurance expenses. They may say no. If they do, you could come back at them, and we’ve had some success with saying, alright, well, you’re not going to pay for all of it. What if we do it like forgiveness over the initial term? What I mean by that is, if you signed a three-year contract, you would say, alright, for every year that I complete for you, one-third of the cost of tail insurance will be covered by you. 

So, after three years, when I’ve completed the initial term, you will be responsible for paying for tail insurance if I leave any period after that. You could also have your new employer pay for your tail insurance. That’s called nose coverage. And then the last way of not having to pay for it would be if you stay with the same insurance company with your new position. They’ll generally roll over your old policy into a new one. In that way, you don’t have to pay for tail insurance. So, that’s a little primer on how tail insurance is calculated.

Claims-Made Malpractice Insurance

One of the most frequent things when reviewing a physician’s contract is malpractice insurance coverage, the differences between the different types, and then tail coverage. Today, I’m going to talk about what is claims-made malpractice insurance for physicians. Let’s just do some basics on what malpractice insurance is, specifically, what claims-made coverage is. Doctors are required to have medical malpractice insurance policy.

Who Usually Pays for Claims Made Insurance Policy?

The employer will be the one that nearly always will pay for the underlying coverage. Every year they must pay a premium to the insurance company. If they continue to pay that premium, the doctor is covered for any of their activities for that employer.

Coverage Limits

Most of the time, the coverage limit will be 1 million, 3 million. That means 1 million per claim. And then no more than 3 million aggregate per year. If you’re having $3 million claims in one year, you have bigger problems than just insurance. You’re going to have some board complaints. You might have a database entry if they settle or lose a trial. So, if someone asks or is concerned about the aggregate medical malpractice insurance coverage limit, it’s a bigger problem than that.

3 Types of Malpractice Insurance

There are usually three types of insurance. 

Self Insurance

You have self-insurance programs. Some of the bigger hospitals and healthcare networks are self-insured, which generally means they have a lot of money set aside to pay claims out of. 

Occurrence Coverage

The second would be occurrence-based insurance. And that just means a malpractice policy has to be in effect when the malpractice event occurred. The benefit of occurrence-based insurance is you do not need tail coverage. The downside is it just costs a little bit more. Generally, occurrence-based insurance costs about a third more per year than a claims-made malpractice policy would. 

Claims Made Coverage

And then lastly, what we’re going to kind of detail today is claims-made insurance. A claims-made malpractice policy must be in effect when the claim is made. If you are with an employer and the agreement is terminated, and you leave, there will be a period called the statute of limitations from when a patient can still sue you. In most states, it’s two years. Even though you’re no longer with the employer, and it was a claims-made malpractice policy that ended when you left, you need gap coverage. 

Tail Insurance

Another malpractice insurance policy covers the gap between the last day you work for the employer and the last date where the statute limitations run. And that’s commonly known as tail coverage or tail coverage. You must buy tail insurance coverage if you had a claims-made malpractice policy. Let’s talk about that. 

Cost of Tail Insurance

Everyone wants to know, well, what’s the cost? A good rule of thumb is that tail insurance coverage generally costs about twice your annual premium. So, if you have a $10,000 annual premium, multiply those times two, and then you would have to pay $20,000 once your employment contract is terminated to cover your tail insurance coverage. That’s a one-time payment. You don’t have to pay it every year. It’s just that you pay all of it upfront, and then you’re covered for whatever it is. 

Some tail insurance coverage policies last longer than others. Generally, you want more than long enough to go past the statute of limitations. Most malpractice claims it’s when the patient either knows or should have known of the malpractice event. There is an infrequent period, but a patient would’ve no way to know about a medical malpractice event until years later. And so that’s kind of when tail coverage kicks in. 

Who Pays for Tail Insurance?

Who must pay for tail coverage? If you work for a hospital or healthcare network, most of them will be self-insured, but let’s just say they had a claims-made malpractice policy. They will generally pay for your tail. Most of the physicians who have to pay for tail coverage are employed with a private physician-owned group. I’d say it’s probably 75% of physicians who work for a smaller physician-owned medical facility that must pay their own tail. 

Is this something you can negotiate? Sure. A couple of thoughts on that. You can just ask them to outright pay for your tail. If they say no to that, which many of them most likely will, then you could also say, alright, well, let’s do it this way. Let’s say for every year that I am employed with you. You’ll agree to pay a quarter of my tail cost. If I finish out a year and then leave, you will pay a quarter of the tail. If I stay for two years, you’d pay half, and so on. And in that way, if I complete 4 years, the employer will pay for the entire tail. I find some employers understand that that is a fair way of doing things. And then you can kind of play with the percentages per year or how much each party pays.

But there are some creative ways of figuring out how to split the cost of the tail coverage with physicians and employers. Most of the time, physicians will not have the choice of either getting an occurrence-based malpractice policy or a claims-made malpractice policy. Whatever the employer or type of insurance the employer decides to go with, that’s the type of insurance the employee will have to use.

Can Physicians Choose Which Insurance To Use?

Usually, physicians can’t say, hey, I’d like an occurrence coverage if the employer decides to use claims-made. The reason why the employer uses claims-made is it’s cheaper. As I said before, an occurrence-based malpractice policy is about a third more expensive per year than a claims-made malpractice policy. So, if you’re the employer and you’re going to make physicians pay for their own tail, you’ll say, not only am I going to save a third per year on annual premium cost, but then I’m not going to pay for tail coverage either. Save them some money. 

There is a kind of math equation. Let’s say you did have the option of choosing occurrence or claims-made insurance. It will be based on how long you decide to be with the employer. If you have, say, a $6,000 annual premium and occurrence-based would be $8,000. So, $2000 more. The longer you are with the employer, the more that would make sense. Whereas if you’re with the claims-made malpractice policy, you’re paying $6,000 a year or the employer is, but in the end, the longer with your employer, the tail can sometimes be a little bit more expensive. So, you do need to do the math of, alright, if I’m paying a third more per year, at what point does it make sense just to pay if I plan on staying with the employer for ten years?

Well, that might make more sense to a claims-made malpractice policy. Whereas if you’re there for a shorter period of time, maybe an occurrence base malpractice policy makes more sense as well. This certainly is something that you can negotiate in an employment contract. 

Why Who Pays for Tail Insurance is a Big Deal?

And I do think it’s something that most physicians feel is important. It’s also specialty-dependent. I mean, if you’re primary care and you’re paying $6,000 in your annual premium, then $12,000 for tail coverage isn’t that big a deal. Let’s say surgeons, or if you’re an OB-GYN and you’re paying $50,000 a year for your underlying coverage, and you must leave. Your tail coverage is a hundred thousand dollars, well, that’s certainly something that’s going to get your attention, and you may need to discuss the employer.

A couple of ways of getting out of having to pay for tail coverage: one, obviously to negotiate, so the employer agrees to pay for it. Suppose you are with an insurance company, and your new job uses the same insurance company. In that case, generally, the insurance company will just roll over your old malpractice policy and tail into your new malpractice policy. You won’t have to pay for tail coverage. Now, no one’s going to know for certain if they leave a position, the new employer will utilize the same insurance company, but that’s one way of doing it. And then the last way of doing it is nose coverage. That means the new employer would pay your old tail called nose coverage. And then that would be a way for you to get out of having to pay for it.

Nose coverage happens, I would say, infrequently, but certainly, it’s not unique that a new employer would pay someone’s old tail. So, that’s what claims-made coverage is. It’s kind of a lot of, I guess, complicated scenarios but simple once you break it down into three different types of insurance.