Short-Term Changes in Long Term Care PLUS Medical PL Symposium March 12, 2003

1. Short-Term Changes in Long Term CarePLUS Medical PL SymposiumMarch 12, 2003

2. LTC Administrator’s Day Reimbursement Cuts Regulators Visit New Lawsuits Premium Increase What if this is “As Good As It Gets?”

3. Possible Reforms • Federal Level - 13 Bills before 107th Congress • State Level - 21 States have Tort Reform on Legislative Agenda • People are Listening

4. Panel Members • Rob Jurgel, RPLU • Product Line Manager - (LTC & Miscellaneous Facility) • Lexington / AIG Healthcare • Theresa Bourdon, FCAS, MAAA • Managing Director and Actuary--Aon Risk Consultants • Scott A. Whipp • Vice President - General Cologne Reinsurance • Jules B. Olsman, Esq. • Plaintiff Attorney--Olsman, Mueller & James, P.C. • Alice L. Epstein • Director, Risk Control Consulting - CNA Health Pro

5. Agenda • Underwriting: LTC Market & Provider Reactions • Actuarial: LTC Claim Trends • Reinsurance: LTC - The Money Pit - Lessons Learned • Attorney Malpractice & Tort Reform • Risk Management: Changes at CMS & Growing Importance of RM • Q & A

6. LTC Litigation- Who Pays the Price? Residents Nursing Home Operators Insurance Companies Taxpayers

7. National Law Journal Top 100 Cases Case • Fuqua v. Horizon/CMS Healthcare Corp. • Ernst v. Horizon/CMS Healthcare Corp. • Sauer v. Advocat, Inc. • Copeland v. Dallas Home for Jewish Aged, Inc. • Retirement Corporation of America Verdict • $312.71 Million TX • $82 Million TX • $78.43 Million AK • $50 Million TX • $50 Million WV

8. ISO - Nursing Home Liability A Discussion of the Current Insurance Crisis • ISO Reporting Companies 1992-2000 • 400,000 Beds - 27% U.S. Total • Primary Limits Only - $1M Limit • Concentration in Northeast - • NY - 56% • NJ - 40% • FL - 16% • TX - 11%

9. 3-Year Average Loss Ratio (1998-2000)

10. LTC Provider Reactions • Increase Self Insured Retentions • Eliminate Excess • Form Captive • Go Bare

11. LTC Liability – The Financial Impact Publicly Traded Company A

12. LTC Liability – The Financial Impact Publicly Traded Company B

13. LTC Liability – Guilt by Association Publicly Traded Company C

14. Theresa W. Bourdon, FCAS, MAAA Managing Director and Actuary Aon Risk Services

15. LTC Liability – Financial Impact: Why Now? • Companies coming off aggregate caps on retained losses • Post bankruptcy emergence • Not just a Florida problem anymore • Large backlog of claims combined with double digit frequency increases • Awareness hitting the Board level now • SEC scrutiny

16. LTC – Working Layers • $0 - $250,000: Hard working layer • $250,000 - $1M: • Working layer for high risk states • Moderate working layer for all other • $1M - $2M: Some exposure in high risk states • $2M - $5M: Less than 1% of claims • Excess $10M: 1 claim in 26,000 (1994 AY)

17. LTC State Trends • Florida continues to be the leader in loss cost per bed • Southern states dominate high cost states • TX, MS, AL, AR • California taking a turn for the worse despite MICRA • All Other states continue upward trend

18. LTC - General Trends • Severity leveling off in the $250,000 - $300,000 range for high risk states • Large cost control focus for providers • Frequency continuing to climb everywhere • Frequency trend keeps loss costs increasing

19. LTC – Tort Reform Efforts • Florida SB 1202 – eff. May 15, 2001 • Increased frequency for pre 5/15/01 incidents • 2002 frequency at pre-reform levels and increasing • Severity unaffected due to lack of non-economic caps; ineffective punitive caps • Mississippi HB No.2 – eff. January 1, 2003 • Increased frequency for pre 1/1/03 incidents • $500,000 non-economic damages cap (steps up in 2011) • Expect little impact on working layers • Should provide relief on excess pricing

20. LTC – Tort Reform Impact • California • MICRA not curbing trends for LTC • Severity continues to climb; average over $250,000 • Frequency still climbing

21. Scott A. Whipp Vice President General Cologne Reinsurance

22. Loss Scenario #1 Runaway Frequency – “A Real Barn Burner”

23. The Risk… • Submitted for 11/1/99-00 policy period • Prior carrier non-renewing (exiting LTC class) • Skilled nursing chain • 47 locations and 5000 beds in 16 states • Southeast, Southwest, Midwest • Primary Policy • 1M/3M (aggregate per location) • Occurrence form • Facultative reinsurance $750,000 xs $250,000

24. Year # Incurred xs $250,000 93/94 5 136,000 None 94/95 8 18,000 None 95/96 15 996,000 505,000(c) 96/97 13 153,000 None 97/98 27 847,000 332,000(o) 98/99 12 238,000 None Prior Loss Experience Note: Excluding divested locations

25. Unexpected Adverse Loss Development What might you expect the 99/00 year losses to be? • 1,000,000? • 2,000,000? • 5,000,000? Answer: $10,000,000 and still growing

26. Claim Frequency Average Claim Severity Total Incurred Expected 30 $50,000 $1,500,000 Actual 80 $125,000 $10,000,000 Frequency 2.5 times higher than expected Severity 2.5 times higher than expected What Happened???

27. Loss % Loss % Beds Texas 6,000,000 60% 17% Tennessee 2,000,000 20% 20% BAD States…

28. TN Fall – Head injury 435,000 Res. TN Decubitus Ulcer 1,065,000 Res. LA Multiple fractures – Osteopenia 370,000 Res. TX Decubitus Ulcer/Malnutrition 695,000 Paid TX Strangled by wheelchair strap 1,025,000 Res. Large Losses…

29. TX Decubitus Ulcer 1,025,000 Res. TX Decubitus Ulcer 1,030,000* Paid TX Malnutrition/Dehydration 1,030,000* Paid TX Inappropriate Sexual Contact 550,000 Paid TX 95 yr. Old Woman Died 1,000,000 Res. Large Losses… (continued) * These amounts do not include contributions from other primary or excess carriers. Total settlements were $1.5M and $2.0M.

30. Lessons Learned… • Quality of Care Issues • Claims Management Issues • Policy Form/Structure Issues

31. Quality of Care Issues… • Understaffing • Not following procedures or physician orders • Poor documentation/charting • Slow reporting or action on changes in condition

32. Claims Management Issues • Inflammatory Testimony from Current, Past Employees • Marginal Claim Investigation • Standard of Care • Causation • Hospitals and Attending Physicians not brought in as Co-defendants. • High Profile Predatory Plaintiff Attorney involvement • High Profile Jurisdictions • Virtually no Defense Exerted

33. Policy Form Issues • Per location aggregate MPL 141,000,000 PML 20,000,000 • Occurrence Form

34. Where do we stand now? • Claim cost inflation (“trend”) continues at 18%+ per year • New “problem states” emerging • Claims management (overall) still marginal at best • Large SIR programs- Claims management a problem • Carriers continue to withdraw from the LTC market • Scheduled reductions in Medicare Reimbursements • No clamor for tort reform

35. Long Term Care- “The Money Pit” • Has the litigation crisis in Long Term Care reached it’s crescendo yet? • Where will meaningful change come from? • Are there any positive signs on the horizon?

36. Jules B. Olsman, Esq.PartnerOlsman, Mueller & James, P.C.

37. DEATHS DUE TO MEDICAL NEGLIGENCE • 44,000 – 98,000 in Hospitals • 100,000 Due to Medical Errors • THE COST: $17 - $29 Billion per year

38. COST OF MALPRACTICE LITIGATION • ½ of 1% of Every National Healthcare Dollar

39. PRESSURE ULCERS • 24% of Nursing Home Residents Suffer from Pressure Ulcers • $1.3 Billion per year Spent on Treatment of Pressure Ulcers • $27,000 per Patient (Median Cost in Acute Care Cases)

40. PRESSURE ULCERS

41. FALLS • 1996: 340,000 Hospital Admissions for Hip Fractures • Avg. Hospital Stay Hip Fx: 2 Weeks • Cause 87% of Fx in People 65+ Years Old • Leading Cause of Injury Deaths in People 65+ Years Old • 1991 Medicare Cost for Hip Fx: $2.9 Billion

42. RESTRAINT ISSUES “Posey type gait belt being used for safety as restraint due to dementia. Resident attempts to stand & has pot’l. to fall. Order rec’d from Dr. ____.”

43. RESTRAINT ISSUES “Gait belt-type Posey (velcro) to be used for resident safety for 72 hours, as restraint. Remove for 15 min. 3X/day.”

44. CURRENT INSURANCE CRISIS • September 11 • Bear Market • Low Interest Rates • Political Opportunity

45. Alice L. Epstein Director Risk Control Consulting CNA Health Pro

46. OIG 2003 LTC Workplanas a Risk Management Plan 1. Accuracy of Online Survey, Certification & Reporting System (OSCAR) data 2. Minimum Data Set (MDS) reporting compliance 3. Medicare/Medicaid billing 4. Repeat deficiencies & Trends in deficiencies 5. Ombudsman complaints 6. Quality of care sanctions compliance & investigations 7. Medical Director’s involvement 8. QA committees 9. Social work services 10. Staffing requirements

47. The Center for Medicare and Medicaid Services Nursing Home Quality MeasuresLaunched 11/02 Reporting of new quality measures for all Medicare and Medicaid certified nursing homes. Resident assessment data which can be converted into quality measures indicating; “...how well nursing homes are caring for their residents’ physical and clinical needs.”www.Medicare.gov

48. CMS Quality Measures Data derived from the MDS reported to CMS. Based on risk adjusted data. Updated on CMS website every 3 months. GIGO - data accuracy Pertains to resident's: • physical conditions • clinical conditions • abilities • preferences • life care wishes

49. CMS Disclaimer (verbatim) “The current quality measures have been chosen because they can be measured and don’t require nursing homes to prepare additional reports. They are valid and reliable. However, they are not benchmarks, thresholds, guidelines, or standards of care. They are based on care provided to the population of residents in a facility, not to any individual resident, and are not appropriate for use in a litigation action.”

50. Quality Measures for Long Term Residents:defined by CMS as residents expected to stay for a long period of time or permanently